Interactive CH 15 Monopoly 9e

N.
GREGORY MANKIW NINTH EDITION
PRINCIPLES OF
ECONOMICS
CHAPTER
Monopoly
15
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 1
IN THIS CHAPTER
• Why do monopolies arise?
• Why is MR < P for a monopolist?
• How do monopolies choose their P and Q?
• How do monopolies affect society’s well-
being?
• What can the government do about
monopolies?
• What is price discrimination?
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
2
Why Monopolies Arise
• Monopoly
– A firm that is the sole seller of a product
without close substitutes
– Has market power
• The ability to influence the market price of the
product it sells: “price maker”
– Arise due to barriers to entry
• Other firms cannot enter the market to
compete with it
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 3
Three Barriers to Entry – 1
1. Monopoly resources
– A single firm owns a key resource.
• Single water provider in town
• DeBeers - owns most of the world’s
diamond mines
2. Government regulation
– The government gives a single firm the
exclusive right to produce the good.
• Patent and copyright laws
Three Barriers to Entry – 2
3. The production process: natural
monopoly
– A single firm can produce the entire
market Q at lower cost than could several
firms
– Arises when there are economies of
scale over the relevant range of output
– Distribution of water, electricity, etc.
EXAMPLE 1: Natural monopoly
You live in a small town where 1,000 homes
need electricity.
• ATC is lower if one firm services all 1,000 homes
than if two firms each service 500 homes.
Cost Electricity
ATC slopes downward due to

huge FC and small MC
$80
$50 ATC
Q
500 1000
6
Monopoly versus Competition
• Competitive firm
– Price taker
– Small, one of many
– Faces individual demand at P: perfectly
elastic demand
• Monopoly firm
– Price maker, market power
– Faces the entire market demand:
downward sloping demand
Demand curves: competitive firm vs. monopoly
P A competitive firm’s P A monopolist’s

demand curve demand curve
P = MR
D
The market
demand curve D
Q Q
The firm can increase To sell a larger Q, the
Q without lowering P, firm must reduce P.
so MR = P for the Thus, MR ≠ P.
competitive firm.
8
Active Learning 1: JJ’s hairdo revenue
Jayla and Jaden own Q P TR AR MR
the only hair salon in 0 $60
town, “JJ’s hairdo.” 1 55
The table shows the 2 50
market demand for 3 45
haircuts. 4 40
• Fill in the missing 5 35
6 30
spaces of the table.
7 25
• What is the relation
8 20
between P and AR?
9 15
• Between P and MR? 10 10
9
Active Learning 1: Answers
• P = AR, Q P TR AR MR
0 $60 $0 n/a
same as for a 1 55 55
55 55
competitive firm. 2 50 45
100 50
3 45 35
135 45
4 40 25
160 40
5 35 15
• MR < P, whereas 6 30
175 35
5
180 30
MR = P for a 7 25 -5
175 25
competitive firm. 8 20 -15
160 20
9 15 -25
135 15
10 10 -35
100 10
10
EXAMPLE 2: JJ’s MR and demand curves
Q P MR P, MR
0 $60 $60
1 55 55 50
45
Demand curve (P)
2 50 40
3 45 35 30
4 40 25 20
5 35 15 10
6 30 5 MR
0
7 25 -5 -10
Q
8 20 -15
-20
9 15 -25
-30
10 10 -35 0 1 2 3 4 5 6 7 8 9 10
11
A Monopolist’s Revenue
• Increasing Q has two effects on revenue:
– Output effect: higher output raises revenue
– Price effect: lower price reduces revenue
• Marginal revenue, MR < P
– To sell a larger Q, the monopolist must
reduce the price on all the units it sells
– Is negative if price effect > output effect
• e.g., when JJ’s increases Q from 6 to 7
Monopoly Profit Maximization
• Produce Q where MR = MC
• Sets the highest price consumers are
willing to pay for that quantity
• Finds this price on the D curve
• P > MR = MC
• If P > ATC, the monopoly earns a profit
Profit-maximization for a monopoly
Costs and
Revenue MC
At this Q, find P on P
the demand curve.
The profit-maximizing D
Q is where MR = MC. MR
Q Quantity
Profit-maximizing output
14
The monopolist’s profit
Costs and
Revenue MC
As with a
P
competitive firm, ATC
the monopolist’s ATC
profit equals
D
(P – ATC) x Q
MR
Q Quantity
15
A Monopoly Does Not Have a 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”
– Q does not depend on P
– Q and P are jointly determined by MC,
MR, and the demand curve
– Hence, no supply curve for monopoly.
CASE STUDY: Monopoly vs. Generic Drugs
The market for

