McConnell_14CE_Micro_PPT_C11.pptx

Mehdi Arzandeh, University of Manitoba PowerPoint Presentation by 11-2 © 2016 McGraw?Hill Education Limited LEARNING OBJECTIVES LO11.1 List the characteristics of monopoly. LO11.2 List and explain the barriers to entry that shield monopolies from competition. LO11.3 Explain how demand is seen by a monopolist. LO11.4 Explain how a monopolist sets its maximizing output and price. LO11.5 Discuss the economic effects of monopoly. LO11.6 Describe why a monopolist prefers to charge different prices in different markets. LO11.7 Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly. LO11.8 Explain the deadweight loss associated with monopoly. 11 Monopoly 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 LO1 © 2016 McGraw?Hill Education Limited 11.1 Characteristics of Monopoly 11-3 Examples of Monopoly Public utility companies Natural Gas Electric Water Near monopolies Intel Wham-O Professional Sports Teams LO1 © 2016 McGraw?Hill Education Limited 11.1 Characteristics of Monopoly 11-4 The factors that keep firms from entering an industry: Economies of Scale Legal Barriers: Patents and Licenses Ownership of Essential Resources Pricing LO2 © 2016 McGraw?Hill Education Limited 11.2 Barriers to Entry 11-5 LO2 © 2016 McGraw?Hill Education Limited 11-6 FIGURE 11-1 Economies of Scale: The Natural Monopoly Case 0 Average total cost Quantity 10 15 $20 50 100 200 ATC The monopolist is the industry Demand curve is the market demand curve Downsloping demand curve Marginal revenue is less than price LO3 © 2016 McGraw?Hill Education Limited 11-7 11.3 Monopoly Demand LO3 © 2016 McGraw?Hill Education Limited 11-8 TABLE 11-1 Revenue and Cost Data of a Monopolist {21E4AEA4-8DFA-4A89-87EB-49C32662AFE0}Revenue Data Cost Data (1) Quantity of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 $ 172 $0 $ 100 $ -100 1 162 162 $ 162 $ 190.00 190 $ 90 -28 2 152 304 142 135.00 270 80 +34 3 142 426 122 113.33 340 70 +86 4 132 528 102 100.00 400 60 +128 5 122 610 82 94.00 470 70 +140 6 112 672 62 91.67 550 80 +122 7 102 714 42 91.43 640 90 +74 8 92 736 22 93.75 750 110 -14 9 82 738 2 97.78 880 130 -142 10 72 720 -18 103.00 1030 150 -310 LO3 © 2016 McGraw?Hill Education Limited 11-9 FIGURE 11-2 Price and Marginal Revenue in Monopoly 0 1 2 3 4 5 6 $142 132 122 112 102 92 82 D Gain = $132 Loss = $30 LO3 © 2016 McGraw?Hill Education Limited 11-10 FIGURE 11-2 Price and Marginal Revenue in Monopoly 0 1 2 3 4 5 6 D Gain = $132 Loss = $30 MR $142 132 122 112 102 92 82 Marginal Revenue is less than Price Monopolist is a price-maker Monopolist sets prices in elastic region of demand curve LO3 © 2016 McGraw?Hill Education Limited 11-11 11.3 Monopoly Demand LO3 © 2016 McGraw?Hill Education Limited 11-12 FIGURE 11-3 Demand, Marginal Revenue, and Total Revenue for a Monopolist $200 150 100 50 0 $750 500 250 0 2 4 6 8 10 12 14 16 18 2 4 6 8 10 12 14 16 18 Price Total Revenue Elastic Inelastic (a) Demand and Marginal-Revenue Curves (b) Total-Revenue Curve D MR TR Q Q Cost Data Assume competitive factor markets MR=MC Rule No monopoly supply curve LO4 © 2016 McGraw?Hill Education Limited 11.4 Output and Price Determination 11-13 LO4 © 2016 McGraw?Hill Education Limited 11-14 TABLE 11-2 Steps for Graphically Determining the Profit-Maximizing Price and Economic Profit (if any) in Monopoly {284E427A-3D55-4303-BF80-6455036E1DE7}Step 1 Determine the profit-maximizing output by finding where MR=MC. Step 2 Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve. Step 3 Determine the pure monopolist’s economic profit by using one of two methods: Method 1. Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any). Method 2. Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any). LO4 © 2016 McGraw?Hill Education Limited 11-15 FIGURE 11-4 Profit Maximization by a Monopolist $200 175 150 125 25 100 75 50 Price, Costs, and Revenue 1 2 3 4 5 6 7 8 9 10 Quantity 0 D MR ATC MC MR=MC ATC=$94 Economic Profit Pm=$122 Profit per unit = Pm - ATC = $28 Misconceptions of Monopoly Pricing: Not the highest price Total, not unit, profit Possibility of losses LO4 © 2016 McGraw?Hill Education Limited 11.4 Output and Price Determination 11-16 LO4 © 2016 McGraw?Hill Education Limited 11-17 FIGURE 11-5 The Loss-Minimizing Position of a Monopolist 0 Price, Costs, and Revenue Quantity D MR ATC MC MR=MC AVC Pm Qm V A Loss Loss per unit Price, Output, and Efficiency Inefficient relative to a perfectly