Econ 201 1st Edition Lecture 11Tuesday 2/17I. 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 powerB.) There has to be a barrier to entry in the market place - Textbookso Patents – governmental barrier, it gives companies the right to charge high pricesC.) 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 competitionD.) 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 pay1. Demand and MRThese 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 MRA 20 0 0 -B 18 1 18 18C 16 2 32 14D 14 3 42 10E 12 4 48 6F 10 5 50 22. Monopolist Choice of Outputa. Suppose MC = 10b. Optimal production rule for firm MR=MCc. At 3 units of output MR=MC so, Qm = 33.Monopolist choice of price a. The monopolist will charge the highest price that it possibly can and still incentivize consumers to pay for itb. This is just the point on the demand curve at the optimal level of outputc.4. Monopoly and Profit (π)a.b. Π = TR – TCc. = (P – ATC) x Q5. Monopoly and Consumer Surplusa.6. Monopoly and Dead Weight Lossa.b. Any monopoly price (above MC) causes some dead weight loss c. There is always some DWLE.) Natural Monopoly - A natural monopoly is an industry that exhibits large economies at scales such that ATC are declining over market levels of
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