Unit 4:
Imperfect
Competition
1
Unit 4:
Imperfect Competition
4.1 Monopolies
2
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Imperfect Competition
Every product is sold in a market that can be
considered one of the above market structures.
Characteristics of Perfect Competition:
•Many buyers and sellers
•Products identical (or nearly so—
substitutes)
•Easy entry and exit out of the market
3
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Imperfect Competition
Every product is sold in a market that can be
considered one of the above market structures.
For example:
•Fast Food Market
•The Market for Cars
•Market for Operating Systems (Microsoft)
•Strawberry Market
•Cereal Market
4
Monopoly
5
Four Market Structures
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Characteristics of Monopoly:
Examples: Idaho Power, De Beers,
• One large firm (the firm is the market)
• Unique product (no close substitutes)
• High Barriers- Firms cannot enter the
industry
•Monopolies are “Price Makers”
•Some advertising
6
What do you already know about
monopolies?
True or False?
1.
2.
3.
4.
5.
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
The government never prevents
monopolies from forming.
7
Can a monopoly be good for the
economy?
Sure, for example: Electric Companies
• If there were three competing electric companies they
would have higher costs
Economies of scale make it impractical
to have smaller firms.
Natural Monopoly- It is NATURAL for
only one firm to produce because they
can produce at the lowest cost.
8
Graphing
Monopolies
9
The good news…
1.Only one graph because the
firm IS the industry.
2.The cost curves are the same
3.The MR=MC rule still applies
4.Shut down rule still applies
10
The Main Difference
• Monopolies (and ALL imperfectly
competitive firms) have downward
sloping demand curve.
• Which mean to sell more a firm must…
lower its price.
• So does MR = Price = Demand?
THE MARGINAL REVENUE
DOESN’T EQUAL THE PRICE!
DEMAND DOES EQUAL PRICE!
11
Why is MR less than
Demand?
P
Qd
$11
0
TR MR
0
-
12
Why is MR less than
Demand?
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
13
Why is MR less than
Demand?
$10
$9
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
18
10
8
$9
14
Why is MR less than
Demand?
$10
$9
$9
$8
$8
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
18
24
10
8
6
$8
15
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
18
24
28
10
8
6
4
$7
16
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
P
Qd
$11
$10
$9
$8
$7
$6
0
1
2
3
4
5
TR MR
0
10
18
24
28
30
10
8
6
4
2
$6
17
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
0
1
2
3
4
5
6
TR MR
0
10
18
24
28
30
30
10
8
6
4
2
0
$5
18
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
19
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
20
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
MR
$8 IS LESS THAN
$7 $7DEMAND
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
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Calculating
Marginal Revenue
22
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
$6
0
$5
1
$4
2
$3
3
$2
4
$1
5
Total
Revenue
Marginal
Revenue
Does the Marginal Revenue equal the price?
23
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
Marginal
Revenue
$6
0
0
-
$5
1
5
5
$4
2
8
3
$3
3
9
1
$2
4
8
-1
$1
5
5
-3
Does the Marginal Revenue equal the price?
24
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
Marginal
Revenue
$6
0
0
-
$5
$4
MR
1 DOESN’T
5
2
8
EQUAL PRICE
5
3
$3
3
9
1
$2
4
8
-1
$1
5
5
-3
Does the Marginal Revenue equal the price?
25
Moonbuck’s D and MR Curves
Q
P
0 $4.50
1
4.00
2
3.50
3
3.00
4
2.50
5
2.00
6
1.50
MR
$4
3
2
1
0
–1
P, MR
$5
4
3
2
1
0
-1
-2
-3
0
Demand curve (P)
MR
1
2
3
4
5
6
7
Q
Understanding the Monopolist’s MR
• Increasing Q has two effects on revenue:
– The output effect:
Higher output raises revenue
– The price effect:
Lower price reduces revenue
• To sell a larger Q, the monopolist must reduce the price
on all the units it sells.
• Hence, MR < P
• MR could even be negative if the price effect exceeds
the output effect
(e.g., when Moonbucks increases Q from 5 to 6).
Calculate and Plot the Demand, Marginal
Revenue, and Total Revenue Curves
P
$6
5
4
3
2
1
1
2
3
4
5
1
2
3
4
5
Q
TR
$9
8
7
6
5
4
3
2
1
Q
28
Demand and Marginal Revenue Curves
What happens to TR when MR hits zero?
P
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
TR
$64
40
20
MR
Total Revenue is
at it’s peak when
MR hits zero
TR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
29
Elastic vs. Inelastic
Range of Demand Curve
30
Total Revenue Test to Determine
Elasticity
Quiz Yourself:
The total revenue test says that if…
Price Increase and TR Decrease it is Elastic for Demand
or
Price Decreases and TR Increases it’s Elastic for Demand
Price Increases and TR Increases it is Inelastic for Demand
or
Price Decreases and TR Decreases it’s Inelastic for Demand
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Total Revenue Test to Determine
Elasticity
Relatively Inelastic
MC1
MC
Relatively Elastic
MC1
MC
D
D
1. What happens to total revenue for each when price
increases?
