'Monopoly – economics Essay\r'

'In this chapter, look for the answers to these questions: ? Why do monopolies arise? ? Why is MR < P for a monopoliser? ? How do monopolies choose their P and Q? ? How do monopolies affect society’s well-being? ? What can the administration do about monopolies? ? What is scathe divergence? Economics PRINCIPLES OF N. Gregory Mankiw subsidy PowerPoint Slides by Ron Cronovich © 2009 South-Western, a quality of Cengage Learning, al champion rights reserved 1 Introduction ? A monopoly is a unwavering that is the sole vender of a harvesting without nearly substitutes. Why Monopolies Arise.\r\nThe main arouse of monopolies is barriers to en get a line †other steadfasts can non cypher the merchandise. Three sources of barriers to entry: 1. A single impregnable owns a rudimentary resource. E. g. , DeBeers owns most of the initiation’s diamond mines 2. The govt f totally(prenominal) aparts a single unwavering the sole(a) right to produce the eff ective. E. g. , sheers, copyright laws 2 ? In this chapter, we choose monopoly and contrast it with perfect competition. ? The advert difference: A monopoly inviolable has commercialise power, the ability to enchant the market impairment of the product it removes. A warring family has no market power.\r\nMONOPOLY MONOPOLY 3 Why Monopolies Arise\r\n3. inseparable monopoly: a single sign of the zodiac can produce the stain little market Q at trim constitute than could several firms. spokesperson: k homes need electricity ATC is get if one firm gos all 1000 homes than if two firms each service viosterol homes. MONOPOLY Monopoly vs. Competition: inquire Curves In a rivalrous market, the market necessity wreathe slopes downward. But the demand kink for any individual firm’s product is horizontal at the market hurt. The firm can impr all over Q without overweight P, so MR = P for the agonistic firm.\r\n4 Cost electrical energy ATC slopes downward o verdue to grand FC and elflike MC ATC 500 1000 Q P A militant firm’s demand slue $80 $50 D Q 5 MONOPOLY 1 10/23/2012 Monopoly vs. Competition: crave Curves A monopolizer is the only marketer, so it faces the market demand wreathe. To contend a bigger Q, the firm mustiness compact P. Thus, MR ? P. P quick LEARNING A monopoly’s receipts popular causa is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. Q 0 1 2 3 4 5 6 P $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 7 1 TR AR n. a. MR A monopolist’s demand mold D Q MONOPOLY 6 What is the parity between P and AR?\r\nBetween P and MR? ACTIVE LEARNING Answers Here, P = AR, equivalent as for a belligerent firm. Here, MR < P, whereas MR = P for a competitive firm. Q 0 1 2 3 4 5 6 1 earthy Grounds’ D and MR Curves P TR $0 4 7 9 10 10 9 AR n. a. $4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 8 MR $4 3 2 1 0 â€1 Q P MR $4 3 2 1 0 â€1 $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 0 $4. 50 1 2 3 4 5 6 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 P, MR $5 4 3 2 1 0 -1 -2 -3 0 1 2 3 Demand curve (P) MR 4 5 6 7 Q 9 MONOPOLY Understanding the Monopolist’s MR ? increase Q has two substance on tax income: ? railroad siding effect: high outturn raises revenue ?\r\n equipment casualty effect: measlyer expense reduces revenue ? To sell a larger Q, the monopolist must reduce the outlay on all the units it sells. Profit-Maximization ? Like a competitive firm, a monopolist maximizes sugar by producing the measuring rod where MR = MC. ? erst the monopolist identifies this quantity, it poses the highest price consumers atomic number 18 willing to pay for that quantity. ? Hence, MR < P ? MR could even be forbid if the price effect exceeds the make effect (e. g. , when Common Grounds increases Q from 5 to 6). 10 ? It finds this price from the D curve. MONOPOLY MONOPOLY 11 2 10/23/2012 Profit-Maximizat ion\r\n1. The meshingmaximizing Q is where MR = MC. 2. collapsethrough P from the demand curve at this Q. Q Costs and tax revenue MC The Monopolist’s Profit Costs and tax MC ATC P D MR Quantity As with a competitive firm, the monopolist’s profit equals (P †ATC) x Q P ATC D MR Q Quantity increasing output MONOPOLY 12 MONOPOLY 13 A Monopoly Does Not hit an S Curve A competitive firm ? takes P as given ? has a supply curve that shows how its Q depends on P. A monopoly firm ? is a â€Å"price-maker,” non a â€Å"price-taker” ? Q does not depend on P; rather, Q and P are collectively determined by MC, MR, and the demand curve.\r\nSo on that point is no supply curve for monopoly. MONOPOLY 14 CASE STUDY: Monopoly vs. generic Drugs Patents on new drugs give a temporary monopoly to the seller. cost The market for a typical drug PM When the patent expires, PC = MC the market becomes competitive, generics appear. QM D MR Quantity QC MONOPOLY 15 The eudaemonia Cost of Monopoly ? mean: In a competitive market equilibrium, P = MC and sum up tautological is maximized. The Welfare Cost of Monopoly Competitive eq’m: quantity = QC P = MC total inordinateness is maximized Monopoly eq’m: quantity = QM P > MC deadweight prejudice Price Deadweight MC outlet?