Unit 4: Imperfect

Competition

1

Memorizing vs. LearningMemorizing vs. Learning12-35711131-71923

Try memorizing the above numberHow effective is memorizing it?

The point: If you try to MEMORIZE all the graphs of economics you will

forget them. You must LEARN them!

4 Market Structures

3

PerfectCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET STRUCTURES

Every product is sold in a market that can be considered one of the above market structures.

For example:•Fast Food Market•The Market for Cars•Market for Operating Systems (Microsoft)•Strawberry Market•Cereal Market

PureMonopoly

MonopolisticCompetition Oligopoly

Imperfect Competition

4

Monopoly

5

Characteristics of Monopolies

6

5 Characteristics of a Monopoly1. Single Seller• One Firm controls the vast majority of a

market• The Firm IS the Industry 2. Unique good with no close substitutes3. “Price Maker”The firm can manipulate the price by changing

the quantity it produces (ie. shifting the supply curve to the left).

Ex: California electric companies7

5. Some “Nonprice” Competition

4. High Barriers to Entry

• No immediate competitors

• Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.

5 Characteristics of a Monopoly

• New firms CANNOT enter market

• Firm can make profit in the long-run

8

Examples of Examples of MonopoliesMonopolies

9

What do you already know about monopolies?

True or False?1. All monopolies make a profit.2. Monopolies are usually efficient.3. All monopolies are bad for the economy.4. All monopolies are illegal.5. Monopolies charge the highest price

possible6. The government never prevents

monopolies from forming.10

11

Four Origins of MonopoliesFour Origins of Monopolies1. Geography is the Barrier to EntryEx: Nowhere gas stations, De Beers Diamonds, San Diego

Chargers, Cable TV, Qualcomm Hot Dogs…-Location or control of resources limits competition and leads to one supplier.

2. The Government is the Barrier to EntryEx: Water Company, Firefighters, The Army,

Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits or

to stimulate innovation. -The government issues patents to protect inventors

and forbids others from using their invention. (They last 20 years)

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Four Origins of MonopoliesFour Origins of Monopolies3. Technology or Common Use is the Barrier to EntryEx: Microsoft, Intel, Frisbee, Band-Aide…-Patents and widespread availability of certain products

lead to only one major firm controlling a market.

4. Mass Production and Low Costs are Barriers to EntryEx: Electric Companies (SDGE)• If there were three competing electric companies

they would have higher costs.• Having only one electric company keeps prices low-Economies of scale make it impractical to have

smaller firms. Natural Monopoly- It is NATURAL for only one firm to

produce because they can produce at the lowest cost.13

Drawing Drawing MonopoliesMonopolies

14

Good news…1.Only one graph because the

firm IS the industry.2.The cost curves are the same3.The MR= MC rule still applies4.Shut down rule still applies

15

The Main Difference• Monopolies (and all Imperfectly

competitive firms) have downward sloping demand curve.

• Which means, to sell more a firm must lower its price.

• This changes MR…

THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE!

16

D

Combine the Demand of an industry with the costs of a firm.

Quantity

ATC

MC

What about MR?

17

Price

D

Combine the Demand of an industry with the costs of a firm.

Quantity

ATC

MC

MR18

Price

P Qd TR MR$11 0 0 -

Why is MR less than Demand?

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$10

P Qd TR MR$11 0 0 -$10 1 10 10

Why is MR less than Demand?

20

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8

Why is MR less than Demand?

$9 $9

21

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6

Why is MR less than Demand?

$9 $9

$8 $8 $8

22

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7 $7

23

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

24

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

25

$10

P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $426

$10

P Qd TR MR$11 0 - -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $427

$10

P Qd TR MR$11 0 - -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

MR IS LESS THAN PRICE

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1 2 3 4 5 6 7

P

Q

D

MR

Why is MR below Demand?

29

$109876543

21

1 2 3 4 5 6 7

P

Q

D

MR

Why is MR below Demand?

30

$109876543

21

At price $10, TR = $10

When price falls to $9, MR =$8

What happens to MR when price falls to $8?

1 2 3 4 5 6 7

P

Q

D

MR

Why is MR below Demand?

31

$109876543

21

At price $10, TR = $10

When price falls to $9, MR =$8

What happens to MR when price falls to $8?

