Unit 4:
Imperfect
Competition
FOUR MARKET STRUCTURES
Perfect
Competition
Imperfect Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
1
4
5 Characteristics of a Monopoly
1. Single Seller
 One firm controls the vast majority of a market
 The firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
 The firm can manipulate the price by changing the
quantity it produces (ie. supply shifts to the left).
Ex: California electric companies
4. High Barriers to Entry
 New firms can NOT enter market
 No immediate competitors
 Firm can make profit in the long-run
5. Some “Nonprice” Competition
 Despite having no close competitors, monopolies still
advertise their products in an effort to increase
demand.
5
Examples of Monopolies
What do you already know about monopolies?
True or False?
1. All monopolies make a profit.
2. Monopolies are usually efficient.
3. All monopolies are bad for the economy.
4. All monopolies are illegal.
5. Monopolies charge the highest price possible
6. The government never prevents monopolies
from forming.
6
7
4 types of monopolies
Geographical
Technological
Government
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one supplier.
Ex: Nowhere gas
stations, Cable TV,
Los Angeles Lakers
Technological
Government
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one
supplier.
Ex: Nowhere gas
stations, Cable TV,
Los Angeles Lakers
Technological
Government
Patents and widespread
availability of certain
products lead to only
one major firm
controlling a market.
Ex: Microsoft, Intel,
Frisbee, Band-Aide…
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one
supplier.
Ex: Nowhere gas
stations, Cable TV,
Los Angeles Lakers
Technological
Patents and
widespread
availability of
certain
products lead
to only one
major firm
controlling a
market.
Ex: Microsoft,
Intel, Frisbee,
Band-Aide…
Government
Natural
• Government allows monopoly
for public benefits or to
stimulate innovation.
• The government issues
patents to protect inventors
and forbids others from using
their invention. (They last 20
years)
Ex: water company, firefighters,
the army, pharmaceutical drugs,
rubix cubes…
4 types of monopolies
Geographical
Technological
Location or
control of
resources limits
competition and
leads to one
supplier.
• Government allows monopoly
for public benefits or to
stimulate innovation.
• The government issues
patents to protect inventors
and forbids others from
using their invention. (20 yrs)
Patents & widespread
availability of certain
products lead to only
one major firm
controlling a market.
Ex: Nowhere gas
stations, Cable
TV, Los Angeles
Lakers
Government
Ex: water company,
firefighters, the
army, pharmaceutical
drugs, rubix cubes…
Ex: Microsoft,
Intel, Frisbee,
Band-Aide…
Natural
• 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.
Ex: Electric Companies (SDGE)
 If there were three competing
electric companies they would have
higher costs.
 Having only one electric company keeps
prices low
Drawing Monopolies
Good news…
1. Only ONE graph because the firm
IS the industry.
2. The cost curves are the same
3. The profit maximizing rule MR=MC
still applies
4. Shut down point rule still applies
13
The Main Difference
• Monopolies (and all imperfectly
competitive firms) have downward
sloping demand curve.
• Which means, in order to sell more,
a firm must lower its price.
• This changes MR…
THE MARGINAL REVENUE DOES
EQUAL THE PRICE!
14
MR is less than
$10 Demand?
$9 $9
$8 $8 $8
$7 $7 $7 $7
$6 $6 $6 $6 $6
P
Qd TR MR
$11
0
0
-
$10
1
10
10
$9
2
18
8
$8
3
24
6
$7
4
28
4
$6
5
30
2
$5
6
30
0
$4
7
28
-2
$5 $5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
15
MR is less than
$10 Demand?
$9 $9
$8 $8 $8
$7 $7 $7 $7
$6 $6 $6 $6 $6
P
Qd TR MR
$11
0
0
-
$10
1
10
10
$9
2
18
8
$8
3
24
6
$7
4
28
4
$6
5
30
2
$5
6
30
0
$4
7
28
-2
$5 $5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
16




How many units can be sold for a price of $10?
$10
What is the total revenue at price of $10? TR=____
How many units can be sold for a price of $9?
As price decreases from $10 to $9, TR=____
$18
TR will increase with the additional unit sold.
P($)
10
How about MARGINAL REVENUE?
9
From 1 to 2 units,
MR = $18-$10
= $8
8
6
4
0
1
2
3
4
5
6
Q
17
$10
 What is the total revenue at price of $10? TR=____
$18
 As price decreases from $10 to $9, TR=____
 As price decreases from $9 to $8, TR=____
$24
As price continuously decreases, TR will increase.
