Chapter 10
X-Inefficiency
(The increase in costs, due to the organizational slack in a monopoly, resulting from the absence of competitive pressure to push costs down to their lowest possible level.)
Deadweight Loss of Monopoly
(The net value (the value to buyers over and above the costs to suppliers) of the difference between the competitive quantity of output (where P = MC and the monopoly quantity of output (where P> MC ); the loss due to not
monopolist,
, P>MR.
For a monopolist to price discriminate, the following conditions must hold:
- 1. the seller must exercise some control over price; that is, it must be a price searcher -2. the seller must be able to distinguish among buyers who are willing to pay different prices - 3. Reselling the good to other buyers must be impossible or too costly; arbitrage must not be possible
monopoly,
A monopoly, unlike a perfectly competitive firm, has some market power. Thus, It can raise its price, within limits, without quantity demanded falling to zero.
A perfectly competitive firm will produce more v output and charge a lower v (per unit) price than a single-price monopoly firm.
A perfectly competitive firm will produce more v output and charge a lower v (per unit) price than a single-price monopoly firm.
Second-Degree Price Discrimination:
A price structure in which the seller charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on
Second-Degree Price Discrimination
A price structure in which the seller charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on.
Price Discrimination:
A price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences
Price Discrimination
A price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences.
Third-Degree Price Discrimination:
A price structure in which the seller charges different prices in different markets or charges different prices to various segments of the buying population
Perfect Price Discrimination:
A price structure in which the seller charges the highest price that each consumer is willing to pay for the product rather than go without it
Perfect Price Discrimination
A price structure in which the seller charges the highest price that each consumer is willing to pay for the product rather than go without it.
public franchise
A public franchise is a right that government grants to a firm and that permits the firm to provide a particular gd or service and excludes all others from doing so (thus eliminating potential competition by law),
Price Searcher:
A seller that has the ability to control, to some degree, the price of the product it sells
Monopoly:
A theory of market structure based on three assumptions: There is one seller, it sells a product that has no close substitutes, and the barriers to entry are extremely high
theory of monopoly is built on three assumptions:
There is one seller. (2) The single seller sells a product for which there are no close substitutes. (3) The barriers to entry into the industry are extremely high.
True or False: There is deadweight loss if a firm produces the quantity of output at which price equals marginal cost.
False
The rationale behind patents is that they encour- age innovation in an economy.
Few people will waste their time and money trying to invent a new product if their competitors can immediately copy and sell it.
monopolist,
For a monopolist, P>MR
There are two key differences between perfect competition and monopoly
For the perfectly competitive firm, P=MR; for the monopolist, P>MR; the perfectly competitive firm's demand curve is its marginal revenue curve; the monopolist's demand curve lies above its marginal revenue curve
Monopoly or Nothing?
From a consumer's perspective, perfect competition seems a better choice than monopoly because it provides more output and a lower price; in short, there is more consumer surplus
monopolist
Therefore, the monopolist is not resource allocative efficient.
perfectly competitive firm,
P = MR;
single-price monopolist,
P>MR; therefore, its demand curve lies above its marginal revenue curve.
Coupons and Price Discrimination
People who place a relatively high value on their time are not willing to spend it clipping and sorting coupons
Price, Marginal Revenue, and Marginal Cost
Perfect competition: P = MR and P= MC Monopoly: P > MR and P> MC
There are three types of price discrimination:
Perfect price discrimination: Second-degree price discrimination: Third-degree price discrimination:
monopoly,
The main way monopolies retain their market power is through barriers to entry, which prevent other companies from entering monopolized markets and competing for customers.
Explain why the M R curve lies below the demand curve for a single-price monopolist.
The monopolist faces a downward-sloping demand curve, so price must be lowered in order to sell more units of its product. Marginal revenue is then below the price charged for the product.
The perfectly competitive firm exhibits resource allocative efficiency, but the single-price monopolist does not. What is the reason for the difference?
The monopolist firm faces a downward-sloping demand curve, and the perfectly competitive firm faces a horizontal demand curve.
price searcher
The monopolist is a price searcher
The Monopolist's Profit-Maximizing Price and Quantity of Output
The monopolist produces the quantity of cutput (Q) at which MR - MC and charges the highest price per unit (R) at which this quantty of output can be sold. at the profit-maximizing quan tily of output, price is greater than marginal cost (P>MC.
monopolist
The monopolist that seeks to maximize profit produces the quantity of output at which MR = MC and charges the highest price per unit at which this quantity of output can be sold.
