Economics Unit 7
How to know if demand is elastic or inelastic when looking at price and TR
In a monopoly, if price and TR go in opposite directions, then elastic demand In a monopoly if price and TR go in the same direction, then inelastic demand
To determine price at which to produce:
1) Look at where MC and MR intersect 2) Take that point and go up to the demand curve and that is the price
Price discrimination is either when
1) Marginal costs are the same across customers but prices are different 2) Prices are the same despite differences in marginal costs - Ex: All you can eat buffet. Some consumers spend more on food than others despite them all being charged the same price.
In order for a monopoly to conduct price discrimination:
1) Must be a price maker 2) Segment the market (Cannot let people lie in order to get a better price or for people to resell the good if they got it for a lower price) - Ex: For travelers, make tickets much more expensive if person does not travel over weekend because people who do not do this are businessmen most likely -Must subtlety do this and not make this too obvious, cannot do it directly - Ex: Costco has a membership where if you buy a bulk of items often, it overall becomes a lot of cheaper rather than if someone buys from costco not much not very often - Ex: Coupons and Loyalty cards 3) No resale - You cannot be able to easily sell a lower priced good and then sell it for a profit - Ex: If you buy a ticket, it is in your name so you cannot sell it to a businessman so you make money and he has a cheaper ticket. It cannot happen.
What is the goal of a monopoly
A goal of a monopoly is to limit competition and to continue to do what they want without competition
Why are monopolies considered the bad guy
A monopolies are considered a bad guy because they charge higher prices and less quantity than a firm with competition
Single- Price Monopolist
A monopolist who charges everyone the same price is known as a single-price monopolist. As the term suggests, not all monopolists do this. In fact, many monopolists find that they can increase their profit by selling the same good to different customers for different prices: they practice price discrimination.
Monopoly with price
A monopolist, on the other hand, can affect the price. Because it is the sole supplier in the industry, its demand curve is the market demand curve DM , as shown in panel (b). To sell more output, it must lower the price; by reducing output, it raises the price.
What is a monopoly a source of
A monopoly is a source of market failure
Downside of public ownership
Experience suggests, however, that public ownership as a solution to the problem of natural monopoly often works badly in practice. One reason is that publicly owned firms are often less eager than private companies to keep costs down or offer high-quality products. Another is that publicly owned companies all too often end up serving political interests—providing contracts or jobs to people with the right connections.
Consider the following data from three different firms each selling to two different customers. Shown are the price per unit charged each customer and the marginal cost of producing each unit for the customer. (Thus, for example, Firm 1 has different marginal costs between customers and charges different prices.) Which firms are engaged in price discrimination? Explain.
Firms two and three are both engaging in price discrimination. Firm two is engaging in price discrimination because the the price of the good is the same for each consumer despite each consumer having different marginal costs. Firm three is engaging in price discrimination because despite the marginal cost being the same for each consumer, the consumers are being charged different prices for the same good.
Why are goods in a monopoly more inelastic than in perfect competition
Goods in a monopoly market are more inelastic compared to perfect competition because there are no close substitutes
How do you get closer to perfect price competition
In general, the greater the number of different prices charged, the closer the monopolist is to perfect price discrimination. True perfect price competition is basically impossible.
Price regulation
In the United States, the more common answer has been to leave the industry in private hands but subject it to regulation. In particular, most local utilities, like electricity, telephone service, natural gas, and so on, are covered by price regulation that limits the prices they can charge.
Is a monopoly allocatively efficient?
Monopoly is not producing at the allocatively efficient quantity - Allocatively efficient point is where supply and demand equal to each other, so where MC intersects with Demand curve - Producing at that point is allocatively efficient
What does price elasticity of demand tell you about total revenue
Remember that the price elasticity of demand determines how total revenue from sales changes when the price changes. If the price elasticity is greater than 1 (demand is elastic), a fall in the price increases total revenue because the rise in the quantity demanded outweighs the lower price of each unit sold. If the price elasticity is less than 1 (demand is inelastic), a lower price reduces total revenue.
Difference of output and price of monopoly and perfect competition
So the monopolist does not meet the P = MC condition for allocative efficiency. As we've already seen, the monopolist produces less than the competitive industry—8 diamonds rather than 16. The price under monopoly is $600, compared with only $200 under perfect competition. The monopolist earns a positive profit, but the competitive industry does not.
