Econ ch15 Monopoly

What are the 4 ways that a gov can do to respond to the inefficiency of monopoly?

1. Anti-trust 2. make the company to a gov-own enterprise 3. regulate the price 4.do nothing at all

Profit Maximization for a Monopoly

1. MR = MC (find Q) 2. use demand curve to find the price that will induce consumers to buy that quantity (find P)

Examples of price discrimination

1. Movie theater: theaters have *local monopoly power* & students and senior citizens have a *lower willingness to pay* 2. Airline Prices: price discrimination separate business travelers and leisure travelers. (leisure travelers are more willing to stay over night) 3. Discount coupons: *coupons allow companies to price discriminate), and the willingness to clip coupons is related to the customer's willingness to pay for the good. 4. Financial aid 5. Quantity discount: sometimes monopolists price discriminate by charging different prices to the same customer for *differnt units that the customer buys.*

Monopoly regulation

Profit maximizing v. marginal cost pricing

Monopoly regulation2

Profit maximizing v. marginal cost pricing v. average cost pricing (which will the producer price? Why? What about their cost?)

Monopoly's supply curve

There is no supply curve for monopoly! Why? *A supply curve tells us the quantity that firms choose to supply at any given price.* Monopoly is a price maker; it does not need to take price. But *the shape of demand curve determines the shape of the MR curve, which determines the monopolist's profit-maximizing quantity.*

How does monopolist increase profits? What is the effect?

They increase profit by charging different prices for the same good based on *a buyer's willingness to pay.* When *price discrimination is imperfect*, it can either raise or lower welfare compared to the outcome with a single monopoly price.

What is the profit under perfect price discrimination?

equal to the difference between the price receives and its average total cost.

Will there be deadweight loss under perfect price discrimination? Why?

every consumer who values the product above the monopolist's MC receives one; although each still pay a price above MC(except for the last consumer to purchase the good), the quantity of products producsed is the social efficient Q. Therefore, there is no daedweight loss under perfect price discrimination.

Producer surplus

the difference between the* amount the producer is willing to supply goods for* and the *actual amount received by him when he makes the trade.*

What is monopoly?

A firm that is the sole seller in its market. 1. when the gov gives a firm the exclusive right to produce a good 2.a single firm can supply the entire market at a lower cost than many firms could.

A firm is a natural monopoly if it exhibits the following as its output increases: decreasing marginal revenue. increasing marginal cost. decreasing average revenue. decreasing average total cost.

Decreasing average total cost (decreasing ATC) A single firm can supply a good or service to an entire market at a lower cost than could two or more firms due to *average total cost decreasing as output increase.*

What is perfect price discrimination?

It describes a situation in which the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price. (sell the same goods to different people at different price according to their willingness to pay)

What is deadweight loss?

It is the reduction in economic well-being that results from the monopoly's use of its market power.

Where is the maximize profit of a monopoly firm? What about the quantity?

MR = MC set the price at which that Q is demanded.

For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price P , marginal revenue MR , and marginal cost MC ?

P > MR = MC

Profit=

TR-TC =P*Q-ATC*Q =(P-ATC)*Q

The deadweight loss from monopoly arises because 1. the monopoly firm makes higher profits than a competitive firm would. 2. some potential consumers who forgo buying the good value it more than its marginal cost. 3. consumers who buy the good have to pay more than marginal cost, reducing their consumer surplus. 4. the monopoly firm chooses a quantity that fails to equate price and average revenue.

Some potential consumers who forgo buying the good value it more than its marginal cost When price charged above marginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist's price. *(cost < consumer value the good < price)* These consumers do not buy the good. Because the value these consumers place on the good is greater than the cost of providing it to them, *this result is inefficient*

If a monopoly's fixed costs increase, its price will _____, and its profit will _____. increase, decrease decrease, increase increase, stay the same stay the same, decrease

Stay the same, decrease Maximize monopolist's profit is the *intersection of the MC and MR curve.* The price it charges is determined by the *point on the demand curve that corresponds to this level of output.* --an increase in fixed costs does not alter the MR or MC, but it decreases the profit because profit = TR - TC

Why there is deadweight loss when single-price monopoly?

The monopoly charges a price above its marginal cost, *so not all consumers who value the good at more than its marginal cost are able to buy it*.

What is the biggest difference between a competitive firm and a monopoly?

The monopoly is able to influence the price of its output.

What is the monopoly differ from a competitive firm?

The price exceeds its marginal revenue, so its price exceeds marginal cost (P > MC)

Why a monopoly's marginal revenue is always below the price of its good?

When a monopoly *increases production by 1 unit, it causes the price of its good to fall*, which reduces the amount of revenue earned on all units produced.

What is single-price monopoly?

When the monopolist cannot price discriminate

Why monopoly cause deadweight losses?

When the monopoly charges a price above marginal cost (P > MC), some consumers who value the good more than its cost of production do not buy it.

Under what circumstances will natural monopoly occur?

When there are economies of scale over the relevant range of output.

Compared to the social optimum, a monopoly firm chooses

a quantity that is too low and a price that is too high

Natural Monopoly

a type of monopoly that the company can provide a service or goods with a lower cost than could two or more firms.

What is the consumer surplus under perfect price discrimination?

consumer surplus equals zero because the difference between each consumer's price they pay is equal to zero.

Because a monopoly is the sole producer in its market, it aces a ( ) demand curve for its product.

downward-sloping demand curve

Consumer surplus

it is the difference between the *total amount that consumers are willing and able to pay* for a good or service(shown by the demand curve) and the *total amount that they actually do pay*(i.e market price)

So what will happen if a monopolist charge price to perfect price discrimination?

it reduces consumer surplus.

The profit maximizing quantity occurs where...

marginal revenue equals marginal cost