Econ 150 Chapter 9 Pure Monopoly

What is the *allocatively efficient* level and what price should it produced this level of output?

*Allocatively Efficiency* is reached when the *Marginal Cost* = *Marginal Benefit* or *Price* (Demand curve)

Competitive Price

*MC* intersects the *Demand* curve.

Normal Profit Price Occurs when

*P = ATC*

Pure Monopoly -*Allocatively Efficient* -*Productively Efficient*

-No because Pure Monopolies maximize profits by choosing levels of output ~lower~ than those found in *Purely Competitive Markers* -Most likely no because the lack of competitive pressures.

Economies of Scale

A condition in which the long-run average total cost of production decreases as production increases.

Monopoly

A market structure characterized by a single seller. Producing a good or service for which there are *no close substitutes*, in a market with *barriers* to entry. A Monopoly is a *Price Maker* The *Demand* it faces is downward-sloping. If a *Pure Monopoly* wants to sell more units, it must lower the price for every unit it sells, giving up some revenue on units it could have sold at higher prices.

Regulated Competitive Price

A regulated price that is = to Marginal Cost of production. The competitive price can be found where the Marginal Cost curve intersects the demand curve, and it is *allocatively efficient*.

Regulated Normal Profit Price

A regulated price that is equal to the ATC of production. The normal profit price can be found where the ATC curve intersects the Demand curve.

*Natural Monopoly*

An industry in which economies of scale are so extensive that the market is better served by a single firm.

Barries to entry

Any impediments that prevent firms from entering a market or industry.

Government can do to Monopolies

Apply Price regulation (*Price Ceilings*) Provide *Subsides to continue operate*.

Find the *Average Total Cost* at the profit-maximizing level of output

Draw a vertical line *|* from the *Demand* until it intersects the *Average Total Cost* Then draw a horizontal line from that point over to the corresponding cost on the *Price*

Find the *Price* the Pure Monopoly should charge to maximize profits

Draw a vertical line from the profit-maximizing quantity until it intersects the *Demand Curve* (D) Then draw a horizontal line from that point over to the corresponding *Price*.

What is the *Profit Per Unit* generated by the Pure Monopoly?

Find *Price* the pure monopoly should charge to maximize profits. MC=MR, then draw a line up to the Demand. Find *ATC*, draw a line down to AVC, and then a horizontal line to the Price. Its profit per unit is: (*P* - *ATC*)

How much *Consumer Surplus* is determined?

Identified MR=MC or ATC △ = Horizontal line up to D

Loss

Identify *Competitive Price*(*• MC & D*) Compare it to ATC, draw a horizontal line and calculate rectangle area.

Profit-maximizing of Pure Monopoly

MR = MC

Marginal Revenue (MR)

MR= △TR / △Q Change in TR / Change in Q The change in a firm's total revenue that results from a 1-unit change in output produced and sold.

Monopoly and Price Discrimination

Monopolies charge *lower prices* to consumers who are relatively more responsive to price changes, and they charge *higher prices* to those who are relatively less responsive to price changes.

Productive Efficiency

Producing output at the lowest possible *Average Total Cost* of production; using the fewest resources possible to produce a good or service.

Allocative Efficiency

Producing the goods and services that are most wanted by consumers in such a way that their *Marginal Benefit* = *Marginal Cost*.

What is the additional profit that a company is able to generate by price-discriminating?

Profit per unit = (*P - ATC*)Q SUM both Companies Increase % : sum(2C)-1C/1C *Note: *MC* = *ATC*

How much profit the pure monopoly generate at the profit-maximization level of output?

Profit per unit x Quantity

*Price Makers*

Pure Monopolies are able to charge the price consumers are willing and able to pay for the amount of output available.

Identify *Deadweight loss*

Represents MC+(•MR+MC)+D

Loss

TR < TC The level of profit that occurs when *Total Revenue* is less than *Total Cost*

Total Revenue (TR)

TR = P x Q

Monopoly Power

The ability of a monopoly to influence prices by *controlling* the Quantities that it produces in the market.

Normal Profit

The level of profit that occurs when *Total Revenue* is = to *Total Cost* Normal Profit is also known as *Zero Economic Profit*

Economic Profit

The level of profit that occurs when total revenue is greater than total cost.

Price Discrimination

The practice of selling the *same* good or service to *different* consumers at *different prices*.

Unregulated Monopoly Price

The profit-maximizing price that will result from an unregulated monopolistic market.

*Deadweight Loss*

The value of the *Economic Surplus* that is forgone when a market is not allowed to adjust to its competitive equilibrium.