Why is society's welfare lower under a monopoly
Society's welfare is lower under monopolies because of the deadweight loss caused by the higher prices - This is not caused by the consumer surplus being transferred to profit for the monopoly as this may be worse for the consumers, but not for society because the loss to the consumers is transferred to the producers keeping it the same.
Demand curve of a monopoly
The demand curve of a monopoly is downward sloping and equivalent to market demand curve - Can find the price at which they will make the most profits as they are not a price taker
When doing price discrimination:
The greater the number of prices the monopolist charges, the lower the lowest price—that is, some consumers will pay prices that approach marginal cost. The greater the number of prices the monopolist charges, the more money is extracted from consumers.
Where is total revenue maximized for a monopoly
The point on a monopoly where total revenue is maximized is where MR = MC, so this is where they produce - Where the two curves intersect, also it is NOT where MC intersects demand curve as demand curve and MR curve are not the same in monopolistic competition
What are the two ways a government can regulate a monopoly
The two way a government can regulate a monopoly is subsidies and changing price
What is marginal revenue influenced by
We've already seen that once the industry is consolidated into a monopoly, the result is very different. The monopolist's marginal revenue is influenced by the price effect, so that marginal revenue is less than the price. That is, - (61-3) P > MR = MC at the monopolist's profit-maximizing quantity of output
How is a natural monopoly still sometimes bad and how can this be changed
Yet even in the case of a natural monopoly, a profit-maximizing monopolist acts in a way that causes inefficiency—it charges consumers a price that is higher than marginal cost and, by doing so, prevents some potentially beneficial transactions. In many countries, the preferred answer to the problem of natural monopoly has been public ownership. Instead of allowing a private monopolist to control an industry, the government establishes a public agency to provide the good and protect consumers' interests.
How do you find the part of consumer surplus that is transferred to DWL and producer surplus:
You go to where the original equilibrium is (MC = D)
Price- searcher
"Price - searcher" is who the monopoly is as they have a lot or total market power so they have influence over the price
How businesses can make sure price discrimination works
(U.S. law places some limits on the ability of companies to practice blatant price discrimination.) Second, even if it were legal, it would be a hard policy to enforce: business travelers might be willing to wear casual clothing and claim they were visiting family in Ft. Lauderdale in order to save $400. So what the airlines do—quite successfully—is impose rules that indirectly have the effect of charging business and leisure travelers different fares. Business travelers usually travel during the week and want to be home on the weekend, so the round-trip fare is much higher if you don't stay over a Saturday night. The requirement of a weekend stay for a cheap ticket effectively separates business travelers from leisure travelers. Similarly, business travelers often visit several cities in succession rather than make a simple round trip; so round-trip fares are much lower than twice the one-way fare. Many business trips are scheduled on short notice, so fares are much lower if you book far in advance. Fares are also lower if you travel standby, taking your chances on whether you actually get a seat—business travelers have to make it to that meeting; people visiting their relatives don't. And because customers must show their ID at check-in, airlines make sure there are no resales of tickets between the two groups that would undermine their ability to price-discriminate—students can't buy cheap tickets and resell them to business travelers. Look at the rules that govern ticket pricing, and you will see an ingenious implementation of profit-maximizing price discrimination.
How to determine if monopoly is earning a profit
To determine whether a monopoly is earning a profit or not, look at where the price is and if it is above ATC, then profit, if ATC is above price, then loss - Profit is box between price and ATC - Box under ATC is cost
Where does monopoly find its price
Applying the optimal output rule, we see that the profit-maximizing level of output, identified as the quantity at which marginal revenue and marginal cost intersect (see point A), is QM. The monopolist charges the highest price possible for this quantity, PM, found at the height of the demand curve at QM (see point B). At the profit-maximizing level of output, the monopolist's average total cost is
Monopolistic competition characteristics:
One single firm Only product of its kind, no close substitutes Ease of entry is impossible - Blocked because it is too expensive or by government -Patents
Productively efficient point
Productively efficient point is the point of lowest cost of production, so minimum ATC - Monopolies often do not produce at this point as they do not need to
How does a monopoly act like a tax on consumers
This net loss arises because some mutually beneficial transactions do not occur. There are people for whom an additional unit of the good is worth more than the marginal cost of producing it but who don't consume it because they are not willing to pay the monopoly price, PM. Indeed, by driving a wedge between price and marginal cost, a monopoly acts much like a tax on consumers and produces the same kind of inefficiency.
