macroeconomic mcgrowhill micro ch 10 19e use this one

• How Pure Monopoly Sets Profit Maximizing Output and Price • The Economic Effects of Monopoly • Why A Monopolist May Wish to Charge Different Prices in Different Markets... Price and

Pure Monopoly

10

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved.

• How Pure Monopoly Sets

Profit Maximizing Output and Price

• The Economic Effects of

Monopoly

• Why A Monopolist May Wish

to Charge Different Prices in Different Markets

Pure Monopoly

Monopolistic Competition Oligopoly

FOUR MARKET MODELS

• Ownership or Control of

Essential Resources

• Pricing and Other

Strategic Barriers to Entry

O 10.2

If ATC declines over extended output, least-cost production is realized only if there is one

producer - a natural monopoly

THE NATURAL MONOPOLY CASE

Price and Marginal Revenue

Marginal Revenue is Less Than Price

Price and Marginal Revenue

Marginal Revenue is Less Than Price

• Try Other Prices to

Determine Other

MR Points

Gain = $132 Loss = $30

The Constructed Marginal Revenue Curve Must Always Be Less Than the Price

MR

• No Supply Curve

G 10.1

W 10.1

Monopoly Revenue and Costs

Revenue and Cost Data of a Pure Monopolist

(1) Quantity

Of Output

(2) Price (Average Revenue)

(3) Total Revenue (1) X (2)

(4) Marginal Revenue

(5) Average Total Cost

(6) Total Cost (1) X (5)

(7) Marginal Cost

(8) Profit (+)

or Loss (-)

0 1 2 3 4 5 6 7 8 9 10

$172 162 152 142 132 122 112 102 92 82 72

$0 162 304 426 528 610 672 714 736 738 720

$162 142 122 102 82 62 42 22 2 -18

$190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00

$100 190 270 340 400 470 550 640 750 880 1030

$90 80 70 60 70 80 90 110 130 150

$-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310

Revenue Data Cost Data

] ] ] ] ] ] ] ] ] ]

] ] ] ] ] ] ] ] ] ]

Can you See Profit Maximization?

Monopoly Revenue and Costs

Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist

Demand and Marginal Revenue Curves

Total-Revenue Curve

D MR

TR

Output and Price Determination

Steps for Graphically Determining the Maximizing Output,

Profit-Maximizing Price, and Economic Profits (if Any) in Pure Monopoly

Step 1 Determine the profit-maximizing output by finding where MR=MC.

Step 2

Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve.

Step 3 Determine the pure monopolist’s economic profit by using one of two methods:

Method 1 Find profit per unit by subtracting the average total cost of

the profit-maximizing output from the profit-maximizing price Then multiply the difference by the profit-maximizing output to determine economic profit (if any).

Method 2 Find total cost by multiplying the average total cost of the

profit-maximizing output by that output Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price Then subtract total cost from total revenue to determine the economic profit (if any).

100 75 50

MR=MC

Pm=$122

A=$94

Economic Profit

• Not the Highest Price

• Total, Not Unit, Profit

• Possibility of Losses

Concerning Monopoly Pricing

A

Pure Monopoly

P=MC=

Minimum ATC

c

ATC 2

Quantity

Average Total Cost

Economic Effects of

Monopoly

O 10.3

Royal Dutch/Shell (Netherlands) Royal Philips (Netherlands)

Sony (Japan) Toyota (Japan) Unilever (Netherlands)

Chemicals Gasoline

Tires Computers Food Products Wireless Phones

Gasoline Electronics Electronics Automobiles Food Products

Source: Fortune.com

– Charging Each Customer

the Maximum They Are Willing to Pay

– Charging Each Customer

One Price For The First Set

of Units Purchased and a Lower Price for

Subsequent Units

– Charging Some Customers

One Price and a Different Price for Other Customers

O 10.4

• Examples of Price

Discrimination – Airfares

– Electric Utilities – Theaters & Golf

ATC P

and more profit!

MR=D

Fair-Return Price

Socially Optimal Price

P r

D

r f

• Decline in Number of Select

Dealers and Cutters

• Classic Monopoly Behavior

– Pricing – Single-Channel Marketing

Are Monopolies Forever?

De Beers’s Diamonds

the world’s diamond market

• Nearly perfect artificial diamonds

diamonds rather than controlling supply