Pure Monopoly

1. “Pure Monopoly”

2. “ PURE MONOPOLY ” A market in which one company has control over the entire market for a product, usually because of a barrier to entry such as a technology only available to that company.

3. Characteristics of Pure Monopoly Single Seller No C lose S ubstitute Price Maker Blocked E ntry

4. How monopolies make production and pricing decision

5.   MONOPOLY DEMAND Assumptions Patents , economies of scale, or resource ownership secure the monopolist's status . No unit of government regulates the firm. The firm is a single-price monopolist; it charges the same price for all units of output.

6. Three implications of the downward-sloping demand curve  

7. Demand and MR for a Monopolist P1 P2 P3 P, Cost Q1 Q2 Q3 Q Total Revenue MR TR PED>1 PED=1 PED<1 D=AR=P At which price/output combination will a monopolist produce?

8. OUTPUT AND PRICE DETERMINATION Cost data Assumption - a pure monopolist hires resources competitively and has the same technology as a purely competitive firm. MR=MC rule A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC. Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve. Draw a horizontal line. This is the price they set.

9. Pure Monopolist Earning Profits Economic Profit P1 ATC 1 P, Cost MC ATC D=AR=P Q1 MR Q

10. No monopoly supply curve No unique relationship between price and quantity supplied for a monopolist → no supply curve. Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output

11. Misconceptions concerning monopoly pricing Not Highest Price Misconception: Monopolists will charge highest price possible because they can manipulate output & price Monopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased. Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost) Monopolist seek maximum total profit, NOT the maximum price Total, Not Unit, Profit Output level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.

12. Pure Monopolist Experiencing Losses ATC1 P1 LOSS ATC MC Q1 MR D=AR=P P, Cost Q

13.   Price Discrimination   The practice of selling a specific product at more than one price when the price differences are not justified by cost differences.   Ways of Price Discriminating 1. Charge each person his or her max willing-to- pay price  2. Charge more for the first set of the product, then less for each additional product bought by the same consumer 3. Charge different customers different price based on factors such as race, gender, age, abilities etc.   

14. Price discrimination Is possible when the following conditions are realized: Monopoly Power Market Segregation No Resale Little or No Cost Difference

15. Perfect Price Discrimination to charge what each consumer is willing to buy. Although perfect price discrimination is unlikely to be achieved, consumer surplus will be reduced to zero.

16. P1 ATC1 Q1 MR Q ATC MC Economic Profit D=AR=P P, Cost ATC1 ATC MC MR=D=AR=P Q1 Q Economic Profit P, Cost Single Price Monopolist Earning Profits Price Discriminating Monopolist

17.   Price Determination MR = MC Rule Monopolies maximize total profit by producing at a level of output where MR = MC This is the same as a purely competitive industry At this level of output, the difference between TR and TC is also at its greatest  

18. Consequences of Price Discriminating Monopolies More profit More output Lowest price will = MC Zero consumer surplus (when perfect) Creates allocative efficiency No productive efficiency because P> min ATC MR is reunited with DARP because the firm no longer has to decrease the price of every unit sold prior. In other words, at each quantity, the product will be sold at a different price.  

19. GROUP 2 Members Aizell Bernal Dianne De Guzman Sheryl Tolentino Shara Jane Clayton Jean Marie Canona Kate Garcia Jeradie Joves Miguel Apruebo Patrizia Louiz Reyes Allan Roi Mapa