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macroeconomic mcgrowhill micro ch 10 19e use this one

10
Pure Monopoly

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions

Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show
10-2

• Characteristics of Pure
Monopoly
• How Pure Monopoly Sets
Profit Maximizing Output and
Price
• The Economic Effects of
Monopoly
• Why A Monopolist May Wish
to Charge Different Prices in
Different Markets
Copyright 2008 The McGraw-Hill Companies


Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati


on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms

FOUR MARKET MODELS
Pure Monopoly:
• Single Seller
• No Close Substitutes
• Price Maker
• Blocked Entry
• Nonprice Competition
Pure
Competition

Monopolistic
Competition

Oligopoly

Pure
Monopoly

Market Structure Continuum

End Show
10-3

Copyright 2008 The McGraw-Hill Companies


Examples of Monopoly

• Public utility companies
• Natural Gas
• Electric
• Water
• Near monopolies
• Intel
• Wham-O (Frisebee)
• Professional Sports Teams
LO1

10-4


Barriers to Entry
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show
10-5

• Economies of Scale
• Legal Barriers to Entry

O 10.2

– Patents
– Licenses

• Ownership or Control of
Essential Resources
• Pricing and Other
Strategic Barriers to Entry
Copyright 2008 The McGraw-Hill Companies


Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms

Average Total Cost

THE NATURAL MONOPOLY CASE

$20
15
10

0

ATC
If ATC declines over extended
output, least-cost production is
realized only if there is one
producer - a natural monopoly
50

End Show
10-6

Copyright 2008 The McGraw-Hill Companies

100
Quantity

200


Monopoly Demand
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show
10-7

• Monopoly Status is
Secure
• No Governmental
Regulation
• Firm is a Single-Price
Monopolist (No Price
Discrimination)
Copyright 2008 The McGraw-Hill Companies


Price and Marginal Revenue
Marginal Revenue is Less Than Price

Characteristics
Barriers to Entr •
y
Monopoly Dema
nd
Price and Margi

nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions •
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina •
tion
Regulated Mono
poly
Last Word

A Monopolist is
Selling 3 Units at
$142
To Sell More (4),
Price Must Be
Lowered to $132
All Customers
Must Pay the Same
Price
TR Increases $132
Minus $30 (3x$10)

$142
132
122
112

End Show
10-8

Copyright 2008 The McGraw-Hill Companies

D

102

Gain = $132

92
82

0

Key Terms

Loss = $30

1

2

3

4

5

6


Price and Marginal Revenue
Marginal Revenue is Less Than Price

Characteristics
Barriers to Entr •
y
Monopoly Dema
nd
Price and Margi

nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions •
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina •
tion
Regulated Mono
poly

Last Word

A Monopolist is
Selling 3 Units at
$142
To Sell More (4),
Price Must Be
Lowered to $132
All Customers
Must Pay the Same
Price
TR Increases $132
Minus $30 (3x$10)
$102 Becomes a
Point on the MR
Curve
• Try Other Prices to
Determine Other
MR Points

Key Terms
End Show
10-9

$142
132
122
112

Loss = $30

D

102

Gain = $132

92
82

MR
0

1

2

3

4

5

6

The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price

Copyright 2008 The McGraw-Hill Companies


Monopoly Revenue and Costs
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms

• Monopolist is a Price
Maker (MR < P)
• Sets Price in the Elastic
Region
• Output and Price
Determination
– Cost Data
– MR = MC Rule

• No Supply Curve

End Show
10-10

Copyright 2008 The McGraw-Hill Companies

G 10.1

W 10.1


Monopoly Revenue and Costs
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms

Revenue and Cost Data of a Pure
Monopolist
Cost Data

Revenue Data
(2)
(1)
Price
Quantity (Average
Of Output Revenue)

0
1
2
3
4
5
6
7
8
9
10

$172
162
152
142
132
122
112
102
92
82
72

(3)
Total
Revenue
(1) X (2)

$0 ]
162 ]
304 ]
426 ]
528 ]
610 ]
672 ]
714 ]
736 ]
738 ]
720

(4)
Marginal
Revenue

$162
142
122
102
82
62
42
22
2
-18

(5)
(6)
(7)
(8)
Average Total Cost Marginal Profit (+)
Total Cost (1) X (5)
Cost
or Loss (-)

$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00

$100 ]
190 ]
270 ]
340 ]
400 ]
470 ]
550 ]
640 ]
750 ]
880 ]
1030

$90
80
70
60
70
80
90
110
130
150

$-100
-28
+34
+86
+128
+140
+122
+74
-14
-142
-310

Can you See Profit Maximization?

