SC ECON 221 - Monopolies (4 pages)

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This lecture discusses markets considered to be monopolistic. The lecture also covers certain specifics such as: profit maximization, marginal revenue, natural monopolies and price discrimination.

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University Of South Carolina-Columbia
Econ 221 - Prin of Microeconomics
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ECON 221 Lecture 17 Outline of Last Lecture I Firms decision making a Maximizing profits b Different types of competition II Cost Curves a Total Cost Curve b Average Total Cost Curve III Short Run vs Long Run costs IV Market Structure Outline of Current Lecture I Monopolies a General info b Natural Monopoly II Marginal Revenue III Profit Maximization IV Price Discrimination Current Lecture Monopolies Lecture 18 A market with a single seller Product does not have close substitute Barriers to entry can t just jump into market These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o o Control of a scarce resource Government Patents copyrights etc Consider the alternative Natural Monopolies o Natural Monopolies More effective to only have one company producing something Ex Phone lines cable television Very high fixed costs but low cost of increasing output once fixed costs are paid Increasing returns to scale across all reasonable levels of production Cheaper for one large firm to provide for the entire market vs two smaller ones Very difficult for smaller firms to compete De Beers Diamonds Exampleo Diamonds are expensive o Not physically scarce but sellers are making them scarce o People with access to the diamond deposits banded together to form De Beers o This kept quantity sold low and prices high How to maximize profits in perfect competition o Firms maximize profits by choosing Q such that MR Q MC Q o In perfect competition MR Q P for any Q o Firms make positive profits and enter the market when P min ATC o Eventually leads to all firms earning zero profit but minimizing their ATC Keep in mind that all of these results are stemmed from the fact that Perfectly Competitive firms are price takers Many sellers Identical products Raising price above market price no buyers Monopolies Single sellers Producing a good with no close substitutes o Marginal revenue is now dependent on quantity sold Because monopolist is the only producer it faces the entire market demand curve To increase output it must lower price can raise price without losing all customers Marginal revenue is decreasing as Q increases As result monopolists can raise price above the price that would occur in a competitive market the price where MC MR Where MR MC still maximizes profits same argument as before however MR is different Prices go down as output increases moves along demand curve Monopolists Marginal Revenue o Decreasing as output increases because prices go down o Always less than the price because monopolists have to charge the same price for every unit sold Quantity effect vs price effect Additional revenue Price received because you re selling to fewer customers With linear demand marginal revenue always becomes negative at the middle of the demand curve Monopolies losing money Monopolies can lose money too Monopolist Profit Maximization o Profits still maximized at MR MC o MR P so at Q MC MR P unlike PC o Think about efficiency implications o Compared to Perfect Competition market level outcomes Under monopoly lower Q higher P Producers earn positive profits but less CS and TS under monopoly Deadweight Loss P MC implies that there are some people who are willing to buy one more unit for less than it would cost to produce it What can be done o In some cases these inefficiencies are preferable to PC Research arts etc o But in the case of natural monopolies there is room for gov t intervention Public ownership US Postal Service utilities in some places Main advantage of gov t not profit motivated so no motivation to artificially restrict supply Regulation Here gov t intervention via price controls may reduce inefficiency Price Discrimination o Recall why MR P for monopolists Increasing output requires monopolist to sell to consumers who have slightly lower willingness to pay But we assumed that monopolist has to charge everyone the same price so price collected from every unit sold goes down o Things change if a firm can price discriminate Charge different prices to different customers o Perfect price discrimination monopolist charges every buyer their willingness to pay Not feasible realistic but useful for comparison Now MR is simply the demand curve so MR Q P Q Everything that was once CS becomes profit In summary o o o o o Monopolists arise due to barriers to entry Like PC monopolists choose Q so that MR MC Unlike PC MR MC P Firms make profits in the long run Market fails to achieve most efficient outcomes When possible firms can extract even more profit from consumers by price discriminating However like PC monopolies are still relatively rare

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