Deadweight Loss of Monopoly:
The net value (the value of buyers over and above the costs to suppliers) of the difference between the competitive quantity of output (where P-MC) and the monopoly quantity of output (where P>MC); the loss due to not producing the competitive quantity of output
There are two key differences between perfect competition and monopoly
The perfectly competitive firm charges a price equal to its marginal cost; the monopolist charges a price greater than its marginal cost; that is: Perfect competition: P=MR and P=MC - Monopoly: P>MR and P>MC
The profit-maximizing price may be the loss-minimizing price;
The profit-maximizing price may be the loss-minimizing price;
price discriminate, the following conditions must hold:
The seller must exercise some control over price; that is, it must be a price searcher. 2. The seller must be able to distinguish among buyers who are willing to pay different prices. 3. Reselling the good to other buyers must be impossible or too costly.
The theory of monopoly is built on three assumptions:
There is one seller, 2. The single seller sells a product that has no close substitutes. 3. The barriers to entry are extremely high,
Coupons and Price Discrimination
Third-degree price discrimination is sometimes employed by means of cents-off coupons
In general, coupons are more common and easier to find for small-ticket items than for big-ticket items.
This is because of price discrimination. Potential purchasers of small-ticket items vary more in their willingness to spend time trying to save money. Coupons help sellers determine which customers have a high willingness to spend time to save money and which customers do not.
deadweight loss.
This loss of surplus
demand curve for the monopoly
Thus, the demand curve for the monopoly firm is the market demand curve, which is downward sloping
The Dual Effects of a Price Reduction on Total Revenue
To sell an additional unit of its good, a monopolist needs to lower the price of the good. This price reduction both gains revenue and loses revenue for the monopolist.
Both the perfectly competitive firm and the monopoly firm charge the highest price per unit for the quantity they produce? True or False?
True
market monopoly
When high barriers take the form of economies of scale or exclusive ownership of a resource result in a monopoly, competition is not legally prohibited
government monopoly
When high barriers take the form of public franchises, patents or government licenses, competition is legally prohibited
What is the Difference Between a Government Monopoly and a Market Monopoly?
When high barriers take the form of public franchises, patents or government licenses, competition is legally prohibited (this is a government monopoly) • When high barriers take the form of economies of scale or exclusive ownership of a resource result in a monopoly, competition is not legally prohibited (this is a market monopoly)
economies of scale
exist if low average total costs (low unit costs) are obtained only through large-scale production. Thus, if new entrants are to compete in the industry, they must enter it on a large scale.
deadweight loss of monopoly,
greater output is produced under perfect competition than under monopoly, The net value of the difference in these two output levels is said to be the deadweight loss of monopoly,
A monopoly firm differs from a perfectly competitive firm in terms of
how much consumers' surplus buyers receive
downward-sloping demand curve
implies that the firm can sell its good at different prices.
horizontal (or flat) demand curve
implies that the firm can sell its good at only one price: the price determined by the market.
monopoly firm
is a price searcher, it has some control over the price of the product it sells.
perfectly competitive firm
is a price taker, it has no control over the price of the product it sells.
monopolist
is constrained by the demand curve it faces, It can only obtain as high a price as the demand curve warrants, that is, as high a price as the buyers are able and willing to pay for the good. If a monopolist raises the price, the quantity demanded by buyers will fall. Similarly, if the monopolist wishes to sell more of its good, it must lower its price.
Total revenue
is defined as price times quantity.
demand curve
is downward sloping becouse we are looking at the market demand curve, nof the firm's demand curve. All market demand curves are downward sloping
Consumers' surplus
is greater in the perfectly competitive market.
When high barriers take the form of econo- mies of scale or exclusive ownership of a resource, competition
is not legally prohibited.
consumers' surplus
is the area under the demand curve and above the price
what determines whether a firm is a price taker or a price searcher
is the demand curve that it faces. The perfectly competitive firm faces a horizontal demand curve. The monopoly firm faces a downward-sloping demand curve.
Consumers' surplus
is the difference between a buyer's maximum price (or highest price the buyer is willing to pay) and the price the buyer actually pays. Graphically, consumers' surplus is the area below the demand curve, above the equilibrium price, out to the equilibrium quantity.
Producers' surplus
is the difference between the price a seller receives for an item and the minimum price at which the seller would be willing to sell the item. Graphically, producers' surplus is the area below the equilibrium price, above the supply curve, out to the equilibrium quantity.
