No Monopolies Monopoly versus Perfect Competition Demand Curves

No Monopolies! Monopoly versus Perfect Competition

Demand Curves Competitive vs. Monopoly (a) (b) Competitive Firm’s Demand Curve Price ’ Demand Curve Monopolist’s Price MC MC D = MR $15 D ≠ MR 0 Quantity of Output A Monopoly is the sole producer => therefore it faces the entire market demand curve

Marginal Revenue Handout

Demand & Marginal-Revenue Price $11 10 9 8 7 6 5 4 3 2 1 0 – 1 – 2 – 3 – 4 If a monopoly wants to sell more, it must lower price. Price falls for ALL units sold. This is why MR is < P. Price = AR Demand Marginal revenue 1 2 3 4 (average revenue) 5 6 7 8 Quantity of Water

Profit Maximization • All profit-maximizing firms set: MR =MC • Competitive firms: P = MR = MC • Monopoly firm = P > MR = MC

Monopoly vs. Perfect Competition • Monopolies charge a higher price & provide lower Qty • Monopoly charges a Price > MC – Competitive firms: Price = MC • Monopolies create deadweight loss to society – Competitive firms: no deadweight loss

Monopolist Equilibrium Costs and Revenue Profit = (P – ATC) * Qty MC ($20 - $10) * 100 = $1, 000 profit E 1 $20 P 1 Monopoly Profit ATC Set MR = MC $10 ATC D MR 0 Q 1 100 Quantity

Sample Monopoly Equilibrium Costs and Revenue Maximize Profit set MR = MC MC Profit = (P – ATC) * Qty E 1 P 1 Monopoly profit ATC Maximize Total Revenue: Set MR = 0 ATC D MR 0 Q 1 Quantity

Pure Monopoly Worksheet

Pure Monopoly Problem #1 Costs and Revenue Profit = $150 per unit (P – ATC) * Qty MC ($750 - $600) * 4 = $600 profit E 1 $750 P 1 Monopoly profit ATC Produce 4 Units MC = MR @ $300 $600 ATC D MR 0 Q 1 4 Quantity

Worksheet Problem #2 Costs and Revenue Profit = (P – ATC) * Qty MC $15 P 1 ($15 - $8) * 100 = $700 profit E 1 Monopoly profit $8 ATC D MR 0 Q 1 100 Quantity

Quick Review: PC vs. Monopoly

Collusion & Cartels • Collusion – An agreement among firms about Qty to produce or price to charge – Antitrust laws prohibit this behavior in USA • Cartel – A group of firms acting in unison – Example: OPEC Meeting

How to become a price setter

De. Beers Video

Graphing Supply & Demand S 2 ----- P 1 -------- E 1 D 1 -------------- S 1 P 2 --------- E 2 S 1 P 1 -------- E 1 Q 1 D 2 Q 1 Q 2 • Demand is kept artificially high & inelastic through advertising • Supply is kept artificially low by De. Beers • End Result: Higher prices paid & larger quantity sold