Unit 4 Imperfect Competition 1 REVIEW Name That

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Unit 4: Imperfect Competition 1

Unit 4: Imperfect Competition 1

REVIEW Name That Concept Rules: 1. Cannot use the word(s) 2. Focus on the

REVIEW Name That Concept Rules: 1. Cannot use the word(s) 2. Focus on the concept not word Ex: Price Maker 2

Name That Concept 1. Monopoly 2. Imperfect Competition 3. Barriers to Entry 4. Dead

Name That Concept 1. Monopoly 2. Imperfect Competition 3. Barriers to Entry 4. Dead Weight Loss 5. Productive Efficiency 3

Name That Concept 1. Marginal Revenue 2. MR = MC 3. Shut down rule

Name That Concept 1. Marginal Revenue 2. MR = MC 3. Shut down rule 4. Natural Monopoly 5. Allocative Efficiency 4

Review: A monopoly produces where MR=MC, but charges the price set by the demand

Review: A monopoly produces where MR=MC, but charges the price set by the demand curve. How much is the TR, TC and Profit or Loss? P MC ATC $10 Profit =$20 9 8 7 6 D MR 5 16 17 18 19 20 Q 5

Elastic and Inelastic Range P Total Revenue Test If price falls and TR increases

Elastic and Inelastic Range P Total Revenue Test If price falls and TR increases then demand is elastic. Inelastic $15 10 5 TR Total Revenue Test If price falls and TR falls then demand is inelastic. Elastic D 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $64 40 20 1 2 3 4 5 6 7 8 Q A monopoly MR will only produce in the elastic range TR Q 6 9 10 11 12 13 14 15 16 17 18

Are Monopolies Efficient? 7

Are Monopolies Efficient? 7

Monopolies are inefficient because they… 1. Charge a higher price 2. Don’t produce enough

Monopolies are inefficient because they… 1. Charge a higher price 2. Don’t produce enough • Not allocatively efficiency 3. Produce at higher costs • Not productively efficiency 4. Have little incentive to innovate Why? Because there is little external pressure to be efficient 8

Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? P CS

Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? P CS S = MC Total surplus falls. Now there is DEADWEIGHT LOSS Pm PS D MR Qm Q 9

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Regulating Monopolies 11

Regulating Monopolies 11

Why Regulate? Why would the government regulate an monopoly? 1. To keep prices low

Why Regulate? Why would the government regulate an monopoly? 1. To keep prices low 2. To make monopolies efficient How do they regulate? • Use Price controls: Price Ceilings • Why don’t taxes work? • Taxes limit supply and that’s the problem 12

Where should the government place the price ceiling? 1. Socially Optimal Price P =

Where should the government place the price ceiling? 1. Socially Optimal Price P = MC (Allocative Efficiency) OR 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) 13

Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm

Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm ATC D MR Qm Q 14

Regulating Monopolies Price. Optimal Ceiling at Socially Optimal Socially = Allocative Efficiency P MC

Regulating Monopolies Price. Optimal Ceiling at Socially Optimal Socially = Allocative Efficiency P MC Pm Pso ATC D MR Qm Qso Q 15

Regulating Monopolies Price Ceiling Returnprofit Fair Return meansat no. Fair economic P MC Pm

Regulating Monopolies Price Ceiling Returnprofit Fair Return meansat no. Fair economic P MC Pm Pso Pfr ATC D MR Qm Qso Qfr Q 16

Regulating Monopolies Unregulated P Socially Optimal MC Fair Return Pm Pso Pfr ATC D

Regulating Monopolies Unregulated P Socially Optimal MC Fair Return Pm Pso Pfr ATC D MR Qm Qso Qfr Q 17

Regulating a Natural Monopoly What happens if the government sets a price ceiling to

Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P The firm would make a loss and would require a subsidy MC ATC Pso MR D Qsocially optimal Q 18

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Price Discrimination 20

Price Discrimination 20

Price Discrimination Definition: Practice of selling the same products to different buyers at different

Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Examples: • Airline Tickets (vacation vs. business) • Movie Theaters (child vs. adult) • All Coupons (spenders vs. savers) • CHS football games (students vs. parents) 21

PRICE DISCRIMINATION • Price discrimination seeks to charge each consumer what they are willing

PRICE DISCRIMINATION • Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. • Those with inelastic demand are charged more than those with elastic Requires the following conditions: 1. Must have monopoly power 2. Must be able to segregate the market 3. Consumers must NOT be able to resell product 22

P Qd TR MR $11 0 0 - 23

P Qd TR MR $11 0 0 - 23

Results of Price Discrimination $10 P Qd TR MR $11 0 0 $10 10

Results of Price Discrimination $10 P Qd TR MR $11 0 0 $10 10 24

Results of Price Discrimination $10 P Qd TR MR $11 0 0 $10 10

Results of Price Discrimination $10 P Qd TR MR $11 0 0 $10 10 $9 2 19 9 $10 $9 25

Results of Price Discrimination $10 $9 P Qd TR MR $11 0 0 $10

Results of Price Discrimination $10 $9 P Qd TR MR $11 0 0 $10 10 $9 2 19 9 $8 3 27 8 $8 26

Results of Price Discrimination $10 $9 $8 P Qd TR MR $11 0 0

Results of Price Discrimination $10 $9 $8 P Qd TR MR $11 0 0 $10 10 $9 2 19 9 $8 3 27 8 $7 4 34 7 $7 27

Results of Price Discrimination P Qd TR MR $11 0 0 $10 10 $9

Results of Price Discrimination P Qd TR MR $11 0 0 $10 10 $9 2 19 $9 $8 3 27 $8 $7 4 34 $7 $6 5 40 $6 $5 6 45 $5 $4 7 49 $4 $10 $9 $8 $7 $10 $9 $8 $7 $6 $5 $4 28

$10 $9 P Qd TR MR $11 0 0 $10 10 $9 2 19

$10 $9 P Qd TR MR $11 0 0 $10 10 $9 2 19 $9 $8 3 27 $8 WHEN PRICE $7 4 34 $7 $8 DISCIMINATING $6 5 40 $6 $8 $7 MR = D$5 6 45 $5 $4 7 49 $4 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $4 29

Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Qm Q

Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Qm Q 30

A perfectly discriminating firm can charge each person differently so the Marginal Revenue =

A perfectly discriminating firm can charge each person differently so the Marginal Revenue = Demand P MC ATC D MR Q 31

A perfectly discriminating firm can charge each person differently so the Marginal Revenue =

A perfectly discriminating firm can charge each person differently so the Marginal Revenue = Demand Identify • Price • Profit • CS • DWL P MC ATC D =MR Qnm Q 32

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Q Q nm 33

Can You Do The Following? 1. Draw a monopoly making a profit at long-run

Can You Do The Following? 1. Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit 34

I hope so because if you do, you can earn extra credit. +3 1.

I hope so because if you do, you can earn extra credit. +3 1. Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry +3 AND firm at long-run equilibrium 3. Draw a price discriminating monopoly +3 at equilibrium and label price, quantity, MR, and profit Due tomorrow. 35