Profit
is the difference of total revenue (TR) and total cost (TC): Profit = TR - TC
demand curve for the monopoly firm
is the market demand curve, which is downward sloping
Maximizing profit
is the same as maximizing total revenue When TVC = 0, TVC falls out of our profit equation and we are left with under one condition: TVC = 0. Profit = TR = TFC
profit maximization
is the same as revenue maximization only when there are no variable costs (i.e., when 7VC = $O).
Profit maximization
is the same as revenue maximization only when there are no variable costs (i.e., when TVC = $0)
When the perfectly price-discriminating monopolist produces the quantity of output at which MR=MC,
it automatically produces the quantity at which P=MC
High barriers to entry may take the form of
legal barriers (public franchises, patents, government licenses), economies of scale, or exclusive ownership of a scarce resource.
When high barriers take the form of public franchises, patents, or government licenses, competition is legally prohibited.
legally prohibited.
deadweight loss caused by the monopoly market structure is equal to
monopolist rather than in a perfectly competitive market. is equal to the loss of total surplus that results from hot dogs being sold by a
PRICE DISCRIMINATION
occurs when a seller charges different orices for its product and the price differences are not due to cost differences.
profit-maximizing quantity
occurs where marginal revenue equals marginal cost,
resource allocative efficient
of the good produced are of greater value to consumers than goods that could be produced using the same resources).
Existing firms may be protected from the entry of new firms by the exclusive or nearly exclusive
ownership of a resource needed to enter the industry.
market is monopolized,
part of the consumers surplus that is lost to buyers becomes profits for the monopolist.
Third-Degree Price Discrimination
price structure in which the seller charges different prices in different markets or charges different prices to various segments of the buy- ing population.
profit-maximizing monopolist
produces the quantity of output at which MR = MC and charges the highest price per unit at which this quantity of output can be sold.
Barriers to Entry: Legal Barriers: These include
public franchises, patents, and government licenses
Welfare loss to society.
quantity of output produced in perfect competition. Therefore, monopoly produces a quantity of output that is too small in comparison to the This difference in output results in a welfare loss to society.
Because TFC is constant as output increases,
rise in TR will automatically increase profit by the same amount.
single-price monopolist
sells its output at a price higher than its marginal cost (P> MC) and therefore is not resource allocative efficient.
In the theory of monopoly,
the firm's demand curve is not the same as its marginal revenue curve but rather lies above its marginal revenue curve
In monopoly,
the firm's demand curve is not the same as its marginal revenue curve but rather lies above its marginal revenue curve.
Why a Monopolist Wants to Price Discriminate
• A perfectly price-discriminating monopolist receives the maximum price for each unit of the good it sells; a single-price monopolist does not
A rise in TR will automatically increase profit by the same amount
• A rise in TR will automatically increase profit by the same amount
PRICE DISCRIMINATION
• A seller that practices perfect price discrimination (charges the maximum price for each unit of product sold) sells the quan- tity of output at which P = MC. This kind of seller exhibits resource allocative efficiency.
Coupons and Price Discrimination
• One of the conditions of price discrimination is that the seller must be able to distinguish among customers who are willing to pay different prices; if you were a seller, how would you find out?
Profit is the difference of total revenue (TR) and total cost (TC)
• Profit is the difference of total revenue (TR) and total cost (TC)
PRICE DISCRIMINATION
• The single-price monopolist is said to produce too little out- put because it produces less than would be produced under perfect competition. This is not the case for a perfectly price- discriminating monopolist.
Natural Monopoly
(The condition in which economies of scale are so pronounced that only one firm can survive.)
Public Franchise
(A firm's government-granted right that permits the firm to provide a particular good or service and that excludes all others from doing so.)
Second-Degree Price Discrimination
(A price structure in which the seller charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on.)
Price Discrimination
(A price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences.)
Third-Degree Price Discrimination
(A price structure in which the seller charges different prices in different markets or charges different prices to various segments of the buying population.)
Perfect Price Discrimination
(A price structure in which the seller charges the highest price that each consumer is willing to pay for the product rather than go without it.)
Price Searcher
(A seller that has the ability to control, to some degree, the price of the product it sells.)
Monopoly
(A theory of market structure based on three assumptions: There is one seller, it sells a product that has no close substitutes, and the barriers to entry are extremely high.)
Rent Seeking
(Actions of individuals and groups that spend resources to influence public policy in the hope of redistributing (transferring) income to themselves from others.)
