Mastering Monopolies with Cost Tables

what we're going to do here is we're going to revisit one of the cost tables that we looked at when we were talking about pure competition and we're going to start at the same place we're talking about there's a pure competition or a perfectly competitive market and this cost table represents what's happening with one firm but there are a hundred small firms all producing exactly the same thing in this market we filled out the cost table we graphed the marginal cost average total cost and the average variable cost for one of these small firms and then we answered all kinds of questions about in a pure competition framework what would these firms do at different prices so if the price was 18 we've said that they would shut down because the shutdown price is $18 and 33 cents when you're looking at a pure competition firm and the break-even price is $30 so what we saw is that each of these 100 little firms at a price of $36 would want to produce seven units and that each of the 100 firms would have a total revenue of 252 total costs of 216 which we find here in the table and a profit of $36 but then we drew the supply curve if there are 100 little firms and each little firm is following the rule that we're going to ignore the downward sloping portion of marginal costs in this case where it goes from 30 down to 10 we can see that on the graph here so ignoring the downward sloping portion of the marginal cost curve then a pure competition firm is going to keep producing as long as the market price is greater than or equal to their marginal cost of producing and so we saw that at that price of 36 they would want to produce 7 units but assuming there are a hundred firms and they all keep producing as long as price is greater than or equal to marginal cost we can draw the market supply curve by saying well if we know that if the market price is 50 that each firm would want to produce 10 units then if there were a hundred firms in the market then altogether the 100 firms would produce ten times a hundred units or thousand units and we drew this market supply curve using that logic here's a quantity of a thousand units here's a price of 50 and so that gives us a point on the market supply curve here of 1,000 units at $50 and then by working our way down the marginal cost curve just adding points we continued drawing points on this supply curve but then we stopped when we got down to the shutdown price of $18.33 here because if all firms shut down at a price below 1833 you don't want to keep drawing that supply curve down here we want to say at any price below 1833 there's going to be a zero quantity supplied in the market and that's what this little orange part of the supply curve over here represents but today we're talking about monopolies so here is the scenario that we want to analyze suppose a monopolist suppose someone with a lot of money said hey what we just saw here was that if we draw the supply curve and we see where it intersects this demand curve that the market price is $26 and that $26 we saw is below the shutdown price of $30 here the minimum average total cost and so all of these firms are losing money so that's what we saw in our last video and we were looking at this table so suppose someone with a lot of money some kind of investor says hey I see an opportunity here all these firms are losing money all these firms are probably looking to exit this industry permanently because they're losing money today so what if I could somehow contact all 100 firms and make them an offer hey I'll buy your firm from you I'll take it off your hands so I'll take all of your land and your labor and your capital and I will act as the entrepreneur but if I owned all 100 firms that will make me a monopolist so let's see what would change in this market if instead of having 100 pure competition firms what if we change this to where we're looking at one monopolist who owns all of those hundred firms let's analyze exactly what would change when we're looking at this market supply and demand curve over here so what we're going to assume is that when the monopolist buys the 100 firms that the monopolist marginal costs of production is going to be the same that the cost curves are going to look just the same it's just now the monopolist owns all 100 firms or alternatively we could assume that these 100 firms have banded together to organize and to help each other and they formed a cartel remember a cartel is when a lot of little firms get together and act as if they're a monopolist and that what a monopolist always wants to do is reduce the quantity produced so that they can jack the price up so what is this monopolist going to do well the first thing we want to do and we're talking about a monopolist is monopolists do not have supply curves so we're going to cross out the word supply remember a supply curve tells us for each market price what quantity would be supplied in the market well there is no market price when you're talking about a monopolist there a price maker so it's whatever price they want it to be so weari label this curve this red line marginal cost however there's something we need to fix down here we were plotting marginal cost all the way down but then when we got down to the shutdown price we stopped graphing those marginal costs if I'm a monopolist the rule is keep producing as long as marginal revenue is greater than or equal to marginal cost and then charge the price the highest price that we find up on the demand curve the highest price that people would be willing to pay for that quantity so while the shutdown price is relevant to a monopolist if the best price they could possibly charge was lower than 18:33 even a monopolist wouldn't bother however this shutdown point right here is not relevant and the reason why it's not relevant is because when a monopolist sees where marginal revenue equals marginal cost they don't charge a price down here that's equal to marginal cost they charge a price up here on the demand curve the highest price they can let's see how this works so let's draw the marginal revenue curve you remember how to do that if the demand is a straight line like this one is then marginal revenue is also a straight line but it has twice the slope so what we want to do is draw a marginal revenue curve that starts here at $50 in a quantity of zero and it goes down twice as fast so this demand it looks like it intersects here a little bit higher than a thousand let's call it about halfway between a thousand and one thousand one hundred about 1,050 so what that means is if the marginal revenue curve are going to draw goes down twice as fast that the marginal revenue curve is going to intersect down here at about 525 just whatever half that quantity is for the demand curve hits so let's draw that line so this line tells us how much additional revenue marginal revenue this monopolist would bring in every time they sell one more unit but here's the problem we can't see where marginal revenue hits the marginal