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Monopoly Quiz Recap

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a) Assume that this profit-maximizing monopolist is unregulated. Identify each of the following:

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i) The monopolist’s quantity of output

10

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ii) The monopolist’s price

$30

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iii) The profit earned by the monopolist

$150

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iv) The deadweight loss

$75

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b) Can the profit-maximizing monopolist continue to earn profit in the long run? Yes!

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c) Now assume that the monopolist can perfectly price discriminate. Identify each of the following:

= MR

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i) The quantity produced

= MR

20

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ii) The profit earned by the monopolist

= MR

$250

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iii) The consumer surplus

= MR

None!

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d) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the socially optimal (allocatively efficient) quantity. Identify each of the following:

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i) The socially optimal quantity

20

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ii) The consumer surplus

$250

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e) Is the monopolist facing the regulation in part (d) earning a positive economic profit, earning zero economic profit, or incurring a loss?

Earning zero economic profit

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f) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the break-even (zero economic profit) quantity. Identify each of the following:

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i) The monopolist’s quantity of output

20

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ii) The monopolist’s price

$15

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g) Is the dot marked by the delicious slice of pecan pie on the elastic, inelastic, or unit elastic portion of the demand curve?

elastic

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h) What is the meaning of life?

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h) What is the meaning of life? ____________ pie

Monopolistic CompetitionMonopolistic Competition

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Examples:

Everything

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Differentiated Products

Characteristics of Monopolistic Competition:

•Relatively Large Number of Sellers•Differentiated Products•Some control over price •Easy Entry and Exit (Low Barriers)•A lot of non-price competition (Advertising)

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PerfectCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

PureMonopoly

MonopolisticCompetition Oligopoly

Monopolistic Qualities• Control over price of own good

due to differentiated product• D greater than MR • Plenty of Advertising• Not efficient

“Monopoly” + ”Competition”

Perfect Competition Qualities• Large number of smaller firms• Relatively easy entry and exit• Zero Economic Profit in Long-

Run since firms can enter26

• Goods are NOT identical.• Firms seek to capture a piece of the market by making unique goods.

• Since these products have substitutes, firms use NON-PRICE Competition.

Examples of NON-PRICE Competition• Branding• Unique Product Attributes • Advertising (Two Goals)

1. Increase Demand 2. Make demand more INELASTIC

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Differentiated Products

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Warm Up1. What are the differences between

monopolistic competition and perfect competition?

2. What are the differences between monopolistic competition and monopoly?

3. What are the differences between Donald Trump and this dog?

Graphing Monopolistic Competition

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D

MR

MCATC

30Q

Monopolistic Competition is made up of price makers so MR is less than Demand

In the short-run, it is the same graph as a monopoly making profit

In the long-run, new firms will enter, driving down the DEMAND for firms

already in the market.

P

Q1

P1

D

MR

MC

31Q

P

New firms enter => demand for firm’s product falls until there is no economic

profit

ATC

Q1

P1

D

MR

MC

32Q

P

New firms enter => demand for firm’s product falls until there is no economic profit

ATC

QLR

PLR

Price and quantity falls and TR=TC

D

MR

MC

33Q

P

LONG-RUN EQUILIBRIUM

ATC

QLR

PLR

Quantity where MR =MC up to Price = ATC

Why does DEMAND shift?When short-run profits are made…

–New firms enter.–New firms mean more close

substitutes and less market share for each existing firm.

–Demand for each firm’s product falls.

When short-run losses are made…–Firms exit. –Result is fewer substitutes and larger

market share for remaining firms.–Demand for each firm’s product rises.

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D

MR

MC

ATC

35Q

What happens when there is a loss?

In the long-run, firms will leave, driving up the DEMAND for firms

already in the market.

P

Q1

P1

In the short-run, the graph is the same as a monopoly making a loss

D

MR

MC

ATC

36Q

Firms leave so demand increases until there is no economic profit

P

Q1

P1

D

MR

MC

ATC

37Q

Firms leave so demand increases until there is no economic profit

P

QLR

PLR

Price and quantity increase and TR=TC

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Side NoteThe elasticity of demand for a monopolistically competitive firm’s product varies with the number of competitors:

If there are many competitors (and therefore many substitutes), demand for the firm’s product will tend to be more elastic

If there are fewer competitors and substitutes, demand will tend to be less elastic

Are Monopolistically Competitive Firms

Efficient?

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D

MR

MC

40Q

P

LONG-RUN EQUILIBRIUM

ATC

QLR

PLR

Not Allocatively Efficient because P MC Not Productively Efficient because not

producing at Minimum ATC

QSocially Optimal

D

MR

MC

41Q

P

LONG-RUN EQUILIBRIUM

ATC

QLR

PLR

This firm also has EXCESS CAPACITY

QSocially Optimal

• The firm can produce at the lowest per unit cost (minimum ATC) but it chooses not to.

• Excess capacity = the gap between the minimum ATC output and the profit maximizing output.

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Excess Capacity

D

MR

MC

43Q

P

LONG-RUN EQUILIBRIUM

ATC

QLR

PLR

The firm can produce at a lower cost but it holds back production to

maximize profit

QProd Efficient

Excess Capacity

• Large number of firms and product variation meets society’s needs.

• Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms.

Ex: Nike might continue to make above normal profit because they are a well-known brand.

Advantages ofMONOPOLISTIC COMPETITION

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