Arbitrage
(Buying a good at a low price and selling it for a higher price.)
Profit
= (Price - Average Total Cost) x Quantity
Profit
= Price X Quantity - Average Total Cost X Quantity
Complete the following sentences to describe the relationship between profit maximization and revenue maximization.
A firm maximizes both profits and total revenue at the same time only under the condition that it has no v variable costs (so marginal costs are zero). If this were not the case with the variable costs, then there would be a difference between maximizing revenue (MR = 0) and maximizing profits (MR = MC). Economists assume that firms try to maximize profits, not revenues
Complete the following sentences to describe the relationship between profit maximization and revenue maximization.
A firm maximizes both profits and total revenue at the same time only under the condition that it has no v variable costs (so marginal costs are zero). If this were not the case with the variable costs, then there would be a difference between maximizing revenue (MR = 0) and maximizing profits (MR = MC). Economists assume that firms try to maximize profits, not revenues V
Public Franchise:
A firm's government-granted right that permits the firm to provide a particular good or service and that excludes all others from doing so
price searcher
A monopolist is a price searcher-that is, a seller with the ability to control, to some degree, the price of the product it sells.
Under what condition will a monopoly firm incur losses?
ATC > P
Rent Seeking:
Actions of individuals and groups that spend resources to influence public policy in the hope of redistributing (transferring) income to themselves from others
Rent Seking
Actions of individuals and groups that spend resources to influence public policy in the hope of redistributing (transferring) income to themselves from others.
RENT SEEKING
Activity directed at competing for and obtaining transfers is referred to as rent seeking.
monopolist,
Because price is greater than marginal revenue for a monopolist, its demand curve necessarily lies above its marginal revenue curve.
The Monopolist's Demand and Marginal Revenue
Because such a curve posits an inverse relationship between price and quantity demanded, more is sold at lower prices than at higher prices, ceteris paribus
PRICE DISCRIMINATION
Before a seller can price discriminate, certain conditions must hold: (1) The seller must be a price searcher. (2) The seller must be able to distinguish among customers who are willing to pay different prices. (3) Reselling the good to others must be impossible or too costly for a buyer.
Arbitrage:
Buying a good at a low price and selling it for a higher price
Arbitrage
Buying a good at a low price and selling it for a higher price.
Exclusive Ownership of a Necessary Resource:
Existing firms may be protected from the entry of new firms by the exclusive ownership of a resource needed to enter the industry
along In the United States, patents are granted to inventors of a product or process for a period of 20 years.
During that time, the patent holder is shielded from competitors: No one else can legally produce and sell the patented product or process.
barriers
Economies of scale ' ' ' ' ' Exclusive ownership of a necessary resource — Legal barriers
Government monopolies are legally protected from competition, whereas market monopolies are not legally protected. A government monopoly is formed by public franchises, patents, or licenses, while a market monopoly is formed by economies of scale or exclusive ownership of a resource.
Government monopolies are legally protected from competition, whereas market monopolies are not legally protected. A government monopoly is formed by public franchises, patents, or licenses, while a market monopoly is formed by economies of scale or exclusive ownership of a resource.
natural monopoly
If economies of scale are so pronounced that only one firm can survive,the for is called a
monopoly firm
If the firm wants to sell 101 units, the price per unit must be lower than if it wants to sell 100 units.
Monopoly, Perfect Competition, and Consumers' Surplus
If the market in the exhibt is perfectly competitive, the demand curve is the marginal revenue curve. The profit- maximizing output is Qrc and price is Pc. Consumers' surplus Is the area PcAB. If the market is a monopoly market, the profit-maximizing output is QM and price is P. In this case, consumers' surplus Is the area Pa AC. Consumers' surplus is greater by the area PPCB in perfect competililon than in monopoly.
rent,
In eco nomics, rent, or, more formally, economic rent, is a payment in excess of opportunily cost.
price searcher,
In short, it "searches" for the best price among the many possible prices.
Economies of Scale:
In some industries, low average total costs are obtained only through large-scale production; if new entrants are to compete, they must enter on a large scale, but this is risky
monopoly, unlike a perfectly competitive firm, has some market power. Thus, it can raise its price, within limits, without quantity demanded falling to zero. The main way monopolies retain their market power is through barriers to entry, which prevent other companies from entering monopolized markets and competing for customers. Which of the following best explains the barriers to entry that exist in this scenario?