End Show
10-11

Copyright 2008 The McGraw-Hill Companies


Monopoly Revenue and Costs
Demand, Marginal Revenue, and Total Revenue for a Pure
Monopolist
$200

Demand and Marginal Revenue Curves
Elastic
Inelastic

Price

150
100
50
0

D

MR
2

4

$750

Total Revenue

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

6

8

10

12

Total-Revenue Curve

14

16

500

250

TR

Key Terms
End Show

0
10-12

18

2

Copyright 2008 The McGraw-Hill Companies

4

6

8

10

12

14

16

18


Output and Price Determination
Steps for Graphically Determining the Profit-Maximizing Output, ProfitMaximizing Price, and Economic Profits (if Any) in Pure Monopoly
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).

LO2

10-13


Profit Maximization
By A Pure Monopolist

$200

Price, Costs, and Revenue

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

175

MC

150
125
100
75

Pm=$122
Economic
Profit

ATC

D

A=$94

MR=MC

50
25

Key Terms

0

MR
1

2

3

4

5

6

Quantity

End Show
10-14

Copyright 2008 The McGraw-Hill Companies

7

8

9

10


Misconceptions

Concerning Monopoly Pricing
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

• Not the Highest Price
• Total, Not Unit, Profit
• Possibility of Losses

Key Terms
End Show
10-15

Copyright 2008 The McGraw-Hill Companies


Loss Minimization
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Price, Costs, and Revenue

By A Pure Monopolist

MC

A
Pm

ATC
Loss

AVC
V

D
MR=MC
MR

Key Terms

0

Qm

Quantity

End Show
10-16

Copyright 2008 The McGraw-Hill Companies


Economic Effects of
Monopoly
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Price, Output, and Efficiency
Pure
Monopoly

Purely
Competitive
Market
S=MC

MC
b

Pm
P=MC=
Minimum
ATC

Pc

c

Pc
a

D
Qc

MR
Qm

Qc

Pure Competition is Efficient
Monopoly Price is Greater Than MC
And Is Therefore Inefficient

Key Terms
End Show
10-17

Copyright 2008 The McGraw-Hill Companies

D


Economic Effects of
Monopoly
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Price, Output, and Efficiency
• Income Transfer
• Cost Complications
• Economies of Scale
– Simultaneous Consumption
– Network Effects

Key Terms
End Show
10-18

Copyright 2008 The McGraw-Hill Companies


Economic Effects of
Monopoly
• X-Inefficiency
Average Total Costs

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

O 10.3

X

ATCX

Average
Total Cost

ATC1

X’

ATCX’
ATC2
Q1

Quantity

Q2

• Rent-Seeking Expenditures
– Rent-Seeking Behavior

• Technological Advance
• Assessment and Policy
Options

Key Terms
End Show
10-19

Copyright 2008 The McGraw-Hill Companies


Economic Effects of
Monopoly
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show

GLOBAL PERSPECTIVE

Representative Highly Competitive
Foreign Multinational Corporations
Company (Country)
Bayer (Germany)
BP Amoco (United Kingdom
Michelin (France)
NEC (Japan)
Nestlé (Switzerland)
Nokia (Finland)
Royal Dutch/Shell (Netherlands)
Royal Philips (Netherlands)
Sony (Japan)
Toyota (Japan)
Unilever (Netherlands)

Main Products
Chemicals
Gasoline
Tires
Computers
Food Products
Wireless Phones
Gasoline
Electronics
Electronics
Automobiles
Food Products
Source: Fortune.com

10-20

Copyright 2008 The McGraw-Hill Companies


Price Discrimination
Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show
10-21

• Three Forms

O 10.4

– Charging Each Customer
the Maximum They Are
Willing to Pay
– Charging Each Customer
One Price For The First Set
of Units Purchased and a
Lower Price for
Subsequent Units
– Charging Some Customers
One Price and a Different
Price for Other Customers
Copyright 2008 The McGraw-Hill Companies


Price Discrimination

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

Key Terms
End Show
10-22

• Conditions

– Monopoly Power
– Market Segregation
– No Resale

• Examples of Price
Discrimination
– Airfares
– Electric Utilities
– Theaters & Golf
Courses

Copyright 2008 The McGraw-Hill Companies

W 10.1


PRICE DISCRIMINATION

Price and Costs

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

P

Economic profits with
a single MR=MC
price

ATC

MR

Key Terms
End Show
10-23

Copyright 2008 The McGraw-Hill Companies

MC

Q1

D
Q


PRICE DISCRIMINATION

Price and Costs

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

P

A perfectly discriminating
monopolist has MR=D,
producing more product
and more profit!

MC

ATC

MR=D
D

Key Terms
End Show
10-24

Copyright 2008 The McGraw-Hill Companies

Q1

Q2

Q


PRICE DISCRIMINATION
Economic profits with
price discrimination

Price and Costs

Characteristics
Barriers to Entr
y
Monopoly Dema
nd
Price and Margi
nal Revenue
Marginal Reven
ue and Costs
Profit Maximizat
ion
Misconceptions
Loss Minimizati
on
Economic Effec
ts of Monopoly
Price Discrimina
tion
Regulated Mono
poly
Last Word

P

MC

ATC

MR=D
D

Key Terms
End Show
10-25

Copyright 2008 The McGraw-Hill Companies

Q1

Q2

Q


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