monopoly and economic | High school final essays Economics

Pure MONOPOLY

We have learned about competitive industry which is a market that has got a large amount of

small firms or businesses but the opposite industry that we are going to learn is monopoly.when

we have only one firm in the market that has the market power(have the power to set price in

the market but of course there is a limit) we call it as monopoly.so we can say a monopolized

market has one single seller and this one seller is producing alone for the hole market.

What kind of products are they producing?homogenous products or differentiated products?

It is homogenous because every seller(which is just one seller)produces the same product.

Demand curve is downward sloping which means if we have larger quantity demand the price is

smaller and we have larger price demand the quantity demanded would be smaller.

Their job is to set price and quantity where there is the maximum profit that's why monopolist

Is a price searcher.

p3)picture number 3 in the lecture slide

There is a wrong belief that monopoly can set price and quantity as high as they want but for

sure no one is willing to buy if they set a high price and there is always a limit for setting price

and quantity demand. producers can find another substitute or some of them rather not to buy

from a monopolist because eventually consumers will find a way to satisfy their needs.

According to this market demand curve even if the price would be zero,the consumers still not

willing to buy more than this quantity and there is a Inverse relationship between quantity and

price demanded.what i found out here is if monopolist want to reach the maximum profit or

maximizing their profit they should let the consumer to decide or choose for example how much

they are willing to pay at x price or monopolists can choose quantity and let the consumer to

decide at what price they are willing to pay for that quantity.

What causes monopolies?

1. Legal fiat, US postal service or producing coins and banknotes.the government gives the

right to the company or market to produce that certain products or services and if other

firms doesn't have right or licence they are not allowed to produce so it is not about

efficiency it's about the right that government should give to firms.

2. Patent,new drugs. Companies invest money to researchers to find a new formula for

drugs when they create and test the new drug and if the final result was convincing

other firms can reproduce the drug based on the formula but the owner of the formula or

recipe should give other firms or people the permission to use the formula.

3. Sole ownership of a resource,football skills.there are so many football players who are

professional in their field and we consider them as monopolists of their service and they

are able to set high prices.there are many world-class football players who are good

substitutes so if their price become to high the football clubs are going to substitute them

for other players.

4. Formation of a cartel,OPEC.the organization of patrol exporting countries.here we have

more than one firms but they agree to work together to form a one single

monopolist.even though these producers are producing the same product if they get

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Pure MONOPOLY

We have learned about competitive industry which is a market that has got a large amount of small firms or businesses but the opposite industry that we are going to learn is monopoly.when we have only one firm in the market that has the market power(have the power to set price in the market but of course there is a limit) we call it as monopoly.so we can say a monopolized market has one single seller and this one seller is producing alone for the hole market. What kind of products are they producing?homogenous products or differentiated products? It is homogenous because every seller(which is just one seller)produces the same product. Demand curve is downward sloping which means if we have larger quantity demand the price is smaller and we have larger price demand the quantity demanded would be smaller. Their job is to set price and quantity where there is the maximum profit that's why monopolist Is a price searcher. p3)picture number 3 in the lecture slide There is a wrong belief that monopoly can set price and quantity as high as they want but for sure no one is willing to buy if they set a high price and there is always a limit for setting price and quantity demand. producers can find another substitute or some of them rather not to buy from a monopolist because eventually consumers will find a way to satisfy their needs. According to this market demand curve even if the price would be zero,the consumers still not willing to buy more than this quantity and there is a Inverse relationship between quantity and price demanded.what i found out here is if monopolist want to reach the maximum profit or maximizing their profit they should let the consumer to decide or choose for example how much they are willing to pay at x price or monopolists can choose quantity and let the consumer to decide at what price they are willing to pay for that quantity.

What causes monopolies?

Legal fiat, US postal service or producing coins and banknotes.the government gives the right to the company or market to produce that certain products or services and if other firms doesn't have right or licence they are not allowed to produce so it is not about efficiency it's about the right that government should give to firms.
Patent,new drugs. Companies invest money to researchers to find a new formula for drugs when they create and test the new drug and if the final result was convincing other firms can reproduce the drug based on the formula but the owner of the formula or recipe should give other firms or people the permission to use the formula.
Sole ownership of a resource,football skills.there are so many football players who are professional in their field and we consider them as monopolists of their service and they are able to set high prices.there are many world-class football players who are good substitutes so if their price become to high the football clubs are going to substitute them for other players.
Formation of a cartel,OPEC.the organization of patrol exporting countries.here we have more than one firms but they agree to work together to form a one single monopolist.even though these producers are producing the same product if they get

together and form a cartel there will be just one producer formed out of smaller producers.

Large economies of scale,for example local utility companies.having just one network to provide the needs of us and companies like electricity is more cost efficient so instead of building individual networks for electricity distribution it is more efficient to have just one network and provide electricity to small companies so if you are producing in larger scale the production become more cost efficient.

