November 17, 2019
Monopoly Graph Review and Practice- Micro Topic 4.2

Monopoly Graph Review and Practice- Micro Topic 4.2

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”]

100 thoughts on “Monopoly Graph Review and Practice- Micro Topic 4.2

  1. You look a lot like my AP Microeconomics teacher. And you act like him if he overdosed on enough cocaine to bring him back from a first overdose on meth. Like wow. Lots of energy. It's good, just very loud. Great video for review, thanks! 🙂

  2. Will per unit tax leaves deadweight loss?
    Those who are complaining about speed can watch at 0.75 speed 😛

  3. Perfect speed. Finally some videos I can use to review the microeconomic topics for the exams without losing time. Thank you.

  4. Does monopoly have different conditions like in perfect competition we have Abnormal profit, Normal profit, Loss , shut down point?

  5. Why do economist fail at life in the teaching department. . Lets spend 20 min. explaining milk and a demand curve but lets rush through 5 min at the speed of light explaining multiple concepts with acronyms of jargon thrown throughout to make sure you are totally confused by the end of it. Jesus Christ. I'm convinced that at this point in the material not even the professors understand this so they are reading off the pre written material at a high rate to rush through it to avoid showing the lack of practical understanding and use.

  6. Please slow down the pace of speaking… it's hard to pick u n look at the same time on the graph for those whose native language is not English… bit seriousness is also required. ..thanks

  7. I can't thank you enough for helping me prepare for my AP econ test. I have learned so much in such a short period of time because of you, and I actually understand it. Thanks 🙂

  8. Legend! Thanks for this video! Amazing how you can encompass so much information in such a short period of time, and I could understand everything! Thanks!

  9. a lot of information in 5:34 (^0^) … I put video speed .75 and same stop video to read English subtitle ……hhhhhhh(0-0)

  10. HEY! you are so good for real but…. if you could go a little slower I would appreciate it because I have to rewind it all the time. I am not a hater just a user cheers

  11. I'm paying 8000 euros to do an online accounting course and I've come here to get an understanding of how monopolies work, Jacob is a great teacher and explains things very well.

  12. Pause the video at 1:24, go to settings, increase the speed by 2x and then play the video……..

  13. There is an economic reason behind the speed of his videos. He knows these concept are hard to grasp and he also knows that his revenue depends on views. How does he maximize his revenues? Make the viewer rewatch the video 10 times.

  14. At first I thought he was just speaking wayy too fast. But, as I go along, his speed is just perfect. I sometimes get lost when people speak too slow, somehow my attention would shift to other things, like the talker's nose, or mouth, or even that little mole on the cheek. With Jacob speaking fast, I tend to be more focused on his points, if I think it is important, I just replay it over and over again until I get his point. Love his videos!!! especially helpful when you are stuck with your lecturer's (confusing) notes and you just want affirmation on your understanding.

  15. I love your videos! So useful, thanks man for your work 🙂 You've saved my life twice, next exam in two days, keep fingers crossed. Cheers!

  16. I wish I knew about you at the start of this term. Microecon has been a struggle for me. I'll definitely be following you next term when I tackle macroecon! Thank you so much for the visual and enthusiastic lessons!!!

  17. Hey Jacob,
    I usualy don`t do comments but after watching your videos for the last few days (and nights) I really wanted to say thanks for doing such an amazing job and helping me to get through my exam. Usulay I prograstinate a lot and end up bing-watching series on netflix. This time I bing-watching on youtube and leanrd more then I did in my entire class 😀
    If I fail on my test I can at leat go on watching your cips 😉

    Greetings from Germany!

  18. All I know is monopoly is so powerful that it has high barriers full stop rest of it seems like I'm preparing to be the new witcher

  19. Does "socially optimal" mean perfect competition? (Is the socially optimal price the price under perfect competition?)

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