AP Microeconomics: Monoply

Overview Introduction ​Oligopoly and monopolistic competition have potential monopoly power The Lerner Index (P – MC) / P used to ascertain the pricing power of potential monopolistic powers the greater the value, the greater the power ​The Herfindahl Index ​the sum of the squares of the market shares of firms in a particular market or industry purpose: to measure the concentrated power of power generated by shares of the market ​​Basic Concepts ​The monopolist faces a downward sloping demand function ​implies that price is greater than marginal revenue which implies a pricing policythat could actually lead to a lowering of price by the monopolist in order to induce more sales in a relatively elastic demand market ​​The monopolist maximizes profits at the optimal level of output (MC = MR) ​controls the supply of the product ​can influence, but not control, the demand by changing the price relative to price elasticity of demand ​Unregulated monopoly can lead to ​higher than competitive prices lower than competitive output misallocation of resources, inefficiency, and dead-weight loss rent seeking ​Regulated monopoly can lead to ​move towards outputs that are more efficient, through subsidies that rise as outputs rise “fair” rate of returnP = ATC a socially optimal price and output, P = MC, which would require subsidies ​​​The Nature of Monopoly and It’s Types ​Basics ​Likely to show some inefficiency relative to the model of perfect competition ​​Dead-weight loss ​a form of resource misallocation resources could have been utilized to produce goods and services but are instead totally wasted ​Higher prices, lower outputs → misallocation of resources Monopolist receives a rent​more than he contributes to production at the margin of the effort of the monopolist ​P > MC is symptomatic of monopoly pricing power Definition of monopoly- both a firm and an industry ​Price Discrimination ​Works best if: ​there are no opportunities for the resale of the product the price differences are not based on cost differences the firm is a price-makerhas a pricing strategy that looks to charge a higher price and realize more profits ​separate markets for consumer based on different price elasticities of demand ​those with high price elasticity of demand have more choices of substitute products Monopolies want to charge each customer exactly the maximum price that each consumer would be willing to pay ​​​Natural Monopoly ​Original theory- certain industries could best operate as monopolies ​competition would negate the major economies of scale inherent in the nature of these industries smaller competitive firms would be less efficient and more costly ​Originally for the electric industry ​Regulated Monopoly ​Prices and outputs in between those of perfect competition and unregulated monopoly ​​“Fair rate of return” ​this price is approximately the price of the perfectly competitive firm would cover average costs​includes implicit costs that represent what would have been earned elsewhere with the same resources ​​​Unregulated Monopoly ​A profit maximizer Prices and determines output at the level of output where MC = MR ​→ prices higher than the competitive price ​→ outputs lower than the perfect competition output ​​Other Regulated Monopolies         ​Priced at the socially optimal price ​May require government subsidies to survive

Monoply Explained