ECO2030 nd 1 Edition Lecture 33 Outline of Last Lecture I Measuring Profit Outline of Current Lecture II III IV V Monopolies Patents Price Discrimination Natural Monopolies Current Lecture a competitive firm s demand curve is really the price they are a price taker Demand is horizontal a Monopoly has the whole market demand they are price makers However the only way for them to increase output is by reducing cost Profit maximization for a monopoly the same rules apply for a competitive firm Produce Quantity where MR MC Difference MR is not equal to price it is downward sloping The intersection of MR and MC sets the quantity but not the price In a monopoly the price can be above this So for a monopoly P MC because they can charge a higher price they are price makers 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 Total profit is the same for a monopoly TR TC or P ATC xQ you can also just calculate the area of the box The Market for drugs When there is a new drug produced by a pharmaceutical company they are often rewarded for their innovation with a patent this keeps the incentive to do more research This patent can give a firm the ability to be a monopoly allows them to produce the Quantity where MR MC and allows them to have P MC As shown above When a patent expires new firms enter the market and the monopoly disappears so price drops The Welfare Cost of Monopolies Total Surplus the total economic well being of both buyers and sellers Consumer Surplus A consumers WTP for a good minus what they actually pay Producer Surplus The amount producers receive for a good minus their total cost to make it to Maximize Total Surplus want to produce where the MC intersects the demand curve most efficient Monopolists want to produce where MC MR therefore Total Surplus is not maximized and therefore not efficient creates deadweight losses because of the lack of competition This deadweight loss is a social loss Bigger PS and Smaller CS Price discrimination sell the same good at different prices for different people It is an attempt to separate customers according to their WTP In Perfect price discrimination firms would charge every customer exactly their WTP means there would be no CS However the monopolist would get the entire Surplus profit EXAMPLES of Price Discrimination Movie Tickets charge more for different times of the day Airline fares charge more for first class Financial aid try to offer just the right amount of aid to get you to their school Quantity Discounts in reality these are not examples of perfect price discrimination Regulations often try to regulate the behavior of a monopoly For a natural monopoly average total cost always keeps falling it is actually beneficial for society in this case competition would raise the price MC is typically a horizontal MC curve for a natural monopoly Because a NAtural Monopoly has a decreasing ATC The MC ATC This is why if regulators require them to make their price to MC the price will fall below the ATC and the monopoly will have a loss Public ownership no profit incentive thats why whenever government provides a good they do it inefficiently Markets provide more efficiently do to profit incentives
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