cost curve because this little green line does not represent their marginal cost the little green line is going to the shutdown price so what we have to do in order to see what this monopolist needs to do is continue drawing marginal cost stem so let me add some of those so this one is a marginal cost of nineteen dollars at four times 100 or 400 units so let's draw that next marginal cost here fifteen dollars three units but if the monopolist owns a hundred little far that's going to be 300 so $15 300 units alright well that's really as far as we need to carry that marginal cost down but let's add the last couple of points just to be complete here so let's see two units $10 ok $210 and we could add that first one there marginal cost of 30 if we wanted to right but that's not going to be relevant here so remember the monopolist is going to continue to produce as long as this pinkish purple margin over Avenue is greater than or equal to the red marginal cost curve and then they're going to stop producing and so what we want to do is just see approximately where does it look like that is happening right about there and then what the monopolist does is it looks down at the quantity axis to see how many units is that and we just want to get a good approximate value we're not going to be able to tell exactly how many that is but to me it looks like it's about halfway between 300 and 400 so I'm going to call it about 350 all right so the monopolist quantity we'll call that Q M looks like it's about 350 units now what price do they want to charge for the 350 units it's not this price over here that's the marginal cost that's the marginal revenue the monopolist wants to charge the highest price they can and what they're going to do is look up up up at the demand curve and that will tell them the highest price they can charge for 350 units and it's always going to be a price higher than what the pure competition firms would be charging remember here where the supply curve and the demand curve intersected was at a price of 26 the monopolist is not going to charge less than 26 dollars so we look up here and that looks to me like it's about $33 so that would be the monopolists price about $33 so that's what changes when you're looking at a monopolist let's just run through a list of what we had to do here since the monopolist keeps producing as long as marginal revenue the additional revenue coming in is bigger than or equal to the marginal cost first we have to draw the marginal revenue line which is a line twice as steep as the demand as long as demand is a straight line and in this class we're always going to use straight-line demand curves so they look at where marginal revenue equals marginal cost that's the second step and if we need to draw additional points to represent the marginal cost because the monopolist is not really going to be bound by this shutdown price because their price they're charging is not down here in this area it's up here on the demand curve right so if we need to fill in some marginal costs do so so we can see where marginal revenue equals marginal cost and then we look down at the quantity axis to see how much to produce to see when to stop producing and then we look up at the demand curve to find what price they should charge and then one big thing we always want to try to do and we're looking at a monopolist is to calculate an estimate of the deadweight loss that's going to be created by this monopolist taking over this market it's a huge consideration whenever firms want to merge one of the things that we try to do we try to advise the government on as economists is how much harm this is going to cause to society and this deadweight loss is one of the biggest measures of the harm so what we want to do is highlight this deadweight loss and it's not exactly a triangle but remember everything we're doing here in this graph on the right hand side is an approximate answer remember why that is because when we draw the supply curve or in this case the marginal cost curve it's kind of a strong assumption to assume that there were exactly a hundred firms and that all of these 100 firms had exactly the same cost structure as the one we're looking at over here on the left so everything over here is approximate we don't want to be sloppy we want to get as close as we can but we don't want to obsess over thinking we can find the one perfect answer we just want a reasonable answer so if we wanted to estimate the area of this orange thing again it's not exactly a triangle but we're going to approximate it as if it was exactly a triangle because we're getting a an approximate answer here then we would say okay this deadweight loss triangle yes squiggly equals approximately equal to one-half times all right let's look at the base and to me I like to think about the base as being this right here this Purple Line and that base looks like it goes from $33 down to 15 16 17 about 17 dollars so that base goes from about 33 down to about 17 so 33 minus 17 is $16 so we're going to call that 1/2 times 16 times and then the height of that triangle goes from that base up to the highest point and that height really is the difference in the quantity it's the difference in the quantity the monopolist is producing the 350 up to the quantity that the purely competitive market would have produced and we said before that looks like it's around 500 units so the height is going to be 500 minus 350 or about 150 all right so 1/2 times 16 times 150 gives us an approximate deadweight loss of about $1,200 and this deadweight loss is the loss and total surplus because the monopolist is not going to produce as much as a purely competitive industry would so again when you compare how much total surplus there is in a purely competitive industry to that of monopoly there's always going to be less total surplus the monopolies goal is always to reduce the quantity they produce and increase the price and when we just visually compare the total surplus here let me just outline this in pink and again this is approximate right because we're not doing the exact marginal cost here we're just kind of a suing that this is somewhat like a triangle in a purely competitive industry the total surplus would be approximately this pink plus the orange highlighted area but then after the monopoly takes over we're going to be left with only the pink area and so deadweight loss is the reduction in the total surplus so that's the big thing that changes when you're looking at a monopoly compared to a purely competitive industry when you're analyzing cost tables and this is a good method to get an approximate idea of how much a market would be harmed if we allowed all the firms to form a cartel and this is one reason why cartels are illegal in most countries so if you have any questions about this please let me know I'll be happy to try to answer your questions this doctor burk you signing out wish you the best of luck I hope to see you next time bye-bye

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