Econ Week 11
U of M
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This 4 page Class Notes was uploaded by Emma Norden on Saturday November 21, 2015. The Class Notes belongs to Econ 1101 at University of Minnesota taught by Thomas Holmes in Fall 2015. Since its upload, it has received 37 views. For similar materials see Principles of Microeconomics in Economcs at University of Minnesota.
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Date Created: 11/21/15
Econ Week 11 112015 Natural Monopolies One firm in entire industry has a lot of market power If there are multiple sellers there is competition so prices are lower if there is one seller price will be higher Economies of scale are important there may only be room for one firm Ex It makes sense to only have one water company vs multiple cost to build pipes would get very expensive What would cause the price that a monopolist charges to change Demand curve which changes marginal revenue Marginal cost Cost side Water Gas station in small town Electric power 0 Demand side that creates natural monopoly Network benefits users potentially creates a natural monopoly Ex Facebook everyone is on Facebook so you join FB Perfect Price Discrimination If firm knows exactly how much a consumer values a good and then charges exactly that price it is perfectly price discriminated Going to sell as much as they can as long as it s pro table It is ef cient to perfectly price discriminate when there s a monopolist Chapter 15 Monopoly Monopoly Sole seller of a product that has no close substitutes Can in uence market price thus they are price makers PgtMC Monopolies are caused by 0 Barriers to entry Monopoly resources Key resource is owned by one firm Very rare in real world Government regulations Government gives exclusive right to a firm to produce a good Copyright and patent The production process A single firm can produce at a lower cost than if there were multiple firms producing If a monopoly arises because of this it is called a natural monopoly Economies of scale ATC curve declines ATC curve declines with increasing quantity Size of market can be a determinant for whether or not there is a natural monopoly ie As market grows market can become more competitive Page 300 Demand curve of a monopoly is the market demand curve Marginal revenue is always less than price of good 0 Increasing quantity sold has 2 effects Output effect More output is sold so Q is higher and total revenue increases Price effect Price falls so P is lower and total revenue decreases Average revenue curve starts at demand curve but then lies below demand curve Marginal revenue is negative when price effect is greater than output effect Ernst and Revenue i39r391jr E3 l5 grim r lquotIl39M 39i 39H m 1 3935 Wmle Page 307 Profit MaXimization Profit maximization quantity is at the point where marginal revenue curve intersects marginal cost curve Competitive firm PMR MC Monopoly firm PgtMR MC thus pricegtmarginal cost Demand curve determines amount consumers are willing to pay Page 306 0 Monopolies are desirable from producer s standpoint but undesirable from consumer s perspective Monopolies charge higher prices Produce less than social optimum total surplus is not maximized Charge price above marginal cost curve which causes deadweight loss similar to a taX but private firm gets the monopoly profit Price discrimination when a firm charges different prices to different customers even when costs are the same Charging different prices based on costumer s willingness to pay will increase profit EX Cost of producing is 0 Customer A values buying a book at 4 customer B values a book at 18 You can charge 4 and miss out on the 12 more you would have made from customer B you can charge 18 and not get 4 from customer A or you can price discriminate and sell the book for 4 to customer A and 18 to customer B making a profit of 22 Page 314 0 Price discrimination Strategy for profit maximization Prevented by arbitrage buying a book at a low price and then selling it at a higher price in another market Can raise economic welfare Ex Charging 18 would leave a DWL which would leave customer A without a book with price discrimination everyone gets the book Total surplus of producers increases but consumer surplus stays the same because the book was bought exactly at the price it was valued at Perfect price discrimination When a monopolist knows exactly the willingness to pay of each customer and can charge everyone a different price Impossible to have perfect price discrimination thus imperfect price discriminations results Examples of Price Discrimination Movie tickets Airline prices Coupons Financial aid Quantity discounts Monopolies don t allocate resources efficiently Produce less than social optimum Charge more than marginal cost 0 Public Policy toward Monopolies Antitrust laws Gives government power to promote competitive market Regulation Government regulates prices of monopolist common in natural monopolies Marginal cost pricing PMC However if price was set at marginal cost firm would lose money because MC lt ATC Solutions to this are Subsidize monopolist through taxing Allow monopolist to charge price higher than MC If P ATC deadweight loss will result because marginal cost of producing good is no longer re ected MC and ATC pricing gives monopolist no incentive to reduce costs Public ownership Government runs monopoly itself ex Postal service Private owners have incentive to minimize costs as long as there is a higher profit so workers can be fired if they re doing a bad job of running the firm In contrast government running firms do not have this incentive Not doing anything Previous policies all have drawbacks so could be argued that it s best for government to do nothing
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