ECO2030 1nd Edition Lecture 33 Outline of Last Lecture I. Measuring Profit Outline of Current Lecture II. Monopolies III. Patents IV. Price Discrimination V. 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 TRTC or (PATC)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 wellbeing 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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