ECONOMICS 200 PRINCIPLES OF MICROECONOMICS

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ECONOMICS 200PRINCIPLES OF MICROECONOMICS

Professor Lucia F. Dunn

Department of Economics

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Monopoly

• A single seller in a market Rare

Monopolist Demand Curve

QQ

D

0

p

3

Monopoly

Monopolist diagramMonopolist diagram

QQ

D = AR = P

0

p

MR

Marginal revenue lies below demand for the monopolist.

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Monopoly

Example:

QD P TR MR0 $172 0 --

1 162 162 162

2 152 304 142

3 142 426 122

4 132 528 102

5 122 610 82

6 112 672 62

7 102 714 42

8 92 736 22

9 82 738 2

10 72 720 -18

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Monopoly

P

Monopolist - Maximizing Diagram

ATCMC

Q0

D

MR

0

P0

A

C

B

Q

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Monopoly

Monopolist - Maximization

P

ATCMC

Q0

DMR

0

P0

A

C

B

Q

NOTE: Always set price from the demand curve.

= TR – TC

= OPoCQo – OABQo

= APoCB

will last to long run because there is no entry by competitors.

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Monopoly

Monopolist Could Also Make A Loss

PATC

MC

Q0

D

MR

0

P0

A C

B

Q

= TR – TC

= OPoBQo – OACQo

= PoACB(shaded area)

A LOSS

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Special Case of Monopoly

Discriminating Monopoly or Price DiscriminationDiscriminating Monopoly or Price Discrimination

Necessary Condition:

(1) Must have some monopoly power

(2) Must face at least two different demands

(3) Must be able to keep the two demand separate.

charging different prices to different customers for the same commodity.

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Reminder

Consumer Surplus is measured as the area above the price line and under the demand curve.

Q

P

QO

PO

Consumer Surplus

D

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Special Case of Monopoly

Discriminating Monopoly or Price DiscriminationDiscriminating Monopoly or Price Discrimination

Result:

Take away some consumer surplus.

Consumer surplus is difference between what a consumer actually pays for a commodity and what she/he would be willing to pay:

D

0Q1Q

p

1p

0p

Q

A

B

Q1 sells at P1 ; Q0 – Q1 sells at P0 .

P0P1AB is no longer consumer surplus, but rather is now part of total revenue for firm.

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Special Case of Monopoly

Perfect Price DiscriminationPerfect Price Discrimination

OUTCOME:

Completely Eliminate Consumer Surplus.

Price will follow the Demand Curve.

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Special Case of Monopoly

Market Structure SpectrumMarket Structure Spectrum

Degree of CompetitionDegree of Competition

Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Concentration Ratio is a measure of market power:

is the the fraction of total market sales controlled by the industry’s largest firms.

— 4 - firm concentration ratio

— 8 - firm concentration ratio

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Monopolistic Competition

CharacteristicsCharacteristics:

1. Lots of firms

2. Free entry and exit

3. Product differentiation

QQ

D

0

p

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Monopolistic Competition

The steepness of demand depends on the number of close substitutes.

QQ

D

0

p

Perfect Competition

QQ

D

0

p

Q1Q2

P1

P2

Monopolistic Competition Monopoly

QQ

D

0

p

Q1Q2

P1

P2

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Monopolistic Competition

P

SRATCMC

Q

D

MR

0

P

C

A

B

Q

Profit-Maximizing in Monopolistic Competition in Short Run

= CPAB

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Monopolistic Competition

P

LRATCMC

Q

DMR

0

PA

Q

Profit-Maximizing in Monopolistic Competition in Long Run

= TR – TC = OPAQ – OPAQ = 0

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Oligopoly

Term is Greek for “few sellers”Term is Greek for “few sellers”

— Is a type of industry where a few large firms account for the majority of sales.

— Their products are usually differentiated, but there are close substitutes.

— Most of the big brand name items that you are aware of are produced under oligopolistic conditions.

— There can be small sellers in these markets also, but the very large ones account for the vast majority of sales.

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Oligopoly

ContinuedContinued

—These firms are not price-takers, they are price-setters.

—They know that their competitions will react to what they do. So there is strategic

behavior.

—Collusion is illegal, but frequently there is “tacit collusion”.

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Oligopoly

P

ATCMC

Q0

D

MR

0

P0

A

B

C

Q

Profit-Maximizing Diagram for Oligopoly

= CP0AB

P > MC

These profit can persist These profit can persist to the long-run because to the long-run because of barriers to entry.of barriers to entry.

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Barriers to Entry

1. Cost Advantage

2. Predatory Pricing

3. Advertising - Creating Brand Loyalties

4. Product Proliferation

5. Government Barriers – Licensing, etc.

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