Price a typical drug
Patents on new
drugs give a temporary
monopoly to the seller: PM
PM, QM.
PC = MC
D
When the patent
MR
expires, the market
becomes competitive, QM QC
generics appear: PC, QC. Quantity
17
The Welfare Cost of Monopolies
• Competitive market equilibrium:
– At P = MC and maximizes total surplus
• Monopoly equilibrium: at P > MR = MC
– The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to
produce that unit (MC)
– The monopoly Q is too low – could increase
total surplus with a larger Q.
– Monopoly results in a deadweight loss
The deadweight loss of monopoly
Price Deadweight
Competitive equilibrium: MC
• quantity = QC loss
PM
• PC = MC PC = MC
• total surplus is MC
maximized D
Monopoly equilibrium: MR
• quantity = QM QM QC Quantity
• PM > MC
• deadweight loss
19
The Monopoly’s Profit: A Social Cost?
• Monopoly profit is not in itself necessarily
a problem for society
– Greater producer surplus for monopoly
– Smaller consumer surplus
– Transfer of surplus from consumers to
monopoly
• The inefficiency:
– Monopoly produces Q < efficient quantity
– Deadweight loss
Price Discrimination
• Price discrimination:
– Sell the same good at different prices to
different buyers
– A firm can increase profit by charging a
higher price to buyers with higher
willingness to pay
– Requires the ability to separate customers
according to their willingness to pay
– Can raise economic welfare
Active Learning 2: At the Movies
You are the manager of the only movie theater in
town. The price you charge is $18 per ticket, and in a
given week you sell Q = 1,000 movie tickets. Assume
that you incur only a fixed cost of $10,000 in a week.
A. How much profit is the movie theater making?
B. If you are dropping the price to $5, you will be able
to sell Q = 2,500 movie tickets. Calculate the
profit.
C. Suggest a way you can price discriminate when
selling movie tickets. Calculate the profit if you
price discriminate, with P1 = $18 and P2 = $5.
22
Active Learning 2: Answers
A. Single price P = $18, Q = 1,000, TC = $10,000
Total revenue TR = P × Q = $18,000
Profit = TR – TC = $8,000
B. Single price P = $5, Q = 2,500, TC = $10,000
 Total revenue TR = P × Q = $12,500
Profit = TR – TC = $2,500
C. Price discrimination: P1 = $18 and P2 = $5.
Sell Q = 1,000 at P1, so TR1 = $18,000
Sell Q = (2,500 – 1,000) at P2, so TR2 = $7,500
Profit = TR1 + TR2 – TC = $15,500
23
Perfect Price Discrimination
• Perfect price discrimination
– Charge each customer a different price
• Exactly his or her willingness to pay
– Monopoly firm gets the entire surplus
(Profit)
– No deadweight loss
Welfare with and without price discrimination
Single price monopoly Perfect price discrimination
Price Price
Consumer
surplus Monopoly
profit
PM
Monopoly
profit DWL
MC MC
D D
MR MR
QM Q
Quantity Quantity
25
Price Discrimination in the Real World
– Not possible in the real world
• No firm knows every buyer’s WTP
• Buyers do not reveal it to sellers
• Price discrimination
– Firms divide customers into groups
based on some observable trait
that is likely related to willingness to pay
(WTP), such as age
EXAMPLE 3: Price discrimination – 1
A. Movie tickets
– Discounts for seniors, students, and people
who can attend during weekday afternoons.
– Lower WTP than people who pay full price
on Friday night
B. Airline prices
– Discounts for Saturday-night stayovers
– Business travelers (higher WTP) vs. more
price-sensitive leisure travelers
27
EXAMPLE 3: Price discrimination– 2
C. Discount coupons
– People who have time to clip and organize
coupons are more likely to have lower
income and lower WTP than others
D. Need-based financial aid
– Low income families have lower WTP for
their children’s college education
– Schools price-discriminate by offering
need-based aid to low income families
28
EXAMPLE 3: Price discrimination – 3
E. Quantity discounts
– A buyer’s WTP often declines with additional
units, so firms charge less per unit for large
quantities than small ones.
– Example: A movie theater charges $7 for
a small popcorn and $9 for a large one that’s
twice as big
29
Public Policy Toward Monopolies – 1
1. Increasing competition with antitrust laws
– Sherman Antitrust Act, 1890
– Clayton Antitrust Act, 1914
– Prevent mergers
– Break up companies
– Prevent companies from coordinating their
activities to make markets less
competitive
ASK THE EXPERTS
Mergers
“A merger of AT&T and Time Warner would
likely increase consumer surplus over the
ensuing decade.”
Source: IGM Economic Experts Panel, August 28, 2013, November 8, 2016.
31
2. Regulation
– Set the monopolists’ price
– Common in case of natural monopolies
• MC < ATC at all Q
• Marginal-cost pricing would result in losses
– Regulator might subsidize the monopolist
or set P = ATC for zero economic profit
– Problem: no incentive to reduce costs
3. Public ownership
– How the ownership of the firm affects the
costs of production
– Private owners: incentive to min costs
– Public owners (government)
• If it does a bad job, losers are the customers
and taxpayers
• Public ownership is usually less efficient since
there is no profit incentive to minimize costs
4. Doing nothing
– Some economists argue that it is often
best for the government not to try to
remedy the inefficiencies of monopoly
pricing
– Determining the proper role of the
government in the economy requires
judgments about politics as well as
economics
The Prevalence of Monopoly
• Pure monopoly – rare in the real world
• Many firms have market power, due to:
– Selling a unique variety of a product
– Having a large market share and few
significant competitors
• In many such cases, most of the results
from this chapter apply, including:
– Markup of price over marginal cost
– Deadweight loss
Competition versus monopoly
Competition Monopoly
Similarities
Goal of firms Maximize profits Maximize profits
Rule for maximizing MR = MC MR = MC
Can earn economic profits in SR? Yes Yes
Differences
Number of firms Many One
Marginal revenue MR = P MR < P
Price P = MC P > MC
Produces welfare-maximizing Yes No
level of output?
Entry in the LR? Yes No
Can earn economic profits in LR? No Yes
Price discrimination possible? No Yes
36
ASK THE EXPERTS
Mergers
“If regulators had not approved mergers in the
past decade between major networked
airlines, travelers would be better off today.”
Source: IGM Economic Experts Panel, August 28, 2013, November 8, 2016.
37
THINK-PAIR-SHARE
A consumer advocate is discussing the airline
industry on the news. He says, “There are so many
rates offered by airlines that it is technically possible
for a 747 to be carrying a full load of passengers
where no two of them paid the same price for their
tickets. This is clearly unfair and inefficient.” He
continues, “In addition, the profits of the airlines have
doubled in the last few years since they began this
practice, and these additional profits are clearly a
social burden. We need legislation that requires
airlines to charge all passengers on an airplane the
same price for their travel.”
38
THINK-PAIR-SHARE
A. List some of the ways airlines divide their

