Download Chapter 8 - Monopoly and Imperfect Competition

Fig. 1 A Natural Monopoly
Dollars
A
15
B
12
LRATC
C
5
DMarket
300
350
Pieces of Clothing
per Week
Fig. 2 Demand and Marginal
Revenue
Monthly $60
Price per
Subscriber 50
48
38
30
A
B
C
F
20
18
G
Demand
5,000
6,000
15,000 20,000
30,000
MR 21,000
Number of Subscribers
Fig. 3 Monopoly Price and Output
Determination
Monthly $60
Price per
Subscriber
40
MC
E
D
10,000
30,000
MR
Number of Subscribers
Fig. 4 Monopoly Profit and Loss
(a)
Dollars
MC
(b)
ATC
MC AVC
Dollars
ATC
$50
E
$40
40
32
E
Total Loss
Total
Profit
D
D
10,000
Number of
MR Subscribers
10,000
Number of
MR Subscribers
Fig. 5a/b Comparing Monopoly and
Perfect Competition
(a) Competitive Market
Price
per
Unit
(b) Competitive Firm
Dollars
per
Unit
S
2. and each firm produces
1,000 units, where P = MC.
MC
ATC
E
$10
3. When monopoly $10
takes over, the old
market supply
curve . . .
d
D
100,000
1. In this competitive
market of 100 firms,
equilibrium price is $10
Quantity of
Output
1,000
Quantity of
Output
Fig. 5c Comparing Monopoly and
Perfect Competition
(c) Monopoly
Price
per
Unit
$15
S = MC
4. becomes the monopoly's MC curve.
F
E
5. The monopoly produces where MR = MC,
10
6. with a higher price and lower market
output than under perfect competition.
MR
100,000
60,000
D
Quantity of
Output
Fig. 6 A Monopolistically
Competitive Firm in the Short Run
Dollars
$70
1. Kafka services 250 homes
per month, where MC and
MR intersect . . .
A
MC
ATC
2. and charges
$70 per home.
d1
30
MR1 3. ATC at 250 units is less
than price, so profit per
unit is positive.
4. Kafka's monthly
profit–$10,000–is
the area of the
shaded rectangle.
250
Homes Serviced per Month
Fig. 7 A Monopolistically
Competitive Firm in the Long Run
In the long run, profit attracts
entry, which shifts the firm's
demand curve leftward.
Dollars
MC
ATC
$40
E
The typical firm
produces where
its new MR
crosses MC.
Entry continues until P = ATC
at the best output level, and
economic profit is zero. d1
MR2
100
d2
250
MR1
Homes Serviced
per Month
Fig. 8 A Duopoly Game
Gus’s Actions
Confess
Don’t Confess
Gus’s profit
= $25,000
Confess
Filip’s Actions
Don’t Confess
Filip’s
Profit =
$25,000
Gus’s profit
= $75,000
Filip’s
Profit =
$–10,000
Gus’s profit
= –$10,000
Filip’s
Profit =
$75,000
Gus’s profit
= $50,000
Filip’s
Profit =
$50,000
Fig. 9a Advertising in Monopolistic
Competition
1.Before advertising, long-run
economic profit is zero.
Dollars
$120
4. Advertising
can lead to a
higher price
in the long
run, as in this
panel . . .
3. But in the long run, imitation
and entry bring economic
profit back to zero.
B
C
100
60
2. In the short run, the first firms to
advertise earn economic profit.
ATCads
ATCno ads
A
dads
dno ads
1,000
2,000
dall advertise
6,000
Bottles of Perfume
per Month
Fig. 9b Advertising in Monopolistic
Competition
Dollars
$120
60
50
5. or to a lower price
B
in the long run, as
in this panel.
dall advertise
A
C
ATCads
ATCno ads
dads
dno ads
1,000
2,000
6,000
Bottles of Perfume
per Month
Fig. 10 An Advertising Game
American's Actions
Run Safety Ads Don't Run Ads
Run Safety Ads
United's Actions
Don't Run Ads
American
earns low
profit
United
earns low
profit
American
earns high
profit
United
earns very
low profit
American
earns very
low profit
United
earns high
profit
American
earns
medium
United
profit
earns
medium
profit