13_monopoly diagrams

Monopolies diagram lesson!: 

Monopolies diagram lesson!

How close to the money are you?: 

How close to the money are you? What can you remember from last lesson. Use your post-it notes to show your amazing memory. The more original the better! What’s the key memories? Anything vital that’s been forgotten? Anything ‘unique’?

Monopoly power: 

Monopoly power Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry Influencing prices Influencing output Erecting barriers to entry Pricing strategies to prevent or stifle competition May not pursue profit maximisation – encourages unwanted entrants to the market Sometimes seen as a case of market failure Need to know this

Monopoly: 

Monopoly Origins of monopoly: Natural monopoly – usually on a network or grid… wasteful to duplicate! Geographical factors – where a country or climate is the only source of supply of a raw material…quite rare. However, consider a single grocery store in a isolated village… Government created monopolies – now sold off! Through growth of the firm Through amalgamation, merger or takeover Through acquiring patent or license Through legal means – Royal charter, nationalisation, wholly owned plc Vital revision

Identify the source of ‘monopoly’ power.: 

Identify the source of ‘monopoly’ power.

Identify the source of ‘monopoly’ power.: 

Identify the source of ‘monopoly’ power. Natural Geographical Govt created Co growth – EoS mergers etc Patent / licence Other London Underground O2 – iphone BAA Royal Mail Microsoft Bank of England i-phone i-tunes De beers diamonds Motorway service station Thames Water

Identify the source of ‘monopoly’ power.: 

Identify the source of ‘monopoly’ power. Natural Geographical Govt created Co growth – EoS or mergers etc Patent / licence Other London Underground  O2 – iphone   BAA  Royal Mail  Microsoft  Bank of England  i-phone i-tunes   De beers diamonds   Motorway service station  Thames Water 

A natural monopoly?: 

A natural monopoly? Why does it make no sense to have a 2 nd channel tunnel? Despite being a natural monopoly, what competition does the firm face?

Label one side: 

Label one side HIGH The other LOW

Monopoly characteristics: 

Monopoly characteristics Price Efficiency Innovation Collusion Promotion Would you predict these to be HIGH or LOW?

Monopoly characteristics: 

Monopoly characteristics Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination possible. Efficiency – could be inefficient due to lack of competition (X- inefficiency) or… could be higher due to availability of high profits Innovation - could be high because of the promise of high profits, Possibly encourages high investment in research and development (R&D). Could be low as there is no incentive to reduce costs. Collusion – possible to maintain monopoly power of key firms in industry High levels of branding, advertising and non-price competition Diagrams next lesson

BAA break up of monopoly: 

BAA break up of monopoly Further reading

How can a monopoly establish it’s position?: 

How can a monopoly establish it’s position? Known as barriers to entry…. Economies of scale Patent protection Information advantage (not sharing its trade secrets!) Government protection Control of resources Can you think of any businesses that have these characteristics that generates ‘monopoly’ like power?

How can a monopoly establish it’s position?: 

How can a monopoly establish it’s position? Economies of scale – Microsoft! Patent protection – drugs (anti aids) Information advantage (not sharing its trade secrets!) – Coca cola, Worcester sauce, Microsoft & Iron bru! (not a monopoly though) Government protection – ( Kenya require new competitors to 1 st get a ‘no objection’ letter from existing firms! E.g mobile phones – Telkom until 2002 was the only mobile network in African continent) Control of resources – De beers diamonds in Africa 60% global sales!

Monopoly revenue diagram: 

Monopoly revenue diagram You will be drawing these in YOUR OWN NOTES… As you need the practice.

Revenue curves of a monopoly : 

Revenue curves of a monopoly The monopolist can influence prices, so faces a downward facing Demand curve. As the price maker, it can choose the location of price along the Demand curve AS Micro theory review! Straight line D curve

Revenue curves of a monopoly : 

Revenue curves of a monopoly So why would the monopolist might choose to locate its price at unitary elastic point? Look at the MR & TR position! Note the relationship between MR & AR. MR has exactly twice the slope of the AR curve. MR is ZERO at the maximum point of Total revenue

Profit orientated Monopoly diagram…: 

Profit orientated Monopoly diagram… A monopolist wishing to maximise profits will produce at point where MR = MC Vital diagram!

