Econ 201 1st Edition Lecture 11 Tuesday 2 17 I Imperfect Competition A The main reason that imperfect competition is because firm s have market power That is a firm can set prices where they want and there are limited competitive forces acting on the firm to change its behavior Limits to competition Market power arises because The ability to set prices gives you market power B There has to be a barrier to entry in the market place Textbooks o Patents governmental barrier it gives companies the right to charge high prices C Barriers to entry in the market Patent protection Government licensing Supply chain control o De Beer s Diamonds Diamond owner The price you pay at the jewelry counter is not the competitive price Nothing stops them from raising the prices especially if they are one of the only players in the market for diamonds Natural Barriers from economies of scale Lack of close substitutes There are varying degrees of market power based on the amount of competition D Monopoly There is one seller A firm that is the only producer of a good for which there is no close substitute and no threat of competition o A monopolist is the market supplier because by definition it is the only firm in the industry Since the monopolist has market power it must choose a price and quantity recall PC firms are price takers Have to charge the price they are willing and able to pay 1 Demand and MR 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 P Price Q Quantity TR Total Revenue MR Marginal Revenue P Q TR MR A 20 0 0 B 18 1 18 18 C 16 2 32 14 D 14 3 42 10 E 12 4 48 6 F 10 5 50 2 2 Monopolist Choice of Output a Suppose MC 10 b Optimal production rule for firm MR MC c At 3 units of output MR MC so Qm 3 3 Monopolist choice of price a The monopolist will charge the highest price that it possibly can and still incentivize consumers to pay for it b This is just the point on the demand curve at the optimal level of output c 4 Monopoly and Profit a b TR TC c P ATC x Q 5 Monopoly and Consumer Surplus a 6 Monopoly and Dead Weight Loss a b Any monopoly price above MC causes some dead weight loss c There is always some DWL E Natural Monopoly A natural monopoly is an industry that exhibits large economies at scales such that ATC are declining over market levels of output
View Full Document
Unlocking...