P($) TR will increase with the additional unit sold.
10
How about MARGINAL REVENUE?
9
From 1 to 2 units,
MR = $18-$10
= $8
8
6
4
0
1
2
3
4
D From 2 to 3 units,
MR = $24-$18
= $6
MR
5 6 Q
18
Combine the Demand of an
industry with the costs of a firm.
MC
Costs (dollars)
ATC
MR
D=
Price
Quantity
19
Calculating
Marginal Revenue
20
Calculate TR and Marginal Revenue
Quantity
Price
TR
MR
0
$16
0
-
1
15
15
15
2
14
28
13
3
13
39
11
4
12
48
9
5
11
55
7
6
10
60
5
7
9
63
3
8
8
64
1
9
7
63
-1
10
6
60
-3
21
Plot the
Demand
Demand,
& MR
MR Curves
& TR Curves
What happens to TR when MR hits zero?
Dollars
$15
10
5
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
MR
Dollars
$105
55
When MR goes negative,
TR will fall
30
TR
0 1 2 3 4 5 6 7 8 9 10 11 12
Q
22
Elastic vs. Inelastic
Range of Demand Curve
23
Elastic vs. Inelastic Range
Dollars
$15
Elastic
Inelastic
10
If price
& TR
demand is…ELASTIC
5
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
MR
Total Revenue Test
Dollars
$105
If price
& TR
demand is…INELASTIC
55
30
Total Revenue Test
A monopoly will
only produce in
the elastic range
0 1 2 3 4 5 6 7 8 9 10 11 12
TR
Q
24
What output should this monopoly produce?
MR = MC
Maximizing Profit
How much is the TR, TC and Profit or Loss?
$9
8
MC
Price
7
6
5
Conclusion:
ATC
Profit =$6
D
4
3
2
MR
0 1 2 3 4 5 6 7 8 9 10
Q
Monopolists
produce where
MR=MC, but
charges the
price consumer
are willing to pay
identified by the
demand curve.
25
What if cost is higher?
How much is the TR, TC and Profit or Loss?
MC
$90
ATC
80
Costs70
Price 60
Loss
AVC
50
40
30
20
10
MR
0 1 2 3 4 5 6 7 8 9
D
Minimum AVC is
shut down point
Q
26
Price, costs, and revenue
1.
2.
3.
4.
Quiz Time
TR = ----------------TC = ----------------Profit/Loss = ---------Profit/Loss per Unit = ---
$780
$600
$180
$30
$175
MC ATC
150
$130
125 Profit=$180
$110
100
75
TR=$780
TC=$600
D
MR
50
0 1 2 3 4 5 6 7 8 9
Q
27
Are Monopolies
Efficient?
28
Efficiency of Perfect Competition
CS and PS of a Perfect Competition
S = MC
P
An industry in
perfect competition
sells where supply &
demand are equal
CS
Pc
PS
D
Qc
Q
29
INEFFICIENCY OF MONOPOLY
Monopolies underproduce & over charge,
CS and PS of a Monopoly
decreasing CS & increasing PS.
Result is
DEADWEIGHT
LOSS to society
P
Pm
Pc
S = MC
At MR=MC,
A monopolist will
produce less and
charge higher price
CS
PS
D
Qm
Qc
MR
Q
30
MONOPOLIES AND EFFICIENCY
Productive Efficiency Allocative Efficiency
The production of a good
in a least costly way.
(minimum amount of
resources are being
used)
The apportionment of
resources towards the
production of products
most wanted by society
(as measured by their
price).
Graphically it is where… Graphically it is where…
Price = Minimum ATC
Price = MC
31
Are Monopolies Efficient?
Price = Min ATC ?
Price = MC ?
Monopolies are NOT Monopolies are NOT
productive efficient allocative efficient
Price, costs, and revenue
MC
ATC
150
125
100
D
75
50
MR
25
0
1
2
3
4
5
6
7
8
Q
32
Are Monopolies Efficient?
Monopolies are
1. They charge a higher price
2. NOT
They don’t efficient!
produce enough
Monopolies are inefficient because…
3.
4.


No allocative efficiency
They produce at higher costs
No productive efficiency
They have little incentive to innovate
Why?
Because there is little external
pressure to be efficient
33
2004 AP Micro FRQ B #1
1.Due to a new technology, Brunelle Inc. enjoys monopoly power. Brunelle
does not engage in price discrimination.
