Unit 4: Imperfect Competition 1 Copyright ACDC Leadership 2015.
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Transcript of Unit 4: Imperfect Competition 1 Copyright ACDC Leadership 2015.
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Unit 4: Imperfect
Competition
1Copyright ACDC Leadership 2015
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REVIEW ACTIVITYName That Concept
Rules: 1. Cannot use the word(s)2. Focus on the concept not word
Ex: Price Maker2Copyright
ACDC Leadership 2015
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Name That Concept
1. Monopoly2. Imperfect Competition3. Barriers to Entry4. Dead Weight Loss5. Productive Efficiency
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Name That Concept
1. Marginal Revenue2. MR = MC3. Shut down rule4. Natural Monopoly 5. Allocative Efficiency
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D
MR
$10
9
8
7
6
5
MCATC
516 17 18 19 20 Q
P
How much is the TR, TC and Profit or Loss?
Profit =$20
Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.
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Elastic and Inelastic Range
6Q
$15
10
5
$64
40
20
TR
D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MR
P
TR
Total Revenue TestIf price falls and TR
increases then demand is elastic.
Elastic
Total Revenue TestIf price falls and
TR falls then demand is inelastic.
A monopoly will only
produce in the elastic
range
Inelastic
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Regulating Monopolies
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How do they regulate?•Use Price controls: Price Ceilings•Why don’t taxes work?
•Taxes limit supply and that’s the problem
Why Regulate?Why would the government regulate
an monopoly? 1. To keep prices low 2. To make monopolies efficient
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1.Socially Optimal PriceP = MC (Allocative Efficiency)
Where should the government place the price ceiling?
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
OR
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QD
MC
ATC
P
Natural Monopoly
10Qsocially optimal
One firm can produce the socially optimal quantity at the lowest cost due to economies scale.
It is better to have only one firm because ATC
is falling at socially optimal quantity
Copyright ACDC Leadership 2015
MR
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QDMR
MC
ATC
P
Natural Monopoly
11Qsocially optimalCopyright ACDC Leadership 2015
Unregulated
Socially Optimal(No DWL)
Fair Return
QM QFR
PM
PFR
QSO
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QD
MC
ATC
P
Regulating a Natural Monopoly
12Qsocially optimal
What happens if the government sets a price ceiling to get the socially optimal quantity?
The firm would make a loss and would require
a subsidy
Pso
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MR
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2008 Audit Exam
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Perfect Price Discrimination
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Price DiscriminationPrice Discrimination:Practice of selling the same products to different buyers at different prices
•Airline Tickets (vacation vs. business)•Movie Theaters (child vs. adult) •All Coupons (spenders vs. savers) •SPHS football games (students vs. parents)
Examples:
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•Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.•Those with inelastic demand are charged more than those with elastic
Requires the following conditions:1. Must have monopoly power2. Must be able to segregate the market 3. Consumers must NOT be able to resell
product16Copyright
ACDC Leadership 2015
Price Discrimination
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P Qd TR MR
$11 0 0 -
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9$10 $9
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8$10 $9
$10 $9 $8
Results of Price Discrimination
20Copyright ACDC Leadership 2015
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8
$7 4 34 7
$10 $9
$10 $9 $8
$10 $9 $8 $7
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 $9
$8 3 27 $8
$7 4 34 $7
$6 5 40 $6
$5 6 45 $5
$4 7 49 $4
Results of Price Discrimination
$10 $9
$10 $9 $8
$10 $9 $8
$10 $9 $8 $7
$7
$6
$5$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5 $422Copyright
ACDC Leadership 2015
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 $9
$8 3 27 $8
$7 4 34 $7
$6 5 40 $6
$5 6 45 $5
$4 7 49 $4
$10 $9
$10 $9 $8
$10 $9 $8
$10 $9 $8 $7
$7
$6
$5$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5 $4
WHEN PRICE DISCIMINATING
MR = D
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Regular Monopoly vs. Price Discriminating Monopoly
24
D
MR
MC
ATC
Q
P
Pm
QmCopyright ACDC Leadership 2015
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A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
25
D
MR
MC
ATC
Q
P
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26
D=MR
MC
ATC
Q
P
Qnm
Identify the Price, Profit, CS, and DWL
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
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D=MR
MC
ATC
Q
P
Qnm
Identify the Price, Profit, CS, and DWL
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
Price Discrimination results in several prices, more profit, no CS, and a higher
socially optimal quantityCopyright ACDC Leadership 2015
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Can You Do The Following?
1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit.
3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit
2. Draw a perfectly competitive industry AND firm at long-run equilibrium
28Copyright ACDC Leadership 2015