Profit maximization

So imagine that firms want to maximize their profit and the number or amount of profit that firms could get depends on the quantity and this is the formula to calculate the profit.TR is total revenue,TC is total,here we have p(q) which means price depends on the quantity but in perfect competitive market the price is given.in the monopoly market if we change the quantity the price will change as well and vica versa. π(q)=TR-TC=p(q).q-TC(q) We are going to take the derivative of pi function with respect to q to get the maximum profit And we are looking for a level where the derivative of the function or slope is equal to zero. dπ(q)/dq=d(p(q).q)/dq-dTC(q)/dq=0 so for q=q* we will have MR(q)=d(p(q).q)/dq=dTC(q)/dq=MC(q) If you notice at each side you can see both sides related to q also in the case of a competitive firm the marginal revenue is related to price(equal) but in monopoly the marginal revenue is not equal to price. p6)profit function:q.p which will be total revenue. Based on the market demand curve if the quantity is zero the price could be very high and the revenue will be zero too because consumers didn't buy anything.also if price would be zero but the quantity would be very high total revenue is going to be zero again. If the combination of quantity and price would be standard the revenue will increase. The total cost is linear and monotonically increasing.we have a point on the graph where TR and TC intersect each other then we will have π(q) and in q* point the profit is maximum also slope of the TR and TC are the same in q* point. MR(q)=MC(q) .To get the maximum profit monopolists should analyze MR and MC.monopolist are not looking for maximum revenue they want to maximize their profit.but how?when the MR=MC monopolists get maximum profit.when they intersect each other. in p9 we find the q* which means the quantity that we have to produce, also monopolists looking for the highest price they can charge so take q* and go up to demand curve and in p* point we have our price which can maximize our profit.

Marginal revenue

● Marginal revenue and output have a relationship,if we change marginal revenue the output will change too. ● If we increase the q revenue will increase as well. ● If we decrease the price to sell more quantity the revenue will decrease but by increasing q itself(just q) revenue will increase. ● The overall effect of a higher output is the balance of these two.

consumer consider it as a free gain also producers would gain which we call it producer surplus and the total surplus that we have is the sum of CS and PS.situation is pareto efficient which means monopoly will be pareto inefficient. Now let's take a look at monopoly graph p16) the rule is Profit-maximizing output level for a monopoly is where q* satisfies MR(q) = MC(q). The consumer surplus in monopoly is less than the competitive case because consumers are getting lower quantity with higher price,also producer surplus is much bigger in this case the consumers are losing surplus instead producers are gaining surplus.sum of the CS and PS is smaller in monopoly is smaller than the competitive case.so Hence the monopolist market is Pareto inefficient.if we reduce the total surplus of monopoly with total surplus pf competitive with will get an area which called DEADWEIGHT LOSS.(Deadweight loss measures the gains-to-trade not achieved by the market.It is the loss of efficiency.

Monopoly behavior

So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer. This is uniform pricing. Can price-discrimination earn a monopoly higher profits?imagine that monopoly is lowering the price for everybody but in this case their profit will decrease.so monopoly decide to set the price higher for some people and set the price lower for some other people to increase the profit we call it as price discrimination,monopoly charge people in different prices.

Type of price discrimination

Different price for every one for example auctioning
different prices for different quantities.monopoly charge people based on how much they are buying .for example bulk buying discount pay2 get 3
different price for different groups of buyers.for example senior citizen and students discount vs no discount for middle aged or working persons. In the case of the first example or degree monopoly should discover who has the higher valuation for the product so they have to know about the valuation of their consumers and be able to separate them from each other. p23)p24) base on the graph monopoly sell the first unit at first highest price and second unit at the second highest price and so on.so each consumer would pay as much as they value the product and when you pay as much as you value the good or product there will be no consumer surplus because we mention that the consumer surplus is the differences between the actual price of a good with the valuation of the consumer and when we don't have consumer surplus all of the thing we have is producer surplus so there is no wasted welfare and the perfectly discriminatory monopoly is pareto efficient.

Third degree price discrimination

The other way to charge different people,different prices is to produce different quantities. How much product should we supply to each group to get the maximum profit? A)MR1(q1) = MR2(q2) we have to reallocate quantities between two markets until the marginal revenue that is coming from each of the markets becomes equal.so if a market offers us a higher marginal revenue by adding one more product then we should reallocate the product from the other market to this market.Is the allocation q1, q2 that maximizes the revenue from selling q1+ q2 output units.E.g. if MR1(q1) > MR2(q2) then an output unit should be moved from market 2 to market 1 to increase total revenue.bringing one more unit to market one will reduce the revenue of market one so mr1 goes down and taking away the product of the second market would increase the marginal revenue.mr2 is smaller than mr1 now so they are going to close to each other. B)MC (q1 + q1) = MR The marginal revenue common to both markets equals the marginal production cost if profit is to be maximized p29)according to these two market demand graphs we can find the marginal revenue.consider marginal cost is constant,then we should put marginal revenues and marginal cost equal each other.after that find the quantities in market 1 and market 2 where is when mr and mc intersect and find p1 and p2 as well on the p axis as you can see the prices are not equal to each other in these markets. In which market will the monopolist employ a higher price? We know that price is related to price elasticity and in p31)you can see that E1>E2 it means that it is closer to zero(we know that they are negative) so E1 is bigger so when the price elasticity is higher the price that market could set is higher. If a monopolist wants to set price discrimination it needs to do : ● It is important that the monopolist finds homogenous groups of consumers with different willingness to pay (different price-sensitivity). ● The monopolist has to be able to easily identify which group a consumer belongs to. ● And should block the possibility of trade across the groups. Hosna Gholami

monopoly and economic, High school final essays of Economics

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Partial preview of the text

Download monopoly and economic and more High school final essays Economics in PDF only on Docsity!

Pure MONOPOLY

What causes monopolies?

Profit maximization

Marginal revenue

Monopoly behavior

Type of price discrimination

Third degree price discrimination