Supply curve of a monopoly
The supply curve is the marginal cost above the shutdown price in a monopoly
Why regulation helps society
The welfare effects of this regulation can be seen by comparing the shaded areas in the two panels of Figure 62.2. Consumer surplus is increased by the regulation, with the gains coming from two sources. First, profit is eliminated and added instead to consumer surplus. Second, the larger output and lower price leads to an overall welfare gain—an increase in total surplus. In fact, panel (b) illustrates the largest total surplus possible. - Deadweight loss is gone as well and made into consumer surplus
Suppose a local beverage shop charges $6 for a six-pack of your favorite beverage and charges $15 for a case (containing four six- packs) of that same beverage? Is this price discrimination?
This is a form of price discrimination because the goods despite being different in number, are the exact same. In addition, the marginal cost of producing the good stays the same while the price of the good differs in this example. In order to do this, the firm looks at the price elasticity of demand of the consumers so they see which consumers are willing to pay more money for more six-packs of their favorite beverage. Because of all of this, this is a form of price discrimination.
Difference between monopoly and perfect competition when profit is in market
Although in perfect competition market, when firms earn profits, more firms join and make the profit become normal profit. However, in a monopoly, due to impossible barriers of entry, nothing happens to a monopoly's profit, long run profits stay
What factors other than income are likely to affect willingness to pay? How will differences in these factors among its customers affect the likelihood that a firm will engage in price discrimination?
A factor other than income that changes someone's willingness to pay is interest and timing for purchasing the good. If someone is more interested in purchasing a good, such as someone applying for early admission at a college, the college is less likely to give them financial aid because they know that their demand is more price inelastic for attending the college. If someone had little time to purchase a good, such as a last minute business trip, plane companies will charge the person a higher price because they know that this person's willingness to pay for the good will be more than a casual person flying to a vacation.
Why monopolistic market is worse for society than a perfectly competitive market
A monopolistic market is worse off for a society compared to a competitive market - In a monopoly, market has little consumer surplus, consumers are not willing to spend any more on a certain good than they already are - Deadweight loss is also present in a monopolistic market because price is too high for many consumers
What a monopoly price does
A monopoly doing the price where MR = MC at the demand point decreases consumer surplus and turns it into profit and deadweight loss
Why is monopoly bad
A monopoly is considered the bad guy because it charges a higher price with less output
What is a monopoly's goal
A monopoly is most important goal is to keep profits, they use goods in least efficient way because instead of using it to improve goods, they use resources to lobby governments and keep competitors out - Uses resources in ways that are unproductive for our citizens
Why is a monopoly not allocatively efficient
A monopoly is not allocatively efficient because Price does not equal MC - It can be productively but it does not have to be, usually is not
Where does monopoly maximize its total revenue
A monopoly maximizes its TR at the point of unit elasticity where MR equals zero
Natural monopoly
A natural monopoly is where fixed costs are very expensive so few firms are able to join and compete in an industry
Price discriminating monopolist with efficiency
A price discriminating monopolist causing less inefficiency because it causes less deadweight loss to occur. More beneficial transactions occur than in a single- price monopolist. This also causes the MR curve to become closer to the demand curve
Fair return price
ATC crosses demand curve (Price)
Common techniques for price discrimination include the following:
Advance purchase restrictions. Prices are lower for those who purchase well in advance (or in some cases for those who purchase at the last minute). This separates those who are likely to shop for better prices from those who won't. Volume discounts. Often the price is lower if you buy a large quantity. For a consumer who plans to consume a lot of a good, the cost of the last unit—the marginal cost to the consumer—is considerably less than the average price. This separates those who plan to buy a lot, and so are likely to be more sensitive to price, from those who don't. Two-part tariffs. In a discount club like Costco or Sam's Club (which are not monopolists but monopolistic competitors), you pay an annual fee (the first part of the tariff) in addition to the price of the item(s) you purchase (the second part of the tariff). So the full price of the first item you buy is in effect much higher than that of subsequent items, making the two-part tariff behave like a volume discount.
Example of regulation
After the law went into effect, however, cable television rates increased sharply. The resulting consumer backlash led to a new law, in 1992, which once again allowed local governments to set limits on cable prices. Was the second round of regulation a success? As measured by the prices of "basic" cable service, it was: after rising rapidly during the period of deregulation, the cost of basic service leveled off. However, price regulation in cable applies only to "basic" service. Cable operators can try to evade the restrictions by charging more for premium channels like HBO or by offering fewer channels in the "basic" package. So some skeptics have questioned whether current regulation has actually been effective.