competitive industry Pm > MC Pm > minimum ATC LO5 © 2016 McGraw?Hill Education Limited 11.5 Economic Effects of Monopoly 11-18 LO5 © 2016 McGraw?Hill Education Limited 11-19 FIGURE 11-6 Inefficiency of Monopoly Relative to a Perfectly Competitive Industry (a) Perfectly Competitive Market (b) Monopoly D D S=MC MC P=MC= Minimum ATC MR Pc Qc Pc Pm Qc Qm a b c d Efficiency loss Monopoly and Deadweight Loss Under Monopoly CS is less Redistribution from consumers to monopolist Sum of CS and PS is less The net loss is Deadweight Loss of monopoly MB > MC Allocative efficiency is not achieved LO5 © 2016 McGraw?Hill Education Limited 11.5 Economic Effects of Monopoly 11-20 LO5 © 2016 McGraw?Hill Education Limited 11-21 FIGURE 11-7 Monopoly and Deadweight Loss (a) Perfectly Competitive Market (b) Monopoly D D S=MC MC MR Pc Qc Pc Pm Qc Qm B c A Monopoly’s gain C Deadweight loss Consumer surplus Producer surplus Efficient output Income transfer Cost complications Economies of scale X-Inefficiency Rent-seeking expenditures Technological advance LO5 © 2016 McGraw?Hill Education Limited 11.5 Economic Effects of Monopoly 11-22 LO5 © 2016 McGraw?Hill Education Limited 11-23 FIGURE 11-8 X-Inefficiency 0 Average total costs Quantity ATC2 ATC1 ATCx Q1 Q2 Average total cost X X' ATCx' Assessment and Policy Options Legitimate concerns Three policy options: Charges under Canada’s anti-combines laws Regulate prices and operations of natural monopolies Ignore monopolies which are unsustainable over the long term LO5 © 2016 McGraw?Hill Education Limited 11.5 Economic Effects of Monopoly 11-24 11.1 GLOBAL PERSPECTIVE Competition from Foreign Multinational Corporations © 2016 McGraw?Hill Education Limited LO5 11-25 Charging maximum price customer will pay Charging customer one price for 1st set purchased and lower price for subsequent units Charging some customers one price, others another LO6 © 2016 McGraw?Hill Education Limited 11.6 Price Discrimination 11-26 Conditions Monopoly Power Market Segregation No Resale Examples Airlines Theatres, golf courses Coupons International trade LO6 © 2016 McGraw?Hill Education Limited 11.6 Price Discrimination 11-27 LO6 © 2016 McGraw?Hill Education Limited 11-28 FIGURE 11-9 Price Discrimination to Different Groups of Buyers MC = ATC MC = ATC Qb Qs Ps Pb P P MRb MRs Db Ds (a) Small businesses (b) Students Economic profit (a) Economic profit (b) Natural monopolies traditionally have been subject to rate (price) regulation e.g. natural gas distributors, regional telephone companies, electricity suppliers Trend to deregulation where possible e.g. long distance telephone LO7 © 2016 McGraw?Hill Education Limited 11.7 Regulated Monopoly 11-29 May be desirable to maintain but regulate a natural monopoly Types of regulation include: Socially optimal price where P = MC Fair-return price where P = ATC LO7 © 2016 McGraw?Hill Education Limited 11.7 Regulated Monopoly 11-30 LO7 © 2016 McGraw?Hill Education Limited 11-31 FIGURE 11-10 Regulated Monopoly 0 Price and Costs (Dollars) Quantity Monopoly Price Fair-Return Price Socially Optimal Price Pr D r f b a Pf Pm Qm Qf Qr MR MC ATC Dilemma of Regulation Setting price at P = MC Firm earns losses Setting price at P = ATC Underallocation of resources Regulation can improve outcomes LO7 © 2016 McGraw?Hill Education Limited 11.7 Regulated Monopoly 11-32 Network effects and economies of scale have driven the monopolistic growth of several Internet giants, including Google, Facebook, and Amazon. Network Effect: Google controls 70 percent of Canadian search market Facebook dominates social media with over a billion users Economies of Scale: Amazon is the world’s largest on-line retailer with over $50 billion in annual sales Data and Logistics The LAST WORD Monopoly Power in the Internet Age © 2016 McGraw?Hill Education Limited 11-33 LO11.1 List the characteristics of monopoly. LO11.2 List and explain the barriers to entry that shield monopolies from competition. LO11.3 Explain how demand is seen by a monopolist. LO11.4 Explain how a monopolist sets its maximizing output and price. LO11.5 Discuss the economic effects of monopoly. LO11.6 Describe why a monopolist prefers to charge different prices in different markets. LO11.7 Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government- regulated monopoly. LO11.8 Explain the deadweight loss associated with monopoly. Chapter Summary © 2016 McGraw?Hill Education Limited 11-34