Unit IV: Imperfect Competition

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Unit 4 Imperfect Competition
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Memorizing vs. Learning
12-35711131-71923
Try memorizing the above number How effective is
memorizing it? The point If you try to MEMORIZE
all the graphs of economics you will forget them.
You must LEARN them!
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4 Market Structures
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FOUR MARKET STRUCTURES
Pure Monopoly
Pure Monopoly
Perfect Competition
Monopolistic Competition
Monopolistic Competition
Oligopoly
Oligopoly
Imperfect Competition

• Every product is sold in a market that can be
  considered one of the above market structures.
• For example
• Fast Food Market
• The Market for Cars
• Market for Operating Systems (Microsoft)
• Strawberry Market
• Cereal Market

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Monopoly
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Characteristics of Monopolies
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5 Characteristics of a Monopoly

• Single Seller
• One Firm controls the vast majority of a market
• The Firm IS the Industry
• 2. Unique good with no close substitutes
• 3. Price Maker
• The firm can manipulate the price by changing the
  quantity it produces (ie. shifting the supply
  curve to the left).
• Ex California electric companies

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5 Characteristics of a Monopoly
4. High Barriers to Entry

• New firms CANNOT enter market

• No immediate competitors

• Firm can make profit in the long-run

5. Some Nonprice Competition

• Despite having no close competitors, monopolies
  still advertise their products in an effort to
  increase demand.

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Examples of Monopolies
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• What do you already know about monopolies?
• True or False?
• All monopolies make a profit.
• Monopolies are usually efficient.
• All monopolies are bad for the economy.
• All monopolies are illegal.
• Monopolies charge the highest price possible
• The government never prevents monopolies from
  forming.

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Four Origins of Monopolies

• Geography is the Barrier to Entry
• Ex Nowhere gas stations, De Beers Diamonds, San
  Diego Chargers, Cable TV, Qualcomm Hot Dogs
• -Location or control of resources limits
  competition and leads to one supplier.
• 2. The Government is the Barrier to Entry
• Ex Water Company, Firefighters, The Army,
  Pharmaceutical drugs, rubix cubes
• -Government allows monopoly for public benefits
  or to stimulate innovation.
• -The government issues patents to protect
  inventors and forbids others from using their
  invention. (They last 20 years)

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Four Origins of Monopolies

• 3. Technology or Common Use is the Barrier to
  Entry
• Ex Microsoft, Intel, Frisbee, Band-Aide
• -Patents and widespread availability of certain
  products lead to only one major firm controlling
  a market.
• 4. Mass Production and Low Costs are Barriers to
  Entry
• Ex Electric Companies (SDGE)
• If there were three competing electric companies
  they would have higher costs.
• Having only one electric company keeps prices low
• -Economies of scale make it impractical to have
  smaller firms.
• Natural Monopoly- It is NATURAL for only one firm
  to produce because they can produce at the lowest
  cost.

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Drawing Monopolies
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• Good news
• Only one graph because the firm IS the industry.
• The cost curves are the same
• The MR MC rule still applies
• Shut down rule still applies

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• The Main Difference
• Monopolies (and all Imperfectly competitive
  firms) have downward sloping demand curve.
• Which means, to sell more a firm must lower its
  price.
• This changes MR
• THE MARGINAL REVENUE DOESNT EQUAL THE PRICE!

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Why is MR less than Demand?
P Qd TR MR
11 0 0 -







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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10






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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8





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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6




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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4



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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2


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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0

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Why is MR less than Demand?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
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Why is MR less than Demand?
P Qd TR MR
11 0 - -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
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Why is MR less than Demand?
P Qd TR MR
11 0 - -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
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MR IS LESS THAN PRICE
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Calculating Marginal Revenue
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Calculate TR and Marginal Revenue
Quantity Price TR MR
0 16
1 15
2 14
3 13
4 12
5 11
6 10
7 9
8 8
9 7
10 6
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Calculate TR and Marginal Revenue
Quantity Price TR MR
0 16 0
1 15 15
2 14 28
3 13 39
4 12 48
5 11 55
6 10 60
7 9 63
8 8 64
9 7 63
10 6 60
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Calculate TR and Marginal Revenue
Quantity Price TR MR
0 16 0 -
1 15 15 15
2 14 28 13
3 13 39 11
4 12 48 9
5 11 55 7
6 10 60 5
7 9 63 3
8 8 64 1
9 7 63 -1
10 6 60 -3
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Calculate TR and Marginal Revenue
Quantity Price TR MR
0 16 0 -
1 15 15 15
2 14 28 13
3 13 39 11
4 12 48 9
5 11 55 7
6 10 60 5
7 9 63 3
8 8 64 1
9 7 63 -1
10 6 60 -3
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Elastic vs. Inelastic Range of Demand Curve
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Maximizing Profit
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Are Monopolies Efficient?
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• Monopolies are inefficient because they
• Charge a higher price
• Dont produce enough
• Not allocatively efficiency
• Produce at higher costs
• Not productively efficiency
• Have little incentive to innovate

Why? Because there is little external pressure to
be efficient
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Lump Sum vs. Per Unit Taxes and Subsidies
ACDC Econ Video
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2007 FRQ 1