Explanation of why price discrimination is good
Air Sunshine has two types of customers, business travelers willing to pay at most $550 per ticket and students willing to pay at most $150 per ticket. There are 2,000 of each kind of customer. Air Sunshine has a constant marginal cost of $125 per seat. If Air Sunshine could charge these two types of customers different prices, it would maximize its profit by charging business travelers $550 and students $150 per ticket. This price discrimination would allow Air Sunshine to capture all of the consumer surplus as profit.
Why should you not break up a natural monopoly
Breaking up a monopoly that isn't natural is clearly a good idea: the gains to consumers outweigh the loss to the producer. But it's not so clear whether a natural monopoly, one in which large producers have lower average total costs than small producers, should be broken up, because this would raise average total cost. For example, a town government that tried to prevent a single company from dominating local gas supply—which, as we've discussed, is almost surely a natural monopoly—would raise the cost of providing gas to its residents.
Difference of surplus in monopoly compared to perfect competition
By comparing panels (a) and (b), we see that in addition to the redistribution of surplus from consumers to the monopolist, another important change has occurred: the sum of profit and consumer surplus—total surplus—is smaller under monopoly than under perfect competition. That is, the sum of CSM and PSM in panel (b) is less than the area CSC in panel (a). Previously, we analyzed how taxes could cause deadweight loss for society. Here we show that a monopoly creates deadweight loss equal to the area of the yellow triangle, DWL. So monopoly produces a net loss for society.
Monopoly demand curve and marginal revenue curve, why are they different
By contrast, a monopolist is the sole supplier of its good. So its demand curve is simply the market demand curve, which slopes downward, like DM in panel (b) of Figure 61.1. This downward slope creates a "wedge" between the price of the good and the marginal revenue of the good. Table 61.1 shows how this wedge develops.
Does a monopoly help or hurt a consumer
By holding output below the level at which marginal cost is equal to the market price, a monopolist increases its profit but hurts consumers. To assess whether this is a net benefit or loss to society, we must compare the monopolist's gain in profit to the consumers' loss. What we learn is that the consumers' loss is larger than the monopolist's gain. Monopoly causes a net loss for society.
How do people get charged during price discrimination
Clearly, the airline would charge each group its willingness to pay—that is, the maximum that each group is willing to pay. For business travelers, the willingness to pay is $550; for students, it is $150. As we have assumed, the marginal cost is $125 and does not depend on output, making the marginal cost curve a horizontal line.
Consumer surplus in a monopoly
Consumer surplus in a monopoly is the triangle above where the price that monopoly produces at
A Monopoly compared to a competitive industry:
Produces a smaller quantity Charges a higher price Earns a profit
Deadweight loss in a monopoly
Deadweight loss within a monopoly is the space between the price given by the monopoly and the allocatively efficient competitive price - This is because more people would be willing to buy a good at the allocatively efficient price yet monopolies do not produce at this price because they make more money at the monopoly price which is the demand curve point vertically above where MC and MR intersect
Why should a natural monopoly be given a fair returns price
During a natural monopoly, government should give monopoly a fair returns price because it is most efficient for a monopoly to be in market but they need to lower prices to the point where monopoly makes a normal profit so consumers feel they have fair price yet monopoly does not lose money
How can you tell through ATC curve whether something is a natural monopoly or not
For simplicity, we assume that the firm's total cost consists of two parts: a fixed cost and a variable cost that is the same for every unit. So marginal cost is constant in this case, and the marginal cost curve (which here is also the average variable cost curve) is the horizontal line MC. The average total cost curve is the downward-sloping curve ATC; it slopes downward because the higher the output, the lower the average fixed cost (the fixed cost per unit of output). Because average total cost slopes downward over the range of output relevant for market demand, this is a natural monopoly.
Elasticity of a demand curve
For the demand curve of a monopoly, the portion of the graph is divided into two sections with a midpoint based on MR - Top section is where MR is positive, midpoint is where MR is zero, bottom section is where MR is negative - Top section is elastic, midpoint is unit elastic, bottom is inelastic
Geographical monopolies
Geographical monopolies are stores that are monopolies because there is no competition near them - Ex: Store in big bears can sell chains for a very high price because there is no competition for chains in big bear, this is the only store that sells them and due to this they can sell them for a high price
What happens when MC is below ATC
If MC is below ATC, ATC is will also experience decreasing
What happens to price and output when fixed costs increase
If fixed cost increases, what happens to the monopoly's price and output, nothing as fixed cost do not affect MC so nothing changes (MC changes is what causes a change in output) - Only difference is less profit as ATC moves up
Where can a regulation not be set and why
If regulators pursued allocative efficiency by setting a price ceiling equal to marginal cost, the monopolist would not be willing to produce at all in the long run, because it would be producing at a loss. That is, the price ceiling has to be set high enough to allow the firm to cover its average total cost.
