monopoly story of nes, comcast, even central parking
TRANSCRIPT
Monopoly
Story of NES, Comcast, even
Central Parking
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Cost and Monopoly Profit Maximization
Calculating Monopoly Profit
On Making Higher Profits: Price Discrimination
The Social Cost of Monopolies
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MonopolistA single supplier that comprises its entire industry for a good or service for which there is no close substitute
Definition of a Monopolist
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Barriers to prevent entry of other
make long-run economic profits and legally prevent other firms from entering.
How to become a monopoly
The firm owns the resources to make the product without close substitutes:
If you owned all the oil reserves, who could enter the refining business?
The Aluminum Company of America (ALCOA) at one time owned 90% of the world’s bauxite.
Barriers to Entry
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Problems in raising adequate capital by other firms
Choose a product that requires a substantial capital investment: others cannot get enough to open a businessWhy not enter the microprocessor market and compete with Intel?
Barriers to Entry
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Other barriers
Economies of scaleYou have cut your costs so low that it drives rivals out who can not meet you’re your costs per unit and your low price.
Natural monopoly
other barriers
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Legal or governmental restrictions
Licenses, franchises, and certificates of convenience patents copyrights
Is the postal service still a monopoly?Consider
UPSFedXFax machinesThe Internet
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Government created barriers
Firms create their own monopoly
$CartelsAn association of producers in an industry that agree to set common prices and output quotas to prevent competition
MKR calls them producers monopolies
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Types of monopoliesGeographicNatural: over time developsTechnological: you have a patent that allows you to produce a product cheaply or more efficientlyGovernment createdResource monopoly: iron, coal, bauxite etc.
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Assumptions of monopolyOne firm that is the whole industry
Unique product or service
Consumers know there is one producer with a unique product that has no close substitutes and the firm knows it has no competitionBlocked entry
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Results for a monopolistIt has market power
It can set price
It will produce at MR=MC but it will set price directly above on the demand curve. Look down from MR=MC for quantity and above for price
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Demand curve
Monopolist’s demand = market demandMonopolist is the industry
Remember the purely competitive firm has a perfectly elastic horizontal demand curve
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Demand Curves Perfect Competitor Monopolist
Figure 24-2, Panels (a) and (b)
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MonopolyPerfect Competition
Single Seller who has market power and is a price setter
Is the market demandcurve
Must lower price to sell more
MR < P
P>MR=MC
Dead weight lossRestricts output
One of many sellers with no market power and is price taker
Perfectly elastic demand (price takers)
Must only produce moreto sell more
All units sold for sameprice (P = MR)
Consumer and producer surplus equal
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Figure 24-3
Marginal Revenue: Always Less Than Price
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ElasticityA monopoly is a single seller of a well-defined good or service with no close substitutes.
If there are substitutes,the greater the price elasticity of demand of the monopolist’s demand curve
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Price Searcher or Price SetterA firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve
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Monopoly Costs, Revenues and Profits
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Figure 24-4, Panels (b) and (c)
Monopoly Costs,Revenues, and Profits
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Why produce where marginal revenue equals marginal cost?
Producing past where MR = MCAdditional cost > additional revenue
Producing less than where MR = MCAdditional revenue > additional cost
Cost and Monopoly’sProfit Maximization
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• What is the Profit Maximizing RuleTotal costs
Total costs
Total revenue
Total revenue
Maximum
Maximum
QUANTITY
DOLLARS
Slope equals price.
Slope equals marginal cost.
QUANTITY
DOLLARSSlope equals marginal revenue.
Slope equals marginal cost.
Maximizing Profit
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Maximizing ProfitsWhere MR=Mc
10_04
1 92 83 74 5 6 10
200
150
100
50
0
DOLLARS
QUANTITY
Marginal cost (MC)
Demand
Marginal revenue (MR)
Profit Max is Where MR = MC (fig 10.4)
Calculating Monopoly Profit
If price above ATC
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TR = P * Q
= TR - TC
TC = ATC * QQuantity
MC
ATC
Pri
ce o
r C
ost (
$)
Monopoly
DMR
QM
PM
Model of a MonopolyPositive Economic Profits
Monopoly not always profitable
If price belowATC in short runthen Loss min
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TR = P * Q
= TR - TC
TC = ATC * QQuantity
MC
ATC
Pri
ce o
r C
ost (
$)
Monopoly
DMR
QM
PM
Model of a MonopolyPositive Economic Profits
• On Making Higher Profits: Price DiscriminationNecessary conditions for price discrimination
–The firm must face a downward-sloping demand curve
–The firm must be able to separate its consumers into
two different markets
• The Social Cost of Monopolies– Start with a perfectly competitive market in
long-run equilibrium• Pe: Qd = Qs
• MR = MC
• Pe = MC
• Zero economic profits