(a)Explain why the demand curve lies above the marginal revenue curve for
Brunelle.
(b)Assume that Brunelle is earning short-run economic profits. Using a
correctly labeled graph, show the following for Brunelle.
(i) Profit-maximizing level of output, labeled as Q*
(ii) Profit-maximizing price, labeled as P*
(iii) Economic profits, as a shaded area
(c) If Brunelle wants to maximize its total revenues instead of profits, using the
graph from part (b) show the following
(i) Revenue-maximizing level of output, label as Qr
(ii) Revenue-maximizing price, labeled as Pr
(d) Given your answer in part (b), indicate whether Brunelle is producing the
allocatively efficient level of output. Explain.
(e) Explain what will happen to Brunelle’s demand curve as other firms adopt
the same technology.
Regulating
Monopolies
Regulating Monopoly
Why would the government
regulate an monopoly?
1. To keep prices low
2. To make monopolies efficient
How do they regulate?
1. Use Price controls:
a. Price Ceiling b. Price Floor
2. Why don’t taxes work?
Taxes limit supply and that’s the problem
REGULATING MONOPOLY
What happens
if theof
government
sets a price
Dilemma
Regulation
ceiling to get the
socially
optimal quantity?
Which
Price?
Price and Costs
The firm would make a loss and would require a subsidy
MR = MC
Monopoly/Unregulated price
MC ATC
TR = TC
Fair-Return Price
Normal Profit
Pm
Pf
P = MC
Ps
Socially-Optimum
Price
D
MR
Qm
Qf
Qs
Q
37
Where should the government
place the price ceiling?
Socially-Optimum Price
P = MC (Allocative Efficiency)
OR
Fair-Return Price
P = ATC (Normal Profit)
38
2007 AP Micro FRQ A #1
1.A patent gives inventors the exclusive right to produce and market a
product for a period of time. GCR Company is a profit-maximizing firm.
It has a patent for a unique antispyware computer program called Aspy.
(a)Assume that GCR is making economic profit. Draw a correctly
labeled graph and show the profit-maximizing price and quantity.
(b) Assume that the government imposes a lump-sum tax on GCR.
(i) What will happen to output and market price? Explain.
(ii) What will happen to GCR’s profits?
(c) Assume instead that the government grants a per-unit subsidy to GCR
for Aspy.
(i) What will happen to output and market price? Explain.
(ii) What will happen to GCR’s profits?
Price
Discrimination
40
PRICE DISCRIMINATION
Practice of selling specific products to
different buyers at different prices.
Conditions
• Firm must have monopoly power
• Firm must be able to segregate
the market
• Consumers must not be able to
resell product
41
PRICE DISCRIMINATION
 Price discrimination seeks to charge each
consumer what they are willing to pay in
an effort to increase profits.
 Those with elastic demand are charged
less than those with inelastic.
Examples:
•
•
•
•
Airline Tickets (vacation vs. business)
College
All Coupons (spenders vs. savers)
WHS soda machine (students vs. teachers)
42
Monopoly
NON-PRICE DISCRIMINATION
P
@ one MR=MC price
MC
ATC
Price
Costs
MR
Q1
D
Q
43
PRICE DISCRIMINATION
Price and Costs
A perfectly discriminating monopolist has MR=D,
producing more product and more profit!
P
with price
discrimination
MC
ATC
MR
Q1
Q2
D
MR’ Q
44
PRICE DISCRIMINATION
Price and Costs
A perfectly discriminating monopolist has MR=D,
producing more product and more profit!
P
with price
discrimination
MR
Q1
Q2
MC
ATC
D
MR’ Q
45
PRICE DISCRIMINATION
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
What’s the Point?
Perfectly price discriminating firms:
•Make more profit
•Produce more
•Produce at allocative efficiency
Price Discrimination results in
several prices, more profit, No CS,
and a higher socially optimal quantity
46
Can You Do The Following?
1.
Draw a monopoly making a profit
identify price, quantity, and profit.
2. Draw a perfectly competitive industry
AND firm at long-run equilibrium
3. Draw a price discriminating monopoly at
equilibrium and label price, quantity, MR,
and profit
47
Side-by-side graph for perfectly completive
industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why?
Firm
Industry
(Price Taker)
S
P
MC
ATC
P
$15
MR=D
$15
5000
D
Q
8
Q
48