Microeconomics Chapter 15

!

Monopoly

How many firms does it take to compete?

How many firms does it take to compete?

One

Monopoly

Monopoly

Only Seller No Close Substitutes

Barriers to Entry

Barriers to Entry

Government Protection Key Resource

Network Externalities Economies of Scale

Patents !

!

Copyrights

Patents !

!

Copyrights

20 Years !

!

Lifetime plus 70 Years

Franchise

Franchise

Exclusive Legal Provider

New Drugs

New Drugs

10 Years of Testing before Approval

!

10 Years of Monopoly

Network Externalities

Network Externalities

The more who use it !

The more valuable it becomes

Natural Monopoly

Natural Monopoly

One firm can supply entire market at a lower average cost than two or

more firms

Natural Monopoly

Natural Monopoly

The more I make the lower my costs

!

Large Fixed Costs

Is competition always good?

Is competition always good?

Sometimes it can lead to higher prices

Monopoly Output and Price

Monopoly Output and Price

Lower Price:

Good: Sell More

Bad: Less Revenue Per Unit

Perfect Competition

Perfect Competition$

Quantity

P

Perfect Competition$

Quantity

Demand=MR

P

Perfect Competition

Marginal Cost MC

$

Quantity

Demand=MR

P

Perfect Competition

Marginal Cost MC

$

Quantity

Demand=MR

Q

P

Perfect Competition

Marginal Cost MC

$

Quantity

Demand=MR

Q

P

Perfect Competition

Marginal Cost MC

$

Quantity

Demand=MR

Total Revenue

Q

P

Perfect Competition

Marginal Cost MC Average Cost

ATC

$

Quantity

Demand=MR

Total Revenue

Q

P

Perfect Competition

Marginal Cost MC Average Cost

ATC

$

Quantity

Demand=MR

Total Revenue

Q

P

Perfect Competition

Marginal Cost MC Average Cost

ATC

Total Cost

$

Quantity

Demand=MR

Q

P

Perfect Competition

Marginal Cost MC Average Cost

ATC

Total Cost

$

Quantity

ProfitDemand=MR

Perfect Competition

Demand

Perfect Competition

Demand

MR

Perfect Competition

Demand MR=

Perfect Competition

Demand MR

Monopoly

Demand

MR

Monopoly

Demand

MR

Monopoly

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

$3

$6

$9

$12

$15

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

$3

$6

$9

$12

$15

$3

$3

$3

$3

$3

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

$3

$6

$9

$12

$15

$3

$3

$3

$3

$3

$5

$4

$3

$2

$1

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

$3

$6

$9

$12

$15

$3

$3

$3

$3

$3

$5

$4

$3

$2

$1

$5

$8

$9

$8

$5

Perfect Competition Monopoly

Q D TR MR D TR MR

1

2

3

4

5

Monopoly: To get more Quantity must lower price

$3

$3

$3

$3

$3

$3

$6

$9

$12

$15

$3

$3

$3

$3

$3

$5

$4

$3

$2

$1

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Demand

Perfect Competition

Demand MR=

Perfect Competition

Demand

MR

Monopoly

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

Qty

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5 1

Qty

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5 1

Qty

$5

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5 1

Qty

$5 $5

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5 $5

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

Lose Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

Lose

Lose

-$1

Gain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

LoseG

ain

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

LoseG

ain

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

LoseG

ain

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$4

1

2

Qty

$5

$8

$5

$3

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$5

$3

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$9

$5

$3

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$9

$5

$3

$1

Lose

-$1

Gain

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$9

$5

$3

$1

Lose

-$2

-$1

Gain

$4

Lose

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$9

$5

$3

$1

Lose

-$2

-$1

Gain

$3

$4

LoseG

ain

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

1

3

2

Qty

$5

$8

$9

$5

$3

$1

Lose

-$2

-$1

Gain

$3

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$5

$3

$1

Lose

-$2

-$1

Gain

$3

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$8

$5

$3

$1

Lose

-$2

-$1

Gain

$3

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$8

$5

$3

$1

-$1

Lose

-$2

-$1

Gain

$3

$4

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$8

$5

$3

$1

-$1

Lose

-$2

-$1

-$3

Gain

$3

$4

Lose

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$8

$5

$3

$1

-$1

Lose

-$2

-$1

-$3

Gain

$3

$4

$2

LoseG

ain Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

1

3

2

4

Qty

$5

$8

$9

$8

$5

$3

$1

-$1

Lose

-$2

-$1

-$3

Gain

$3

$4

$2

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$3

$1

-$1

Lose

-$2

-$1

-$3

Gain

$3

$4

$2

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

Lose

-$2

-$1

-$3

Gain

$3

$4

$2

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

Gain

$3

$4

$2

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

Lose Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

LoseG

ain Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Monopoly

Price

1 3

$5

$3

$4

$2

$1

$02 4 5

Price Qty TR MR

$5

$3

$4

$2

$1

1

3

2

4

5

Qty

$5

$8

$9

$8

$5

$5

$3

$1

-$1

-$3

Lose

-$2

-$1

-$3

-$4

Gain

$3

$4

$2

$1

Demand

Marginal Revenue MR

Monopoly$

Q

Monopoly$

Q

Demand

Marginal Revenue MR

Monopoly$

Q

Demand

Marginal Cost MC

Marginal Revenue MR

Monopoly$

Q

Demand

Marginal Cost MC

Marginal Revenue MR

Monopoly$

Q

Demand

1. MR=MC?

Marginal Cost MC

Marginal Revenue MR

Monopoly$

Q

Demand

1. MR=MC?

Marginal Cost MC

Q

Marginal Revenue MR

Monopoly$

Q

Demand

1. MR=MC?

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly$

Q

Demand

1. MR=MC?

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly$

Q

Demand

1. MR=MC?2. TR= P x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

$

Q

Demand

1. MR=MC?2. TR= P x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Profit

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Profit

Demand

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Profit

Demand

Consumer Surplus

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Profit

Demand

Consumer Surplus

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

Marginal Cost MC

Q

P

Marginal Revenue MR

Monopoly

Average Cost ATC

Cost

$

Q

Profit

Demand

Deadweight Loss

Consumer Surplus

1. MR=MC?2. TR= P x Q3. TC=ATC x Q4. Profit =TR-TC or (P-ATC) x Q

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

D

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

Gain

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

Gain

Loss

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

Loss

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

0 1 2 3 4 5 6 7 8 9 10

Quantity

MC

DMR

Loss

Loss

Price Discrimination

Price Discrimination

Selling the same good to different customers at

different prices