When is monopoly losing money
If the marginal cost of each unit is greater than the MR gained from that unit, a monopoly should not sell at this quantity because they are losing profit - If MR is greater than MC, you are making profit but can make more by producing more
Price compared to marginal revenue in a monopoly
In a monopoly, the price is greater than the marginal revenue always - Both decrease as you continue to produce more
Where does price discrimination happen and where does it not
In fact, price discrimination takes place under oligopoly and monopolistic competition as well as monopoly. Never happens under perfect competition.
Perfect price discrimination
In this case, the consumers do not get any consumer surplus! The entire surplus is captured by the monopolist in the form of profit. When a monopolist is able to capture the entire surplus in this way, we say that the monopolist achieves perfect price discrimination.
Why is marginal revenue less than demand
Marginal revenue is less than demand because as you increase the quantity produced, you cannot sell the good at the same price as before, you have to sell it at a lower price in order to make profit -Must lower price on all previous units as well - This make the both curves downward sloping and MR less than the demand curve
Is MR reflected on the demand curve
Marginal revenue is not being reflected on the demand curve as it is less than price - It is a curve on the graph to the left of the demand curve
Are monopolies good for the economy
Monopolies are often dangerous without regulation
Monopolies to surplus
Monopolies increase producer surplus and decrease consumer surplus
Where will monopolies produce
Monopolies will NOT produce where total revenue is maximized, they will produce at MR = MC which is where PROFIT is maximized
When will monopolies use price discrimination
Monopolies will use price discriminations if different consumers have drastically different elasticity of demand - Ex: For a flight, businessmen are very inelastic while students are very elastic, so flights charge higher prices to businessmen and lower prices to students --This makes the flight the most money possible as they can attract the most consumers possible. Take away the most consumer surplus possible. --If business only charges higher price, losses quantity of people unwilling to pay that price, if businessmen only charges lower prices, loses the option of making much more money per ticket on the consumers who are willing to buy the good for a much higher price.
What is the only monopoly that helps a market
Natural monopolies are the only efficient monopolies that help the market - This is because one firm in an industry is actually better for the industry - Usually because of high ATC that slopes down considerably as firm producers more -- Better for one large firm - Earns a profit of everything above its ATC to its Demand from where MC and MR intersect - These firms have decreasing MC over a large range of output making cheaper prices for producers if they can produce a considerable amount; Hence, monopolies are better for market - Ex: Electric company
What is a natural monopoly
Natural monopoly: It is a market where it is more efficient for there to be a singular firm in a market - ATC is smaller in a natural monopoly than if multiple firms were in a market better suited for a natural monopoly - The government regulates a natural monopoly by using price regulation
Monopolistic competition results:
Nearly Complete price- setting power - Some very expensive prices will cause people to not buy good Nonprice competition is irrelevant because there is no competition for the good They do not have be productive or allocatively efficient - No incentive to be efficient because they have no competition, they no they are going to make lots of money regardless Huge long- run profits Example: Standard Oil Company and U.S. Steel
Where are price and quantity effect strong
Notice that it is hill-shaped: as output rises from 0 to 10 diamonds, total revenue increases. This reflects the fact that at low levels of output, the quantity effect is stronger than the price effect: as the monopolist sells more, it has to lower the price on only very few units, so the price effect is small. As output rises beyond 10 diamonds, total revenue actually falls. This reflects the fact that at high levels of output, the price effect is stronger than the quantity effect:
Where price regulation would be set
Now suppose that regulators impose a price ceiling on local gas deliveries—one that falls below the monopoly price PM but above average total cost, say, at PR in panel (a). At that price the quantity demanded is QR. Does the company have an incentive to produce that quantity? Yes. If the price the monopolist can charge is fixed at PR by regulators, the firm can sell any quantity between zero and QR for the same price, PR. Because it doesn't have to lower its price to sell more (up to QR), there is no price effect to bring marginal revenue below price, so the regulated price becomes the marginal revenue for the monopoly just like the market price is the marginal revenue for a perfectly competitive firm. With marginal revenue being above marginal cost and price exceeding average cost, the firm expands output to meet the quantity demanded, QR. This policy has appeal because at the regulated price, the monopolist produces more at a lower price.
