Monopoly Graph Review and Practice- Micro Topic 4.2 - YouTube

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?!

[music]

[music]

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.

[dance break]

YAS MR CLIFFORD U WERK HUNTAYYY

[dance break]

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!

[dance break - "BONUS DANCE FOR YOU"]