MR CURVE IS LESS THAN

DEMAND CURVE!!!

Calculating Marginal Revenue

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Calculate TR and Marginal RevenueQuantity Price TR MR

0 $161 152 143 134 125 116 107 98 89 7

10 6 33

Quantity Price TR MR0 $16 01 15 152 14 283 13 394 12 485 11 556 10 607 9 638 8 649 7 63

10 6 60

Calculate TR and Marginal Revenue

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Quantity Price TR MR0 $16 0 -1 15 15 152 14 28 133 13 39 114 12 48 95 11 55 76 10 60 57 9 63 38 8 64 19 7 63 -1

10 6 60 -3

Calculate TR and Marginal Revenue

35

Quantity Price TR MR0 $16 0 -1 15 15 152 14 28 133 13 39 114 12 48 95 11 55 76 10 60 57 9 63 38 8 64 19 7 63 -1

10 6 60 -3

Calculate TR and Marginal Revenue

36

Plot the Demand, Marginal Revenue, and Total Revenue Curves

37Q

$15

10

5

$64

40

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TR

P

Q

$15

10

5

$64

40

20

TR

D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MR

Demand and Marginal Revenue CurvesWhat happens to TR when MR hits zero?

Total Revenue is at it’s peak when

MR hits zero

38

P

TR

Elastic vs. Inelastic Range of Demand Curve

39

Elastic and Inelastic Range

40Q

$15

10

5

$64

40

20

TR

D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MR

P

TR

Total Revenue TestIf price falls and TR

increases then demand is elastic.

Elastic

Total Revenue TestIf price falls and

TR falls then demand is inelastic.

A monopoly will only

produce in the elastic

range

Inelastic

Maximizing Profit

41

D

MR

$9876543

2

MC ATC

42 1 2 3 4 5 6 7 8 9 10 Q

P

What output should this monopoly produce?MR = MC

How much is the TR, TC and Profit or Loss?

Profit =$6

D

$9876543

2

Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve.

MC ATC

43 1 2 3 4 5 6 7 8 9 10 Q

P

MR

D

MR

$10987654

3

MCATC

446 7 8 9 10 Q

P

TR= $90TC= $100Loss=$10

AVC

What if cost are higher? How much is the TR, TC, and Profit or Loss?

D

MC

MR

TR=TC=

Profit/Loss=Profit/Loss per Unit=

Identify and Calculate: $70

$14$56

ATC

$2

45

$1098765

4 1 2 3 4 5 6 7 8 9 10 Q

P

Are Monopolies Efficient?

46

Q

P

D

S = MC

Ppc

Qpc

CS

PS

47

In perfect competition, CS and PS are

maximized.

Monopolies vs. Perfect Competition

At MR=MC,A monopolist willproduce less and

charge a higher price

48

Monopolies vs. Perfect Competition

Q

P

D

S = MC

Ppc

Qpc

MR

Pm

Qm

Where is CS and PS for a monopoly?

49

Monopolies vs. Perfect Competition

Q

P

D

S = MC

MR

Pm

Qm

CS

PS

Total surplus falls. Now there is

DEADWEIGHT LOSS

Monopolies underproduce and over charge, decreasing CS and increasing PS.

Are Monopolies Productively Efficient?

Does Price = Min ATC? No. They are not producing at the lowest

cost (min ATC)

50

D

$9876543

2

MC ATC

1 2 3 4 5 6 7 8 9 10 Q

P

MR

Are Monopolies Allocatively Efficiency?

Does Price = MC? No. Price is greater. The monopoly is under

producing.

51

D

$9876543

2

MC ATC

1 2 3 4 5 6 7 8 9 10 Q

P

MR

Monopolies are NOT efficient!

Monopolies are inefficient because they…1. Charge a higher price2. Don’t produce enough• Not allocatively efficiency

3. Produce at higher costs • Not productively efficiency

4. Have little incentive to innovateWhy?

Because there is little external pressure to be efficient

52

QDMR

MCATC

P

Natural Monopoly

53Qsocially optimal

One firm can produce the socially optimal quantity at the lowest cost due to economies scale.

It is better to have only one firm because ATC

is falling at socially optimal quantity

Lump Sum vs. Per Unit

Taxes and Subsidies

54

ACDC Econ Video

2007 FRQ #1