ap microeconomics
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AP Microeconomics. 12:2 Warm Up : What are the four main market structures? How would you describe the products in each one?. Perfect Competition & Monopoly Compared. (1) Perfectly competitive firms are Price- _______________; which means And P = MR - PowerPoint PPT PresentationTRANSCRIPT
AP Microeconomics
12:2 Warm Up: What are the four main market structures? How would you describe the products in each one?
Perfect Competition & Monopoly Compared
(1)• Perfectly competitive firms are Price- _______________;
which means• And P = MR
• Monopoly firms are Price - _____________________; which means
• Therefore, P ≠ MR!!• Having power in a market means firms can change
price and still make profit! Firms can acquire power in imperfectly competitive markets if they can consistently price their goods in excess of marginal costs.
TAKERSNo one firm has price control in the market
MAKERS
The one firm is the only provider; total price control
Perfect Competition & Monopoly Compared
(2) • A perfectly competitive firm’s [output] demand
curve is • A perfectly competitive firm’s [output] supply
curve is
• A monopoly firm has NO _________________ curve because they are both the industry and the firm.
• A monopoly firm’s ___________________ curve dictates the both the quantity supplied and demanded at each price.
the constant MR curve; perfectly elastic
the firm’s MC curve at all prices above the min. point on the AVC curve
SUPPLY
DEMAND
Perfect Competition & Monopoly Compared
• (3) The demand curve of firms in both monopolies and perfect competition are
• (4) Marginal cost curves and average cost curves are the same shape in both market structures:
• (5) The optimal level of production for ALL firms occurs when MR = MC.
Negative, and downward sloping
Increasing in the short run
To find Q (output) always look for
Monopoly Power
1. Market ShareMeasured by the Herfindahl Index
• This measures the size of firms in relationship to the industry and an indicator of the amount of competition among them
2. PricingMeasured by the Lerner Index• Describes a monopoly’s price power• L = (P – MC)• P• The greater the value, the greater the price power.• In perfect competition, where P = MC, Lerner index is zero; no market
power.
2 Forms: ways to measure a firm’s power
Monopolies
• Monopoly demand curves are downward sloping to the right implying that P>MR and a pricing strategy ensues.
• The monopolist determines price and output (optimal or best) at the intersection of MR and MC.
• So in order to induce more sales (increasing total revenue) monopolists will lower price (if the product is relatively elastic).
MONOPOLY REVENUES & COSTSQuantity of Output
Price(average revenue)
Total Revenue
Marginal Revenue
Average Total Cost
Total Cost Marginal Cost
Profit +Or
Loss -
0 $172 $0 -- -- $100 --
1 162 162 $190 190
2 152 304 135 270
3 142 426 113.33 340
4 132 528 100 400
5 122 610 94 470
6 112 672 91.67 550
7 102 714 91.43 640
8 92 736 93.73 750
9 82 738 97.78 880
10 72 720 103 1030
MONOPOLY REVENUES & COSTSQuantity of Output
Price(average revenue)
Total Revenue
Marginal Revenue
Average Total Cost
Total Cost Marginal Cost
Profit +Or
Loss -
0 $172 $0 -- -- $100 --
1 162 162 $162 $190 190
2 152 304 142 135 270
3 142 426 122 113.33 340
4 132 528 102 100 400
5 122 610 82 94 470
6 112 672 62 91.67 550
7 102 714 42 91.43 640
8 92 736 22 93.73 750
9 82 738 2 97.78 880
10 72 720 -18 103 1030
MONOPOLY REVENUES & COSTSQuantity of Output
Price(average revenue)
Total Revenue
Marginal Revenue
Average Total Cost
Total Cost Marginal Cost
Profit +Or
Loss -
0 $172 $0 -- -- $100 --
1 162 162 $162 $190 190 $90
2 152 304 142 135 270 80
3 142 426 122 113.33 340 70
4 132 528 102 100 400 60
5 122 610 82 94 470 70
6 112 672 62 91.67 550 80
7 102 714 42 91.43 640 90
8 92 736 22 93.73 750 110
9 82 738 2 97.78 880 130
10 72 720 -18 103 1030 150
MONOPOLY REVENUES & COSTSQuantity of Output
Price(average revenue)
Total Revenue
Marginal Revenue
Average Total Cost
Total Cost Marginal Cost
Profit +Or
Loss -
0 $172 $0 -- -- $100 -- -$100
1 162 162 $162 $190 190 $90 -28
2 152 304 142 135 270 80 34
3 142 426 122 113.33 340 70 86
4 132 528 102 100 400 60 128
5 122 610 82 94 470 70 140
6 112 672 62 91.67 550 80 122
7 102 714 42 91.43 640 90 74
8 92 736 22 93.73 750 110 -14
9 82 738 2 97.78 880 130 -142
10 72 720 -18 103 1030 150 -310
12:3 Identify The Market Structures of the following Products:
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
MR
Elastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
DQ
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Q
MONOPOLY REVENUES & COSTS
Q
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
TR
MR D
InelasticElastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Underneath Graphs:
• When the demand for the product is ELASTIC, the monopolist should lower prices to raise TR.
• When the demand for the product is INELASTIC, the monopolist should raise prices to raise TR.
How Do Monopolists Determine Profit?Price & Cost
Quantity
DemandMR
MC
ATC
Find Where MC
= MR to determine quantity
QX
At that Quantity is also the quantity
demanded and thus price
PX
The revenue earned from the q.d. determines the profit above
ATC
Profit
Downward sloping demand curve, whatever is demanded the monopolist will
supply
The MR curve should hit the x-
axis at the demand curves
Mid-Point
How do Monopolists Determine Profit?
Look For:
#1: Where MC = MR
(optimal point of production, therefore quantity supplied)
#2: That quantities intersection with both the demand curve and ATC curve
#3: Price on Demand Curve & Price on ATC curve
Monopolists realize profits and set price where
MC = MR and P > MR!!!
Contrasts to Perfect Competition
1.Output is restricted
2.Price is higher
3.Output is lower, which leads to:
4.Misallocation of resources
Contrasts to Perfect Competition
5. Reduction of Consumer Surplus
•{Review of Consumer Surplus: marginal utility is greater than price and people who are willing to pay higher than the market price for a good “save” money} Looks Like:
Price
Quantity
S
D
PX
Consumer Surplus
Producer Surplus
Contrasts to Perfect Competition
6. Monopolists receive a rent
{receives more than contributes to production}
7. Accruement of dead-weight loss
{wasted resources}
Q
DMR
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
P1
Profit
Consumer Surplus
Wasted Resources
Dead weight loss; monopolists do not have to conserve resources!! They have no competition
Costs
Therefore, Monopolies are powerful but are likely to show inefficiencies!!!
Q
D
MR
MCATC
PP
rice
an
d C
ost
sMR = MC
Monopolists Price
Fair-Return PriceNormal Profit Only
Socially-OptimumPrice
Qm Qf Qs
Pm
Pf
Ps
Dilemma of Regulation:
Which Price?
Is there a need for government to regulate this market structure?
