Lecture Essentials of economics (3/e): Chapter 8 - Brue, McConnell, Flynn

Chapter 8 - Pure monopoly. This chapter is divided into six basic sections: the characteristics of pure monopoly, the barriers to entry that create and protect monopolies, price and output determination under monopoly, the economic effects of monopoly, price discrimination under monopoly, and the regulation of monopolies.

Chapter Pure Monopoly McGrawưHill/Irwin Copyrightâ2014byTheMcGrawưHillCompanies,Inc.Allrightsreserved 1ư1 AnIntroductiontoPureMonopoly Single seller—a sole producer • No close substitutes—unique product • Price maker—control over price • Blocked entry—strong barriers to • entry block potential competition Nonprice competition—mostly PR or advertising the product 8­2 Examples of Monopoly • Public utility companies • Natural gas • Electric • Water • Near monopolies • Intel • Wham-O • Professional sports teams 8­3 Barriers to Entry • Barrier to entry: a factor that keeps firms from entering an industry • Economies of scale • Legal barriers: patents and licenses • Ownership of essential resources • Pricing LO1 8­4 Monopoly Demand • The pure monopolist is the industry • The demand curve is the market • LO1 demand curve • Downsloping demand curve Marginal revenue is less than price 8­5 Monopoly Demand Revenue and Cost Data of a Pure Monopolist Revenue Data Cost Data (1) Quantity of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) $ 172 $0 162 162 $ 162 $ 190.00 190 $ 90 -28 152 304 142 135.00 270 80 +34 142 426 122 113.33 340 70 +86 132 528 102 100.00 400 60 +128 122 610 82 94.00 470 70 +140 112 672 62 91.67 550 80 +122 102 714 42 91.43 640 90 +74 92 736 22 93.75 750 110 -14 82 738 97.78 880 130 -142 10 72 720 -18 103.00 1030 150 -310 LO2 (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost $ 100 (8) Profit (+) or Loss (-) $ -100 8­6 Monopoly Demand • All customers must pay the same price Loss = $30 D Gain = $132 LO2 8­7 Output and Price Determination $200 Price 150 100 MR 50 D 10 12 14 16 18 Quantity LO2 8­8 Monopoly Demand • Marginal revenue < Price • Monopolist is a price maker • Monopolist sets prices in elastic region of demand curve 8­9 Output and Price Determination Price, Costs, and Revenue $200 175 Pm=$122 MC 150 125 100 75 Economic Profit ATC D A=$94 MR=MC 50 25 MR Quantity 10 8­10 Misconceptions of Monopoly Pricing • Not highest price • Total profit • Possibility of losses 8­11 Economic Effects of Monopoly Pure competition is efficient Monopoly is inefficient S=MC MC P=MC= Minimum ATC Pc D LO3 Pm Pc b d c a MR Qc Qm Qc (a) (b) Purely competitive market Pure monopoly D 8­12 Economic Effects of Monopoly • Income transfer • Cost complications • Economies of scale • X-inefficiency • Rent-seeking expenditures • Technological advance 8­13 Price Discrimination • Price discrimination • Charging different buyers different • LO4 prices • Price differences are not based on cost differences Conditions for success: • Monopoly power • Market segregation • No resale 8­14 Examples of Price Discrimination • Business travel • Electric utilities • Movie theaters • Golf courses • Railroad companies • Coupons • International trade LO4 8­15 Graphical Analysis P P Economic profit Pb Economic profit MC = ATC Qb MRb Db (a) Small businesses LO4 Ps MC = ATC Qs Ds MRs (b) Students 8­16 Monopoly and Antitrust Policy • Antitrust laws • Break up the firm • Regulate it • Government determines price and • LO5 quantity Ignore it • Let time and markets get rid of monopoly 8­17 Global Perspective Competition from Foreign Multinational Corporations 8­18 ... 110 -1 4 82 7 38 97. 78 880 130 -1 42 10 72 720 - 18 103.00 1030 150 -3 10 LO2 (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost $ 100 (8) Profit (+) or Loss (-) ... $ 162 $ 190.00 190 $ 90 - 28 152 304 142 135.00 270 80 +34 142 426 122 113.33 340 70 +86 132 5 28 102 100.00 400 60 +1 28 122 610 82 94.00 470 70 +140 112 672 62 91.67 550 80 +122 102 714 42 91.43... $ -1 00 8 6 Monopoly Demand • All customers must pay the same price Loss = $30 D Gain = $132 LO2 8 7 Output and Price Determination $200 Price 150 100 MR 50 D 10 12 14 16 18 Quantity LO2 8 8 Monopoly Demand