ECON 221 Lecture 17Outline of Last Lecture I. Firms decision-makinga. Maximizing profitsb. Different types of competition II. Cost Curvesa. Total Cost Curveb. Average Total Cost CurveIII. Short Run vs. Long Run costsIV. Market Structure Outline of Current Lecture I. Monopoliesa. General infob. Natural Monopoly II. Marginal RevenueIII. Profit MaximizationIV. Price DiscriminationCurrent LectureMonopolies – Lecture 18- A market with a single seller- Product does not have close substitute- Barriers to entry- can’t just jump into marketThese 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 Control of a scarce resourceo 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 Example- o 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 Revenueo Decreasing as output increases (because prices go down)o Always less than the price (because monopolists have to charge the same price for everyunit 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 = MCo MR < P, so at Q*  MC (=MR) < P (unlike PC!)o Think about efficiency implicationso 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 summaryo Monopolists arise due to barriers to entry o Like PC, monopolists choose Q so that MR=MC o Unlike PC, – MR=MC<P  Firms make profits in the long-run  Market fails to achieve most efficient outcomes o When possible, firms can extract even more profit from consumers by price discriminating o However – like PC, monopolies are still relatively