32
Total Revenue Test Review
Uses elasticity to show how changes in price will
affect total revenue (TR).
Inelastic Demand• Price increase causes TR to increase
• Price decrease causes TR to decrease
Elastic Demand• Price increase causes TR to decrease
• Price decrease causes TR to increase
Unit Elastic• Price changes and TR remains unchanged
Elastic and Inelastic Range
P
Total Revenue Test
If price falls and TR
increases then
demand is elastic.
Elastic
Inelastic
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Total Revenue Test
If price falls and
TR falls then
demand is inelastic.
$64
40
20
1 2 3 4 5 6 7 8
Q
A monopoly
MR
will only
produce in
the elastic
range
TR
Q
34
9 10 11 12 13 14 15 16 17 18
Maximizing
Profit
35
Profit-Maximization
1. The profitmaximizing Q
is where
MR = MC.
Costs and
Revenue
MC
P
2. Find P from
the demand curve
at this Q.
D
MR
Q
Quantity
Profit-maximizing output
The Monopolist’s Profit
Costs and
Revenue
As with a
competitive firm,
the monopolist’s
profit equals
MC
P
ATC
ATC
D
(P – ATC) x Q
MR
Q
Quantity
A Monopoly Does Not Have an S Curve
A competitive firm
 takes P as given
 has a supply curve that shows how its Q depends on
P
A monopoly firm
 is a “price-maker,” not a “price-taker”
 Q does not depend on P;
rather, Q and P are jointly determined by
MC, MR, and the demand curve.
So there is no supply curve for monopoly.
What output should this monopoly produce?
Profit-Maximization MR = MC
How much is the TR, TC and Profit or Loss?
P
$9
8
7 Profit =$6
6
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
39
Conclusion: A monopolists produces where
MR=MC, buts charges the price consumer are
willing to pay identified by the demand curve.
P
$9
8
7
6
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
40
What if cost are higher?
How much is the TR, TC, and Profit or Loss?
MC
P
ATC
$10
9
8
AVC
7
6
5
D
4
TR= $90
TC= $100
Loss=$10
MR
3
6 7 8 9 10
Q
41
Identify and
Price
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
MC
$10
9
8
7
6
5
$50
$25
$25
$5
ATC
D
MR
5 6 7 8
9 10 11
Q
42
Identify and
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
$54
$36
$18
$3
P
$10
9
8
7
6
MC= ATC
5
D
MR
4
1 2 3 4 5 6 7 8
9 10
Q
43
Case Study: Monopoly vs. Generic Drugs
Patents on new drugs
give a temporary
monopoly to the seller.
Price
The market for
a typical drug
PM
When the
patent expires,
PC = MC
the market
becomes competitive,
generics appear.
D
MR
QM
Quantity
QC
Are Monopolies
Efficient?
45
Monopolies are inefficient
because they…
1.Charge a higher price
2.Don’t produce enough
3.Produce at higher costs
46
Types of efficiency
1.Efficient in production is
when an economy is
producing on the PPC
2.Efficient in allocation
means resources are used
so that consumers are as
well off as possible
47
Consumer Surplus, Producer
Surplus and Deadweight Loss
Monopolies vs. Perfect Competition
Test Yourself:
Draw a perfectly competitive market (not firm)
showing CS, PS, and Deadweight Loss
Is it allocatively efficient?
Is it productively efficient?
48
Monopolies vs. Perfect Competition
S = MC
P
In perfect
competition, CS and
PS are maximized,
thus it is allocatively
efficient
It is also productively
efficient
CS
Ppc
PS
D
Qpc
Q
49
Consumer Surplus, Producer
Surplus and Deadweight Loss
Monopolies vs. Perfect Competition
Test Yourself:
Draw a monopoly showing CS, PS, and Deadweight Loss
Is it allocatively efficient?
Is it productively efficient?
50
Monopolies vs. Perfect Competition
S = MC
P
At MR=MC,
A monopolist will
produce less and
charge a higher price
Pm
Ppc
D
MR
Qm
Qpc
Q
51
Monopolies vs. Perfect Competition
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
Monopolies underproduce and over
D
charge, decreasing CS and
increasing
PS.
MR
Qm
Q
52
The Welfare Cost of Monopoly
Competitive eq’m:
quantity = QC
P = MC
total surplus is
maximized
Monopoly eq’m:
quantity = QM
P > MC
deadweight loss
Price
Deadweight
MC
loss
P
P = MC
MC
D
MR
Q M QC
Quantity
Are Monopolies Productively Efficient?
Does Price = Min ATC?
P
$9
8
7
6
No. They are not
producing at the lowest
cost (min ATC)
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
54
Are Monopolies Allocatively Efficiency?
Does Price = MC?
P
$9
8
7
6
No. Price is greater.
The monopoly is under
producing.
MC
ATC
5
4
3
D
Monopolies are NOT efficient!
2
MR
1 2 3 4 5 6 7 8 9 10 Q
55
Natural Monopoly
One firm can produce the socially optimal quantity
at the lowest cost due to economies scale.
P
It is better to have only
one firm because ATC is
falling at socially
optimal quantity
MC
ATC
MR
D
Qsocially optimal Q
56