Hi! Hi new econ students! This is Mr Clifford, welcome to ACDC econ.
right now we're gonna talk about monopoly
And no, we can't play that board game
I just hate that board game
- everyone just cheats, and it ruins families
Do you know how many divorces have been caused because of that board game?!
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I'm assuming you've already learned a few things about monopolies
- like, for example, it has a unique good with no close substitutes
and it's a price maker, as opposed to a price taker, like perfect competition.
And the most important characteristic is that there's high barriers to entry so other firms can't enter
- that's what makes a monopoly stay a monopoly.
Now let's go straight to the graph for monopoly, to help you understand what it looks like.
In perfect competition, there was a horizontal demand curve that was equal to the marginal revenue curve.
But it's not like that for monopoly.
In fact, monopoly looks like this -
When you're a price maker, you can sell your product for a very high price,
or you can sell it for a low price. YOU determine the price.
But a monopoly can't price discriminate
so, to sell another unit, they've got to lower the price of the previous unit
they could have sold for a higher price.
So, if a monopoly decides to charge $100, that's fine
- but, if they lower the price down to $90,
they've got to lower the price down to $90 for everybody.
So they lose some money on the units they could have sold for $100.
The point is, the marginal revenue is less than the demand curve, that looks like this
Now, the marginal cost curve and ATC is exactly the same as in perfect competition
MC goes down and up,
and ATC goes down, hits a minimum, and then goes back up
And that is the graph for a monopoly.
Now it's time to apply what you've already learned in previous videos to a monopoly.
I want you to answer these six questions
- pause the video, then we're gonna go over them.
BAM, WAP, WHOOP WHOOP
To figure out the profit maximising quantity, you do what you do for all firms
- you find where MR hits MC.
Now on this graph it's right here, at Q1
- but the price is not P6
You don't charge the price where it hits the marginal revenue
- you charge what people are willing to pay
Just up here, at P2.
So for monopoly, they produce where MR = MC,
they charge a price up the demand curve, which is
right there at P2. The total revenue is just the
price times the quantity,
- so this rectangle right here.
It's a rectangle of PQ
A,
Q1,
and Q0.
So, finding total revenue, total costs and profit on the graph
is exactly the same skill you apply to perfect competition
To figure out total costs, you go up to the ATC and over
so it's right there
So what's left over must be profit, which is right there.
So if this monopoly's making profit
are other firms going to enter in the long run and take away that profit?
NO! Because there's high barriers!
Remember, this is a monopoly, high barriers means
you make that profit in the long run.
You remember that consumer surplus is the difference between what you were willing to pay and what you did pay for something
So for monopoly, consumer surplus is right there
It's the triangle P1,
A, PQ.
Now the revenue maximising quantity is not Q1
- remember Q1 is the profit maximising quantity
If you want to maximise the total revenue,
you're gonna produce at Q2
This is the spot where marginal revenue hits 0.
When your marginal revenue is going down, but it's still positive,
that means your total revenue is going up.
And when marginal revenue hits 0, your total revenue will be at a max.
Now, why doesn't a firm decide to produce to maximise total revenue at Q2?
Well, because they want to maximise PROFIT, where MR = MC.
Now, if you take this idea of total revenue
and you connect it to something you've learned before, called the total revenue test
you can spot the elastic and inelastic range
The elastic range in the demand curve is
segment P1 to B.
Or, you could've said any quantity less than Q2.
The point is, the elastic range is when MR is positive
and the inelastic range is when MR is negative
This is because in the elastic range the price is falling
the total revenue is going up
- which is the whole idea of elastic demand
When the price is going down, and total revenue is going down,
well that's the idea of inelastic demand.
Did you get all that?
Well, I have four more questions to help you understand the idea of monopoly
I want you to pause the video and try these four questions
Then I'm gonna go over 'em.
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YAS MR CLIFFORD U WERK HUNTAYYY
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I'm not sure I'm doing that move...
YEEEEAHH
The socially optimal quantity, or the allocatively efficient quantity
is right there at Q3.
This is the place where the price, what people want to pay
exactly equals the additional cost of producing those units
So society is saying
"We want this many units!"
Before I answer the rest of the questions, let's go back
and talk about the idea of socially optimal
and being efficient.
When this monopoly maximises profit, are they gonna produce Q3?
Well, no! Remember we said they're going to produce Q1
- and that's a reason why monopolies are inefficient
Right? They cause deadweight loss
These are units society wants produced
but the monopoly is not gonna make it because they'd rather produce where MR = MC.
So a monopoly produces too little output and charges too high a price
causing deadweight loss.
To understand that concept will help you understand
question 8, right?
Consumer surplus, at socially optimal, must be right here
at the triangle P1, C, and P4.
This is the consumer surplus that would exist if this was a perfectly competitive market
and they were producing the socially optimal quantity
of Q3.
This also explains why the government might want to regulate a monopoly
- if a monopoly has deadweight loss
well they can put a price ceiling right here
and force them to produce the quantity Q3, that's socially optimal.
For question 9, there's only one quantity in the entire graph
where the price = ATC, and they're making no economic profit.
It's right there at Q4.
So Q4 is the only spot where total revenue equals total costs
and they're breaking even.
Alright, last question.
What's gonna happen to price and quantity
if there's a per unit tax?
Unlike a lump sum tax,
a per unit tax will shift the marginal cost
- causing it to go up
So, the new quantity, where MR = MC is there
causing quantity to go down, and price to go up
So the answer is: price goes up,
quantity goes down.
Remember - it's not the same if that was a lump sum tax
- a lump sum tax is a one time tax
that affects fixed costs
So marginal costs wouldn't change.
Price and quantity would stay the same,
if there was a lump sum tax.
I hope this video helped you understand the graph for monopoly.
If you like these videos, or if you have a question, leave a comment
And make sure to subscribe!
Also take a look at the next video
that explains oligopolies and the whole idea of game theory
And the unit playlist
that covers all the key concepts and graphs
covering imperfect competition.
Kay? Till next time!
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