Legal barriers
Legal barriers
Licenses are legal barriers created by the government to limit entry into an industry. This restricts the supply of a good and thus creates profit for the providers of that good, since new suppliers are not allowed to enter the industry and drive down prices and profit.
Coupons and Price Discrimination
Many sellers place cents-off coupons in newspapers and magazines for people who place a value on their time relatively low
Because TC is the sum of total fixed costs (TFC) and total variable costs (TVC) we can rewrite our profit equation as:
Profit = TR - (TFC + TVC)
Because TC is the sum of total fixed costs (TFC) and total variable costs (TVC), we can rewrite our profit equation as
Profit = TR - (TFC + TVC)
suppose TVC is not zero; we return to our profit equation:
Profit = TR - (TFC + TVC)
Maximizing profit is the same as maximızıng total revenue under one condition: TVC=0; then TVC falls out of our profit equation, and we are left with:
Profit = TR - TFC
Profit
Profit = Total Revenue - Total Cost
Monopoly Profits and Losses
Profits A monopoly seller is not guaranteed any profits. In (a), price is above aver age tolal cost at Q, the quantily of output at which MR - MC. There fore, TR (the area ORBQ) is greater than TC (he area OCAQI, and proftits equal the area CRBA, In (b), price is below averoge tolal cost at Q, Therefore, TR the area OPAG is less than TC pthe area OCBQ), and losses equal the area RCBA.
Why is rent seeking individually rational but socially wasteful?
Rent-seeking activity reflects the actions of individuals who spend resources trying to influence public policy in the hope of redistributing income to themselves from others; it is simply a transfer activity, not a production activity.
monopoly firm
So, to sell an additional unit, a monopoly firm tmust lower its price on all previous units,
The Monopolist's Demand Curve and Marginal Revenue Curve Are Not the Same
The Monopolist's Demand Curve and Marginal Revenue Curve Are Not the Same
Natural Monopoly:
The condition in which economies of scale are so pronounced that only one firm can survive
Natural Monopoly
The condition in which economies of scale are so pronounced that only one firm can survive.
Demand Curve and Marginal Revenue Curve
The demand curve plots price agalnst quantily. The marginal revenue curve plots marginal revenue agalnst quantify. For a monopolist, P> MR, so the marglinal revenue curve must lie below the demand Curve.
X-Inefficiency:
The increase in costs, due to the organizational slack in a monopoly, resulting from the absence of competitive pressure to push costs down to their lowest possible level
The monopolist that seeks to maximize profit produces the quantity of output at which MR=MC,
and charges the highest price per unit at which this quantity of output can be sold
Licenses
are legal barriers created by the government to limit entry into an industry. This restricts for the providers of that good, since new suppliers are not allowed to enter the industry and drive down prices and profit. the supply of a good and thus creates profit
deadweight loss triangle.
area is the loss attached to not producing the competitive quantity of output.
The perfectly price-discriminating monopolist and the perfectly competitive firm
both exhibit resource allocative efficiency
Profit-maximizing monopolists,
by contrast, produce a quantity of output at which P> MC. Such firms, therefore, are not resource allocative efficient and exhibit deadweight loss. Deadweight loss is the difference between the competitive equilibrium output (where P = MC) and the monopoly equilibrium output (where P > MC).
the monopolist
can raise its ice and still sell its product (though not as much).
price searcher
can raise its price and still sell its product-although it will not sell as many units as it would at the lower price.
monopolist
cannot charge any price it wants for its good-only the highest price that the demand curve allows it to charge.
RENT SEEKING
case From society's perspective, rent secking is a socially wasteful activity.
perfectly competitive firm
charges a price equal to its marginal cost;
monopolist
charges a price greater than its marginal cost. That is, Perfect competition: P = MR and P= MC Monopoly: P > MR and P> MC
monopolist
charges a price that is greater than its marginal cost (P>MC).
In a perfectly competitive market,
the intersection of the demand and supply curves determines the market equilibrium.
theory of monopoly,
the monopoly firm and the industry are the same
the theory of monopoly,
the monopoly firm is the industry, and the industry is the monopoly firm; they are one and the same.
X-inefficiency.
the organizational slack that is directly tied to the monopolist operating at a cost that is higher than the lowest possible
Whether profits are earned depends on
whether Pis greater or less than average total cost at Q.
single price monopolist,
which is a monopolist that sells all units of is product for the same price,
price discrimi- nation,
which occurs when the seller charges different prices for the product it sells and the price differences do not reflect cost differences.