AP Micro - Unit 4

Monopoly

Monopoly

1 firm that dominates the industry and sells a unique poduct

Oligopoly

Type of market with a few large firms that dominate the industry

Monopolistically Compeitive Market

Large number of sellers that offer differentiated products

Characteristics of Imperfectly Competitive Firms

• Fewer, large firms

• Firms are price makers

• High barriers to entry

• Firms earn long run profits (except monopolisitc compeition, which break even in the long run)

• Products that are sold are differentiated

• Firms are inefficient in the long run

• Demand is GREATER than marginal revenue

Price maker

Firms have some of total control over the price at which they choose to sell their goods in the market

Where do inefficient competitive firms produce?

Profit maximizing point, MR = MC

Non- price compeition

Companies use tools like advertising to promote their products

Why are imperfect firms not efficient?

Due to the lack of competition, the firms do not feel pressure to produce at efficient levels

Why is demand greater than marginal revenue for imperfect firms?

In order to sell another unit, the firm must lower the price of the next unit

Geographic barriers to entry

A firm is the only one in the area that offers a particular product

Government serving as a barrier to entry

They issue patents and other protections to ensure one firm has exclusive rights to manufacture a product

Common use barrier to entry

Ability of a firm to use it’s brand name and reputation to maintain their costumer base, making it difficult for new firms to enter and compete

Economies of scale barrier to entry

Ability of a firm to mass produce their goods at low costs. Since new firms have higher start up costs, they have difficulty competing in the industry.

High fixed cost barrier to entry

New firms may not have the financial resources to incur the upfront costs of entering the market, thus difficulty competing in the industry (ex: a company wanting to enter an airline needs to buy airplanes and maintain them)

Characteristics of Monopolies

• One large firm

• Firms are price makers

• High barriers to entry

• Firms earn long run profits

• Products sold are unique

• Non price compeition

• Inefficient

Natural monopoly

Occurs when an individual firm comes to dominate an industry by producing goods and services at the lowest possible production cost.

Are natural monopolies beneficial to society?

Yes; charge low prices and promote productive efficiency

Why is MR < D in a monopoly graph?

Monopolies can’t price discriminate

Calculating/locating monopoly profit

The difference between ATC and demand at the profit maximizing output point

Between ATC and demand, occurs when ATC is BELOW demand

Calculating/locating monopoly loss

Difference between ATC and demand at profit maximizing quantity

Found between ATC and demand, where the ATC is ABOVE the demand

Socially optimal quantity and price of a monopoly; do monopolies produce here?

D = MC; no, price ceilings are here to force monopolies to produce here

Fair return price and output of a monopoly

Where P = ATC (not the same as the productively efficient point of P = minimum ATC)

Total revenue maximizing point on a monopoly graph

Located where MR = 0, used to determine elastic and inelastic parts of the demand curve

Unit elastic point on a monopoly graph

Located where MR = 0, where that X value crosses the demand line

Elastic region of demand curve

Section of demand curve above the unit elastic point

Inelastic region of demand curve

Section of demand curve below the unit elastic point

Can a monopoly lower their prices in the elastic reigon and still increase TR?

Yes

Can a monopoly lower their prices in the inelastic region and still increase their TR?

No, they will not willingly produce here because it will lower their profits

Uniformly pricing monopoly

Monopolist charges only one price - the demand price at the point where MR = MC

Consumer surplus on a monopoly graph (non price discriminating)

Triangle at profit maximizing point to top of the demand curve;

Producer surplus on a monopoly graph (non price discriminating)

Triangle found at profit maximizing point and bottom of the MC curve

Deadweight loss on a monopoly graph (non price discriminating)

Anything to the right of the profit maximizing point, up until the demand curve and marginal cost

Conditions for price discrimination

• Firm must have monopoly power

• Firm must be able to segregate the market - be able to find out what each consumer’s willingness to pay is

• Consumers cannot easily resell the product

Pure monopoly vs price discriminating monopoly: demand and MR

Pure: D > MR

Price discriminating: D = MR

Pure monopoly vs price discriminating monopoly: efficiency

Pure: Productively and allocatively INefficient

Price discriminating: Allocatively efficient, productively inefficient

Pure monopoly vs price discriminating monopoly: economic profits

Pure: smaller long run economic profits

Price discriminating: larger long run economic profits

Pure monopoly vs price discriminating monopoly: consumer surplus

Pure: some consumer surplus

Price discriminating: Zero consumer surplus

Locating price discriminating monopoly profit on a graph

Trapezoid found using where the MC = D/MR, and the corresponding ATC value

Characteristics of monopolistic competition

• Many, various sized firms

• Firms are “price makers”

• Low barriers to entry

• Firms break even in the long run

• Differentiated products sold

• Non-price competition

• Inefficient both allocatively and productively

• Experience excess capacity

Monopolistic competitive firm in the long run

The economies of scale section of the ATC (downward sloping part) will line up with the corresponding profit maximizing value

In a monopolistic competitive industry, what happens when a firm earns a profit in the short run?

Other firms are compelled to enter, resulting in less market share for the existing firms. Demand and MR shift LEFT together.

In a monopolistic competitive industry, what happens when a firm earns a loss in the short run?

Firms are compelled to exit, leading in more market share for the remaining firms. Demand and MR shift RIGHT together

Allocative efficiency

Price = MC

Productive efficiency

Price = minimum ATC

Excess capacity

Difference between a firm’s current inefficient level or production and the productively efficient level of output.

Characteristics of oligopolies

• Few, large firms

• Price makers

• High barriers to entry

• Firms earn long run profits

• Differentiated products sold with many close substitutes

• Non-price competition

• Firms are inefficient

Colluding oliogoplies

Firms communicate with each other and act as one unit, also known as cartels

Non-colluding oligopolies

Firms compete and do not work together, practice price leadership

Dominant strategy

Strategy that a firm should take no matter what the other firm does

Nash equilibrium

No players can unilaterally improve their position - they cannot improve unless the other player moves, but the other player also can’t move unless the first player does, etc.

Price leadership in oligopolies

The dominant firm will initiate a price change in the industry

If you’re in an oligopoly and you have to increase your price..

More elastic demand for your product (consumers become price sensitive)

If you’re in an oligopoly and you decrease your price…

Your competitor will match your price and the market will stay relatively similar, with a relatively inelastic demand curve

Oligopoly kinked demand curve

If your price increase is above equilibrium price, it’s on elastic section of graph

If your price decrease is below equilibrium price, it’s on inelastic section of graph