Can price discrimination increase efficiency in a market
Our discussion also helps explain why government policies on monopoly typically focus on preventing deadweight loss, not preventing price discrimination—unless it causes serious issues of equity. Compared to a single-price monopolist, price discrimination—even when it is not perfect—can increase the efficiency of the market. When a single, medium-level price is replaced by a high price and a low price, some consumers who were formerly priced out of the market will be able to purchase the good. The price discrimination increases efficiency because more of the units for which the willingness to pay (as indicated by the height of the demand curve) exceeds the marginal cost are produced and sold. Consider a drug that is disproportionately prescribed to senior citizens, who are often on fixed incomes and so are very sensitive to price. A policy that allows a drug company to charge senior citizens a low price and everyone else a high price will serve more consumers and create more total surplus than a situation in which everyone is charged the same price.
Socially optimal point
P = MC is the point of allocative efficiency (socially optimal point)
Marginal revenue curve vs. demand curve
Panel (a) shows the monopolist's demand and marginal revenue curves for diamonds from Table 61.1. The marginal revenue curve lies below the demand curve. To see why, consider point A on the demand curve, where 9 diamonds are sold at $550 each, generating total revenue of $4,950. To sell a 10th diamond, the price on all 10 diamonds must be cut to $500, as shown by point B. As a result, total revenue increases by the green area (the quantity effect: +$500) but decreases by the orange area (the price effect: −$450). So the marginal revenue from the 10th diamond is $50 (the difference between the green and orange areas), which is much lower than its price, $500. Panel (b) shows the monopolist's total revenue curve for diamonds. As output goes from 0 to 10 diamonds, total revenue increases. It reaches its maximum at 10 diamonds—the level at which marginal revenue is equal to 0—and declines thereafter.
What is the best regulated price
Panel (b) shows a situation in which regulators have pushed the price down as far as possible, at the level where the average total cost curve crosses the demand curve. At any lower price the firm loses money. The price here, P*R, is the best regulated price: the monopolist is just willing to operate and produces Q*R, the quantity demanded at that price. Consumers and society gain as a result.
How do the price and output of a monopolist differ from those in the perfectly competitive market?
Perfectly competitive firm has price and output set by the market, monopolists set it for itself. It has a lower quantity and higher price because MR is less than the demand curve.
What does the gov. look at to determine if they should intervene in a monopolistic market
Policy toward monopolies depends crucially on whether or not the industry in question is a natural monopoly, one in which increasing returns to scale ensure that a bigger producer has lower average total cost. If the industry is not a natural monopoly, the best policy is to prevent a monopoly from arising or to break it up if it already exists. Government policy used to prevent or eliminate monopolies is known as antitrust policy
How do you price discriminate
Price discriminating monopolist use advanced purchase restrictions, two part tariffs, and volume discounts in order to price discriminate
Price discrimination
Price discrimination is charging certain consumers more or less based on consumer surplus - Ex: charging elderly people less and a movie theatre while regular adults more based on their consumer surplus and elasticity of demand
What is price discrimination
Price discrimination is charging different prices to different customers of the exact same product - Ex: Seniors, children, and adults all pay different prices to see the same movie
Price effect
Price effect: Looking at marginal revenue at a certain unit -Can also be found as (Price - [increase in price * quantity sold]) -- So $70 - (3*14) = 28
What is perfect price discrimination
Profit with perfect price discrimination is when you pay each consumers exactly how much they are willing to pay - There is zero consumer surplus - Basically impossible, there will always be some customers who have consumer surplus when they buy a good - This means that the more a firm can price discriminate, the more consumer surplus they can transfer to profit - When firms have perfect price discrimination, D = MR because you do not have to lower the prices of prior units when changing price for present units -- Business becomes efficient because MR = MC = D -- This causes output to increase as well as no deadweight loss - The better a firm can price discriminate, the closer the MR curve becomes to the demand curve making the industry become more efficient
Quantity effect
Quantity effect: Is looking at the price at a certain unit
Where is quantity of monopoly
Quantity of monopoly is where marginal revenue and MC intersects
Firm's optimal output rule
Recall the firm's optimal output rule: a profit-maximizing firm produces the quantity of output at which the marginal cost of producing the last unit of output equals marginal revenue
Where is the best place to regulate a monopoly on a graph and what is a problem with this
Regulating monopolies in the best way is to regulate them where P = ATC - The problem is that society wants the the price where P = MC, however some monopolies will make a loss at this price because ATC is above it, so they would shut down and this would be worse off for everyone. So the next best option is putting P = ATC. Instead of regulating at the socially optimal price, they regulate where ATC crosses demand (fair returns price)
Is sometimes not doing anything for a natural monopoly the right thing
Sometimes the cure is worse than the disease. Some economists have argued that the best solution, even in the case of a natural monopoly, may be to live with it. The case for doing nothing is that attempts to control monopoly, one way or another, will do more harm than good.
