Download Comparing Equilibrium situations for Monopoly and perfect

Comparing Equilibrium situations
for Monopoly and perfect
Competition
Characteristics of a Monopolist
A monopolist firm is the only supplier of a good or service in
a market.
•The revenue curves for a monopoly are different from those of a
perfect competitor.
•The monopolist is able to restrict output so that a high price can
be charged, this means in order to sell more product the
monopolist must drop its price.
• Sound similar to the LAW OF DEMAND?
•As price decreases quantity demanded increases
•This must mean the monopolist must have a downwards sloping
demand curve!
•AR=D
Revenues for a monopolist
Price
Quantity
Total
Revenue
Average
Revenue
Marginal
Revenue
30
1
30
30
30
25
2
50
25
20
20
3
60
20
10
15
4
60
15
0
10
5
50
10
-10
5
6
30
5
-20
Revenue Curves for the Monopolist
The AR curve is the firms demand curve
Both the AR and MR are downwards sloping, but AR
is>
When TR is increasing, MR is positive
When TR is decreasing, MR is negative
When TR is at its maximum MR=O
Comparing Demand Curves
Perfect Competitor
Demand Curve
Degree of influence
over price
Relationship between
AR and MR
Horizontal
Price Taker
AR=MR
Monopolist
Downwards sloping
Only producer,
Price setter
MR<AR
Profit Maximising Equilibrium for the
Monopolist
To identify the profit
maximising equilibrium
position for the monopolist
firm.
1. Find where MR=MC, from
this position draw a dashed
line directly down to
horizontal axis, (Qe)
2. Continue this dashed line
vertically till you reach the
AR curve, then take this line
to the vertical axis (Pe)
To identify AC at profit max level.
Find where the line goes vertically up from Qe and reaches the AC
curve take this then to the vertical (price axis) point c
Total supernormal profit Pe, a, b, c
Normal Profits
AR =AC
Supernormal Profit
AR > AC
Supernormal Profits
Subnormal Profits
AC> AR
Differing profit situations for the
monopolist
Profit Situations
These are assessed in the same way as perfect competitorsat the profit maximising level of output
If
AR < AC
Subnormal Profits
AR=AC
Normal Profits
AR > AC
Supernormal Profits
What happens in the SR and LR?
In the short run, a monopoly must stay in the
industry no matter what the profits position , as at
least on factor is fixed.
In the Long Run
 Earning a supernormal profit – this situation will
continue as strong barriers to entry prevent any
other firms entering the market
 Earning a normal profit – a firm will continue to
operate, as it is earning just enough profit to be
worthwhile
 Earning a subnormal profit – a firm will leave the
market as better returns can be gained else where
Monopoly VS Perfect Competition
Due to high barriers to entry, compared to a
perfectly competitive firm a monopoly can and will
Deliberately restrict output
Set a price higher than MC
Be able to earn supernormal profits in the LR.
Not achieve the efficient level of output where AR=MR
Barriers to entry
Barriers to entry- strategies available that will
stop new firms from entering a market
This means, existing firms will be able to keep earning supernormal
profits in the long run.
Examples of barriers to entry
Patents – give the firm intellectual property rights over a new
invention
Predatory pricing – policies to cut prices to a level that would force
any new entrants to operate at a loss
Cost Advantages- resulting from economies of scale (allowing them
to undercut price)
Spending on R&D (research and development)
Producing a good with no close substitutes
Advertising and marketing – competitors find it expensive to break
into the market
Monopoly VS Perfect Competition
However there are some situations where the monopolist can
provide some advantages to society
Supernormal profits can be used to pay for R&D which could
lead to further efficiencies
If the monopolist is earning sufficient economies of scale a firm
could charge a price below that of a competitive firm.
Loss of Allocative Efficiency
Work book page 73
In a perfectly competitive market, price is set by demand and
supply at market equilibrium, so the market is allocatively
efficient
Curves of a monopolist
Demand curve is downwards sloping
MR< AR
The monopoly restricts output to the profit maximising level
where MR=MC
Where MR=MC, the monopolist charges a higher price and lower
output than the market equilibrium where MC (S) = AR (D)
The allocative efficient level of output is where AR=MC
Deadweight loss will exist.
.
Deadweight loss (DWL) = Represents a loss of allocative efficiency
that is lost to the market
Loss of Allocative Efficiency
Government Policies and
Monopolies
Because monopolists operate at a non allocative efficient point
governments may choose to intervene in the following ways
Price Controls
-Force the monopoly to operate at a price where
AR=MR
(called marginal cost pricing )
If costs are too high the firm may be forced into
a subnormal profit. As a result the government
may
need to subsidise the firm
- Force the monopoly to operate where AR=AC (called average
cost pricing)
The firm will then be making a normal profit and it will be
operating at a close to the allocatively efficient point.
Remove all artificial barriers to entry for a firm – e.g legal barriers
Encourage/legislate competition – forcing monopolies to share facilities
Force any parts of a monopoly that can be broken up to be sold