Chapter+15+-+Monopoly+CDJ

=MONOPOLY = =  = =  = =  = =  =

media type="custom" key="3025218"
& look at the graph below as you listen to the podcast !
 * Marginal Revenue curve is below the Demand curve

http://www.auhy69.dsl.pipex.com/images/dd202/b1i.jpg

Profit Maximization
The monopoly will maximize it's profit when MR = MC. This is the intersection of the MR curve and the MC curve. It will change the price based on the willingness to pay of the consumers.

A Monopoly's Profit
Profit = TR - TC OR Profit = (TR/Q - TC/Q) X Q

TR/Q is average revenue which is price and TC/Q is average total cost (ATC) so Profit = (P-ATC) X Q

The Welfare Cost of monopoly Monopoly is not efficient. The reason being is because P is higher than MC. It is not met to an equilibrium by invisible hand. This makes it hard to maximize the efficiency.

Dead Weight Loss [[image:http://upload.wikimedia.org/wikipedia/en/thumb/e/ef/Monopoly-surpluses.svg/300px-Monopoly-surpluses.svg.png align="right"]]
The quantity is socially efficient when D = MC therefore consumer surplus = producer surplus if MC < D, every time the number of output increases, the profit increases if MC > D, every time the number of output decreases, the profit increases Monopolists want to produce less than the efficient quantity because the consumer's value is greater than the cost so this = MORE PROFIT! This makes it inefficient hence creates deadweight loss! They set prices higher than the MC, which discourages some buyers to not buy the product. Picture: http://upload.wikimedia.org/wikipedia/en/thumb/e/ef/Monopoly-surpluses.svg/300px-Monopoly-surpluses.svg.png

Policy toward Monopolies
Since monopoly lacks in efficiency and the cost is set higher than the MC, it fails to distribute resources very well. Therefore, the government interferes by

1. increasing competition Have anti- trust acts which prevents monopoly and encourages more competition. This also prevents from further merging

2. Regulation The government sets the price of the goods. This prevents the companies from charging at any price they desire. This is important for any necessities

3. Public Ownership The government controls the monopoly

4. Doing Nothing There are -ve sides to controlling monopoly so some prefer to leave it alone

Price Discrimination [[image:http://kimandjason.com/blog/wp-content/uploads/2007/11/movie_tickets.jpg align="right"]]
Since monopoly has a large market power, it has the power to control the price according to the consumers WTP. Higher for consumers with high WTP Lower for consumers with low WTP

examples of price discrimination include 1. movie tickets 2. airline prices 3. discount coupons, 4. financial aid 5. quantity discounts

picture: http://kimandjason.com/blog/wp-content/uploads/2007/11/movie_tickets.jpg


 * __Summary__ **
 * When there is one seller that sells a product that has no close substitutes
 * Natural monopoly: when one firm can supply a good or service to an entire market at lower cost
 * The monopoly will maximize its profit when MR = MC
 * TR/Q is average revenue which is price and TC/Q is average total cost (ATC) so Profit = (P-ATC) X Q
 * Since monopoly lacks in efficiency and the cost is set higher than the MC, it fails to distribute resources very well. Therefore, the government interferes by increasing competition, regulation, public ownership, and doing nothing
 * Since monopoly has a large market power, it has the power to control the price according to the consumers WTP

Questions for Review
1. Name two policies for regulating monopoly Increasing competition, Regulation, Public Ownership, Doing Nothing

2. Why does a monopoly have deadweight loss? This makes it inefficient hence creates deadweight loss! They set prices higher than the MC, which discourages some buyers to not buy the product.