What happens when another powerful firm can join a monopoly market
Studies have shown that when a second provider enters a market, prices can drop significantly, as much as 30%. In fact, the United States is currently behind on this front: today more than 60% of households in Hong Kong watch TV programs delivered over the Internet.
Price discrimination (airplane) what should they do and why
Suppose that a company sells its product to two easily identifiable groups of people—business travelers and students. It just so happens that business travelers are very insensitive to the price: there is a certain amount of the product they just have to have whatever the price, but they cannot be persuaded to buy much more than that no matter how cheap it is. Students, though, are more flexible: offer a good enough price and they will buy quite a lot, but raise the price too high and they will switch to something else. The answer is the one already suggested by our simplified example: the company should charge business travelers, with their low price elasticity of demand, a higher price than it charges students, with their high price elasticity of demand. This is beneficial because business travelers typically place a high priority on being in the right place at the right time and are not very sensitive to the price. But leisure travelers are fairly sensitive to the price: faced with a high price, they might take the bus, drive to another airport to get a lower fare, or skip the trip altogether.
Advantages of public ownership
The advantage of public ownership, in principle, is that a publicly owned natural monopoly can set prices based on the criterion of efficiency rather than profit maximization. In a perfectly competitive industry, profit-maximizing behavior is efficient because producers set price equal to marginal cost
What creates the wedge between the demand and marginal revenue curve
The crucial point about the monopolist's marginal revenue curve is that it is always below the demand curve. That's because of the price effect, which means that a monopolist's marginal revenue from selling an additional unit is always less than the price the monopolist receives for that unit. It is the price effect that creates the wedge between the monopolist's marginal revenue curve and the demand curve: in order to sell an additional diamond, De Beers must cut the market price on all units sold.
How price discrimination happens
The important point is that the two groups of consumers differ in their sensitivity to price—that a high price has a larger effect in discouraging purchases by students than by business travelers. As long as different groups of customers respond differently to the price, a monopolist will find that it can capture more consumer surplus and increase its profit by charging them different prices.
Price of monopoly point
The price of a monopoly is the finding quantity point, and then going up to demand curve - Consumer surplus decrease when you do this and producer surplus increases
When can a monopolist not achieve perfect price discrimination
The problem in reality, however, is that prices are often not perfect signals: a consumer's true willingness to pay can be disguised, as by a business traveler who claims to be a student when buying a ticket in order to obtain a lower fare. When such disguises work, a monopolist cannot achieve perfect price discrimination.
Suppose a firm starts off with selling a uniform product to two different customers at the same price per unit for each. Now it decides to engage in price discrimination by raising price to one customer and lowering the price to the other customer. Why doesn't profit lost due to lowering the price of one customer eliminate all of the higher profits achieved by raising the price to the other customer?
The profit lost due to lowering the price of one customer does not eliminate all of the higher profits achieved by raising the price to the other consumer because without price discrimination, the consumer who is being charged the lower price would have not even have purchased the good to begin with. Because of this, by having price discrimination, the firm adds to the amount of quantity sold even at a low price which adds to profit.
Quantity effect vs. price effect
The quantity effect dominates the price effect when total revenue is rising; the price effect dominates the quantity effect when total revenue is falling.
Quantity in a natural regulated monopoly compared to quantity in a natural non-regulated monopoly
The quantity for a regulated natural monopoly is higher than that of an unregulated natural monopoly
Relationship between marginal revenue and demand
The relationship between marginal revenue and demand is that marginal revenue is always less than demand - Both curves are downward sloping
Where is profit maximized
To maximize profit, the monopolist compares marginal cost with marginal revenue. If marginal revenue exceeds marginal cost, De Beers increases profit by producing more; if marginal revenue is less than marginal cost, De Beers increases profit by producing less. So the monopolist maximizes its profit by using the optimal output rule:
Why does monopoly earn a profit in both the short AND long run
We learned that a perfectly competitive industry can have profit in the short run but not in the long run. In the short run, price can exceed average total cost, allowing a perfectly competitive firm to make a profit. But we also know that this cannot persist. In the long run, any profit in a perfectly competitive industry will be competed away as new firms enter the market. In contrast, while a monopoly can earn a profit or a loss in the short run, barriers to entry make it possible for a monopolist to make positive profit in the long run.]