So why does MC = MR : 

So why does MC = MR as the profit maximising position?

The profit maximising level of output: 

The profit maximising level of output Another diagram to learn! Vital diagram!

So to understand the diagram: 

So to understand the diagram I have notes for you from these slides…

Monopoly: 

Monopoly Costs / Revenue Output / Sales AC MC AR MR AR (D) curve for a monopolist likely to be relatively price inelastic. Output assumed to be at profit maximising output (note caution here – not all monopolists may aim for profit maximisation!) Q1 £7.00 £3.00 Monopoly Profit Given the barriers to entry, the monopolist will be able to exploit abnormal profits in the long run as entry to the market is restricted. This is both the short run and long run equilibrium position for a monopoly

PowerPoint Presentation: 

Welfare implications of monopolies Costs / Revenue Output / Sales AC MC AR MR A look back at the diagram for perfect competition will reveal that in equilibrium, price will be equal to the MC of production. We can look therefore at a comparison of the differences between price and output in a competitive situation compared to a monopoly. Q1 £3 The price in a competitive market would be £3 with output levels at Q1. Q2 £7 The monopoly price would be £7 per unit with output levels lower at Q2. On the face of it, consumers face higher prices and less choice in monopoly conditions compared to more competitive environments. Loss of consumer surplus The higher price and lower output means that consumer surplus is reduced, indicated by the shaded area.

PowerPoint Presentation: 

Monopoly Costs / Revenue Output / Sales AC MC AR MR Welfare implications of monopolies Q1 £3 Q2 £7 The monopolist will be affected by a loss of producer surplus shown by the grey triangle but…….. The monopolist will benefit from additional producer surplus equal to the shaded rectangle. Gain in producer surplus

PowerPoint Presentation: 

Welfare implications of monopolies Costs / Revenue Output / Sales AC MC AR MR Q1 £3 Q2 £7 The value of the shaded triangle represents the total welfare loss to society – sometimes referred to as the ‘deadweight welfare loss’.

Your go….: 

Your go…. Split into 2 groups Using your whiteboard to note your answers…

Is it easy to criticise a monopoly?: 

Is it easy to criticise a monopoly? So go on then Brainstorm the key problems of having monopolies! Why do most governments intervene to disband monopolies? So do something more challenging Brainstorm the key benefits of having monopolies! Why do some governments allow monopolies to exist?

Problems of monopolies: 

Problems of monopolies Excessive prices (above market equilibrium) Supernormal profits Easy life… no incentive to be innovative – sole supplier – allocative inefficient Can delay innovation through barriers of entry Loss in consumer surplus and a gain in producer surplus (profits) Dead weight loss….. Product is under consumed.

The Case Against Monopoly - inefficiencies: 

The Case Against Monopoly - inefficiencies There may be little pressure for a firm with monopoly power to maximise their efficiency or minimise costs of production (i) “ Managerial slack ” or “ X-inefficiencies ” (ii) Limited incentives to adopt cost-reducing innovations (iii) (John Hicks) “The best of all monopoly profits is a quiet life” The result may be a higher level of costs per unit ( external diseconomies of scale )

Benefits of a monopoly: 

Benefits of a monopoly EoS – lower costs from size of business Innovation from retained profit – have little threat of competition so will invest profits into LT R&D New technology or product development – many monopolies are ‘patents’ protected….. Fewer wastes of ‘resources’ – most monopolies are ‘network’ based co that any competition requires duplication of resources. To avoid govt investigation – may choose NOT to set excessive prices but pass on low LRAC (EoS) / abnormal profit as lower prices Productively efficient (MR=MC) Creates stability for consumers… monopolist knows its market well and can make LT plans with confidence

Monopoly: 

Monopoly Problems with models – a reminder: Monopolies not always ‘bad’ – may be desirable in some cases but may need strong regulation Monopolies do not have to be big – could exist locally

Homework: 

Homework Revise diagrams from today’s lesson – for diagram test next lesson. Use textbook (if they’ve arrived) to read up on Monopoly theory. (or read photocopy pages!)

Next lesson: 

Next lesson On Thursday – go upstairs to S6 for the ½ lesson – ICT research activity