customers according to their willingness to pay.
B. Is it necessarily inefficient for airlines to charge
different prices to different customers? Why or why
not?
C. Is the increase in profits generated by this type of
price discrimination a social cost? Explain.
39
CHAPTER IN A NUTSHELL
• Monopoly: the sole seller in its market.
• Monopoly arises when:
– A single firm owns a key resource
– The government gives a firm the exclusive right
to produce a good
– A single firm can supply the entire market at a
lower cost than many firms could.
• Monopoly faces a downward-sloping demand
curve for its product: MR < P
40
• Monopoly maximizes profit
– Produce Q where MR = MC, but Q is not
efficient
– For this Q, the price is on the demand curve.
– So P > MR = MC
– Causes deadweight loss
• Price discrimination: charge different prices for the
same good based on a buyer’s willingness to pay.
– Can raise economic welfare by getting the good
to some consumers who would otherwise not
buy it.
41
– No deadweight loss
– The entire surplus in the market goes to the
monopoly producer.
• Policymakers can:
– Use the antitrust laws to try to make the industry
more competitive.
– Regulate the prices that the monopoly charges.
– Turn the monopolist into a government-run
enterprise.
– Do nothing at all.
42

Interactive CH 15 Monopoly 9e

Uploaded by

Copyright:

Available Formats

Interactive CH 15 Monopoly 9e

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Interactive CH 15 Monopoly 9e

Uploaded by

Copyright:

Available Formats

N.

GREGORY MANKIW NINTH EDITION

ATC slopes downward due to

P A competitive firm’s P A monopolist’s

The market for

A. List some of the ways airlines divide their

You might also like