Hi, how you doing Econ students? This is Mr. Clifford. Welcome to ACDC Econ.
Right now we're going to talk about monopolies. And no, we can't play that board game. I just hate that board game. Everyone just cheats. It just ruins families.
You know how many divorces have been caused because of that board game? 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 that 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 a monopoly to help you understand what it looks like. In perfect competition, there's a horizontal demand curve that was equal to the marginal revenue curve.
But it's not like that for a monopoly. In fact, a 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 Monopoly decides to charge $100, that's fine. But if they lower the price down to $90, they 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 and it looks like this. Now the marginal cost curve in the ATC is exactly the same as perfect competition. MC goes down and up and ATC goes down, hits a minimum, 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 and I'm going to go over them. To figure out the profit maximizing quantity, you do what you do for all firms. You find where MR hits MC.
And 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, which is up here at P2. So for Monopoly, they produce where MR equals MC and they charge a price up to the demand curve, which is right there at P2. The total revenue is just the It's the price times the quantity. And so it's this rectangle right here.
It's a rectangle of P2, A, Q1, and Q0. So finding total revenue, total cost, and profit on the graph is exactly the same skill that you applied in perfect competition. To figure out the total cost, you're going to go up to the ATC and over.
And so it's right there. And so what's left over must be profit, which is right there. So if this monopoly is 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 they're going to make that profit in the long run. You remember that consumer surplus is the difference between what you're willing to pay and what you did pay for something. So for monopoly, consumer surplus is right there. It's the triangle P1, A, P2.
Now the revenue maximizing quantity is not Q1. Remember, Q1 is the profit maximizing quantity. If you want to maximize your total revenue, you're going to produce at Q2. This is a spot where marginal revenue hits zero. 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 zero, your total revenue will be at a max. Now why doesn't a firm decide to produce to maximize total revenue at Q2? Well, because they want to maximize profit where MR equals 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 of the demand curve is segment P1 to B. Or you could have said any quantity less than Q2. The point is the elastic range is where MR is positive and the inelastic range is when MR is negative. This is because in the elastic range, the price is falling, but 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 going to go over them.
What? I'm not sure I'm doing that move. Yeah! The socially optimal quantity, or the allocatively efficient quantity, is right there at Q3.
This is a 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 maximizes profit, are they gonna produce Q3?
Well, no. Remember, we said they're gonna produce Q1. And that's the reason why monopolies are inefficient, right?
They cause deadweight loss. These are units society wants produced, but the monopoly's not gonna make them because they'd rather produce where MR equals MC. So a monopoly produces too little output and charges too high a price, causing deadweight loss. Understanding that concept will help you understand question eight, right?
Consumer surplus. at socially optimal must be right here. It's the triangle of P1C 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 nine, there's only one quantity in the entire graph where the price equals the 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 cost and they're breaking even. All right, last question.
What's going to 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 m equals 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 it 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.
Okay? Till next time!