How can you tell the difference between monopoly and perfect competition behavior
What this tells us is that the difference between monopoly behavior and perfectly competitive behavior depends on the price elasticity of demand. A monopolist that faces highly elastic demand will behave almost like a firm in a perfectly competitive industry. - For example, Amtrak has a monopoly on intercity passenger service in the Northeast Corridor, but it has very little ability to raise prices: potential train travelers will switch to cars and planes. In contrast, a monopolist that faces less elastic demand—like most cable TV companies—will behave very differently from a perfect competitor: it will charge much higher prices and restrict output more.
Lump - sum tax vs. excise tax on a monopoly
When an excise tax is imposed on a good produced by a monopoly, even less of the good is sold, and the deadweight loss grows. However, a lump-sum tax—one that does not depend on the quantity sold—does not contribute to the deadweight loss unless it is so high that it causes the monopoly to close down. The reason is that a lump-sum tax does not affect the marginal cost or the marginal revenue, so the monopoly goes on producing the same profit-maximizing quantity.
First- class passengers generally pay higher fares than coach passengers, even when they take advantage of advance-purchase discounts. Is this price discrimination? (Hint: Seats in the first class are generally leather rather than fabric and are about 50 percent wider than coach seats. Also, there are more flight attendants per passenger in the first-class section.)
When first-class passengers pay higher fares than coach passengers, this is not a form of price discrimination. Price discrimination can only be applied when the goods are exactly the same. First class seats compared to coach seats are different goods that differ in quality. Because of this, first class passengers paying a higher price for tickets is not price discrimination.
Regulation of a monopoly:
When regulating a monopoly, government tries to make monopoly produce at where demand curve intersects with MC rather than where MC = MR - Government is trying to make monopoly more efficient and make less profits with cheaper prices and more output (act like a perfectly competitive firm) When government regulates monopoly, if monopoly starts losing money due to this, it will try to get out of industry as fast as possible Monopolies sometimes get out of regulation by bribery such as donating to politicians A better way of regulation is where government makes monopoly produce at output of D = MC but they are allowed to have a higher price than D = MC so they can cover losses and produce at a normal profit - Set a price control where they can make a normal profit Another way of regulation that they use is price discrimination
Is it price discrimination when a professional football team charges, say, $350 per ticket for fifty-yard-line tickets in the lower deck and $100 per ticker for upper-deck tickets overlooking the end zone?
When this happens, this is not a form of price discrimination. This is because the seats for the fifty-yard-line tickets in the lower deck are different than the seats in the upper-deck. Price discriminations can only be for the same exact good and these two tickets are not the same good as they differ in quality.
Quantity and price effect
Why is the marginal revenue from that 10th diamond less than the price? Because an increase in production by a monopolist has two opposing effects on revenue: A quantity effect. One more unit is sold, increasing total revenue by the price at which the unit is sold (in this case, +$500). A price effect. In order to sell that last unit, the monopolist must cut the market price on all units sold. This decreases total revenue (in this case, by 9 × −$50 = −$450).
Why price discrimination occurs
Will potential passengers take the flight? It depends on the price. The business travelers, it turns out, really need to fly; they will take the plane as long as the price is no more than $550. Since they are flying purely for business, we assume that cutting the price below $550 will not lead to any increase in business travel. The students, however, have less money and more time; if the price goes above $150, they will take the bus. What the airline would really like to do, however, is charge the business travelers the full $550 but offer $150 tickets to the students. That's a lot less than the price paid by business travelers, but it's still above the marginal cost; so if the airline could sell those extra 2,000 tickets to students, it would make an additional $50,000 in profit.
How many graphs are there for a monopoly
With perfect competition, a firm and market graph are compared side by side, however, with a monopoly, there is only graph as the singular firm is the market
Perfect price discrimination and allocative efficiency
a monopolist who can engage in perfect price discrimination doesn't cause any allocative inefficiency! The reason is that the source of allocative inefficiency is eliminated: all potential consumers who are willing to purchase the good at a price equal to or above marginal cost are able to do so. The perfectly price-discriminating monopolist manages to "scoop up" these consumers by offering some of them lower prices than others.