Monopoly Markets (ch 15) Recall the characteristics of a monopoly market: one firm unique product Monopolies exist

because of barriers to entry. - control the resource - government license

complete barriers to entry

- natural monopoly

A monopoly is a price setter. That is, the firm can determine what price to charge. - charge according to demand I. The Firms Marginal Revenue and Demand TR = P x Q AR = P MR = change in TR change in Q MR P The demand curve for a monopoly firm is ____________________________________ because it is the market demand curve. - the monopoly is the only firm therefore the market demand is the same as the firm demand The ______________________________ curve is also downward sloping. - for linear demand, marginal revenue is twice as steep Ex: demand: marginal revenue: demand: marginal revenue: P = 100 1/3Q MR = P = 50 Q MR =

II. The Firms Output and Price We learned previously that the firm will produce the level of __________________ where marginal revenue is equal to marginal cost. Graphically: Since a monopolist is a price setter, it can charge a price as high as ________________ will allow.

Notice that for a monopolist, at Q*, the price is higher than marginal cost and marginal revenue. - monopolist is not allocatively efficient

Algebraically: The Whatsa Widget Company has a monopoly in the sale of widgets. Here is the firms demand and total cost: Quantity Price TR TC MR MC profit 0 15 8 1 14 11 2 13 16 3 12 26 4 11 39 5 10 57

III. The Firms Profits Graphically Because a monopoly IS the entire market, we rarely need to worry about the ___________________ point. We will instead focus on the ATC and profits. if P > ATC, then profits if P = ATC, then break even if P < ATC, then loss A monopoly firm will compare P to ATC at the profit maximizing level of output to determine its profits. - at the quantity where MR = MC, compare the price to the ATC

A. At Q*, P > ATC

B. At Q*, P = ATC.

C. At Q*, P < ATC

Recap: 1) Produce the level of output where MR = MC. 2) Charge the price according to the demand curve at Q*. 3) Compare the price to the ATC at Q* to determine profits or losses. IV. Efficiency A monopoly firm ___________________________________________ productively efficient. (producing at minimum of ATC) A monopoly firm is __________________ allocatively efficient P > MC always Monopoly Market vs Competitive Market Monopoly markets result in some ________________________________. The demand curve represents the value that buyers place on each additional unit of a good or service. The marginal cost curve represents the additional cost of producing each unit of a good or service. The ____________________________ quantity of output is found where the demand curve and the marginal cost curve intersect. This is where total surplus is maximized.

A monopoly market results in a lower quantity and higher price than a competitive market would have. Because the quantity is lower and the price is higher, there is deadweight loss. Total surplus is not at its maximum.

Remember, there are some benefits to monopolies: - although patents create monopolies, the patent system encourages innovation - the costs of production may make a single producer more efficient due to economies of scale

V. Price Discrimination We know that people have ________________________ price elasticities of demand. We also know that a firms revenues depend on __________________________ of demand. - a firm can charge a higher price to someone with an inelastic demand - to get someone with elastic demand to purchase the item, a firm would charge a lower price ____________________________________: the business practice of selling the same good at different prices to different customers - based on their price elasticity of demand Examples: Movie tickets: matinees and evening shows are different prices Student /Senior Citizen discounts: show your ID and get a discount Coupons: if you have a coupon, the item is cheaper Business travel vs leisure travel: travel from a Tuesday to Thursday is more expensive than from a Friday to Sunday Quantity discount: buy more and get a price break In order to be able to price discriminate, a firm must: 1) have the ability to set its price 2) be able to group consumers by their willingness to pay 3) be able to keep the markets separate (prevent arbitrage) Price discrimination results in ________________________ for the firm because more output is sold and consumer surplus is reduced. - lower the price in the elastic market gain sales - raise the price in the inelastic market lose few sales Some consumers are also better off.