Monday, December 4, 2023

Microeconomics Chapter 14 Notes

 Monopolies have one firm, no diffentiated products, price settlers, high price levels, no rivals, no entry, and positive long-run economic profit A monopoly is the only supplier of a good or service that has no close subtitutes Monopolies are common: Local and provincial governments create them for utilities including water, electricity, natural gas, and garbage collection Countries grants patents to inventors of new goods, such as new drugs, which give the inventor the exclusive right to sell the good for 20 years The implementation of market power The ability of a firm to set price above arginal cost, P>MC to max profits A perfectly competitive firm has no market power because it sets price equal to marginal cost to max profits In contrast, a profit-max monopolist has the most market power of any firm in any markets tucuture The loos in total social welfare associated with a monopoly The monopolist's pricing/production decsions are often not in the best interests of society because total surplus is not maxed as with perfect competititon. A case can therefore be made for governments intervention to improve the market outcome What is a monopoly? A firm that is the sole seller of a product The product it sells has no subtitutes Many firms are also like monopolists in terms of their market share Google market share in 2018 was 90 percent Causes of monopolies A monopoly market has a barrier to entry an explict restiriction or cost that prevents new firms from entering The monopolist is not subject to the resticition or does no bear the cost Other firms cannot enter the market The 2 main reasons why some markets are monopolies The government creates a monopoly through its pratices or in law A firm may have a cost advantage that enables it to become a monopoly Government Pratices Give a single firm the exclusive right to produce a good

Give a single firm the exclusive right to produce a good Restricting licences to operate Auctioning the right to be a monopoly Contract competition to award rights to collect garbage in Ottawa's five collection zones Government Laws Enacting specific legislation to create a monopoly Example: The Beer Store Patents Grants tht eholder the exclusive right to use or sell an invention for the term of the patent The WTO agreement on trade related aspects of intellectual property rights was signed by 123 nations Cost Advantages wEssential factory A single firm owns a scarce/key resource that a rival needs to survive A single firm has a superior technology or organization Natural Monopoly A single firm can produce the entire market output at lower cost than ould several firms Average cost cruves falls as output increases for observable levels of output This means that fixed costs are very large Natural Monopoly Characterisitics FC fixed costs are very large So AFC falls a lo as output increases And ATC is still falling at the auntity demanded by the market If 1,000 homes demand electricty q=1000 Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings

Find Pm from the demand curve at this Q

Then the TC is lower if one firm services all 1,000 homes 2,500*1,000=2,500,000 Than if 2 firms each service 500 homes 2*4,000*500=4,000,000 per year In a competitive market, the market demand curve slopes downward It can increase its output without affecting price It can sell as much or as little as it likes at the market rpcie So MR=p for the competitive firm But a competitive firm's demand curve is horizontal at the market price because each firm is a price taker This makes the demand for its product perfectly elastic Were it to raise its price above the market price, demand for its product would falls to zero The competitive firm is a price taker because its product has many perfect subs Monopoly vs competition: demand curves Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings

Since it is the only seller, a monopoly faces the market demand curve To sell a larger output, the firm must reduce its price Thus MR does not equal P This is what makes the difference between a competitive and a monopoly, in terms of both firm behaviour and welare implications. Profit = average revenue, the same as for a competive firm p> Mr, in contrast to p= MR for tha competive firm Output effect: higher output riases revenue Price effect: lower prie reduces revenue Increasing Q has 2 effects on revenue Hence MR<P To sell a larger Q the monopolist must reduce the price on all the units it sells so the price effect offsets the benefits of the output effect MR could even be negative if the price effectexceeds the output effect Understanding the monopolist's MR A monopolist maxes profit by producing the quantity where MR=MC Once it is identified it sets the highest price consumers are willing to pay for that quantity Profit maxing Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Profit maxing quantity, Qm is found where MR=MC Ink Drawings Ink Drawings Ink Drawings

Find Pm from the demand curve at this Q

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R=TR-TC Revenue = Total revenue - Total costs pQ- TC Total Revenue= price*output p-ATC Profit = price - average total cost A supply curve provides a unique relationship between price and output Is a price maker Rather, output and price are determinded together with MC, MR and the demand curve Output does no depend only on price Because of how the curves shift, price-output combinations may not be unique A monopoly A monopoly does not have a supply curve Quantity = Qc Pc = Mc Total curplus is maxed Competitive equilibrium Quantity = Qm Pm>MC Monopoly equailibrium The welfare cost of monopoly Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings

Price Discrimination

To do so, the monopolist must know the willingness to pay (WTP) of each customer A firm can increase profit by charging a higher price to buyers with a higher reservation price Selling a firm's goods at different prices to different buyers Price discrimination is rational strategy for a monopolist since it can increase the firm's profits Be able to identitfy customers who are WTP more TO prevent arbitrage shifting instead profits to customers who buy low and sell high Can prevent or limit resale of its product Can increase economic welfare I requires that the monopolist Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Monopoly profit Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Ink Drawings Consumer surplus Dead Weight loss Ink Drawings Ink Drawings Ink Drawings Ink Drawings



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