\r\nIn the monopoly eq’m, P > MR = MC ? The value to vendees of an additive unit (P) exceeds the cost of the resources take to produce that unit (MC). ? The monopoly Q is to a fault low †could increase total surplus with a larger Q. ? Thus, monopoly results in a deadweight loss. P P = MC MC D MR QM QC Quantity MONOPOLY 16 MONOPOLY 17 3 10/23/2012 Price pattern ? divergence: treating people otherwise based on some property, e. g. race or gender. gross(a) Price Discrimination vs. genius Price Monopoly Here, the monopolist charges the resembling price (PM) to all emptors. A deadweight loss results.\r\nPrice Consumer surplus Deadweight l oss ? Price dissimilitude: interchange the same good at different prices to different purchasers. PM MC ? The characteristic used in price discrimination is willingness to pay (WTP): ? A firm can increase profit by charging a higher(prenominal) price to buyers with higher WTP. Monopoly profit D MR QM MONOPOLY 18 Quantity 19 MONOPOLY perfect(a) Price Discrimination vs. iodine Price Monopoly Here, the monopolist produces the competitive quantity, but charges each buyer his or her WTP. This is called perfect price discrimination. The monopolist captures all CS as profit.\r\nBut there’s no DWL. MONOPOLY Price Discrimination in the unfeigned World ? In the accredited number world, perfect price discrimination is not possible: ? No firm knows every buyer’s WTP ? Buyers do not announce it to sellers Price Monopoly profit ? So, firms divide customers into groups MC D MR Quantity based on some observable character that is likely related to WTP, such(prenominal) as age . Q 20 MONOPOLY 21 display cases of Price Discrimination depiction tickets neglects for seniors, students, and people who can help during weekday afternoons. They are all more than likely to beat lower WTP than people who pay encompassing price on Friday night.\r\n airway prices Discounts for Saturday-night stayovers help distinguish care travelers, who normally realise higher WTP, from more price-sensitive leisure travelers. MONOPOLY 22 Examples of Price Discrimination Discount coupons People who imbibe magazine to clip and organize coupons are more likely to have lower income and lower WTP than others. Need-based financial aid Low income families have lower WTP for their children’s college education. Schools price-discriminate by offering need-based aid to low income families. MONOPOLY 23 4 10/23/2012 Examples of Price Discrimination\r\nQuantity discounts A buyer’s WTP often declines with extra units, so firms charge less per unit for large quantities tha n small ones. Example: A cinema theater charges $4 for a small popcorn and $5 for a large one that’s twice as big. Public constitution Toward Monopolies ? Increasing competition with antitrust laws ? ostracise some anticompetitive dedicates, allow govt to break up monopolies. ? E. g. , Sherman Antitrust figure out (1890), Clayton Act (1914) ?\r\nRegulation ? Govt agencies set the monopolist’s price. ? For immanent monopolies, MC < ATC at all Q, so peripheral cost pricing would result in losses. ? If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. MONOPOLY 24 MONOPOLY 25 Public Policy Toward Monopolies ?\r\nPublic ownership ? Example: U. S. Postal Service ? difficulty: Public ownership is usually less efficient since no profit motive to derogate costs CONCLUSION: The prevalence of Monopoly ? Doing nothing ? The foregoing policies all have drawbacks, so the outflank policy may be no policy. ? In the real world, pure m onopoly is rare. ? Yet, many firms have market power, due to: ? selling a unique variety of a product ? having a large market dowry and few significant competitors ?\r\nIn many such cases, most of the results from this chapter apply, including: ? markup of price over bare(a) cost ? deadweight loss MONOPOLY 26 MONOPOLY 27 CHAPTER summary ? A monopoly firm is the sole seller in its market. Monopolies arise due to barriers to entry, including: government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output. CHAPTER outline ? Monopoly firms maximize profits by producing the quantity where marginal revenue equals marginal cost. But since marginal revenue is less than price, the monopoly price will be great than marginal cost, leading to a deadweight loss. ?\r\nA monopoly firm faces a downward-sloping demand curve for its product. As a result, it must reduce price to sell a larger quantity, which causes marginal revenue to fall to a lower place price. 28 ? Monopoly firms (and others with market power) try to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination. 29 5 10/23/2012 CHAPTER SUMMARY ? Policymakers may respond by regulating monopolies, using antitrust laws to promote competition, or by taking over the monopoly and ravel it. Due to problems with each of these options, the scoop up option may be to take no action. 30 6.\r\n'