ECO401_Lecture19

0:21 Bismillah Rehman Rahim Assalam Walekum Dear Students I hope your all is well and you are enjoying the way in which slowly but soon we are inching towards a completion of our understanding of micro economics at least at the introductory level Now in our previous lecture we talked about costs we talked about revenue and we started to understand how profit maximization happens in the real world how ever we noted that in order to understand profit maximization better we need to see what are the different market structures in which firms operate and we

1:07 identified what is in the middle and what is monopolistic competition and oligo Now we started our discussion with the case of competition First of all we noted that the term perfect competition did not by itself have any normative connotation that is we were not passing a statement as too perfect Competition was the most desirable form of market structure know because we got the example of If you remember a

1:53 perfect poison and a perfect bomb so the term perfect can be used with any word that does not necessarily mean that the word it is being used with necessarily represents a good thing than how ever we note that there are certain advantages of using the perfect competition concept and the main advantage judge that it provides us with a polar position against which to compare all other different forms of market structures so together with the case of monopoly where you have just one firm you can define the whole spectrum of market structures that we can have in the real world so you can have oligopoly in which there are

2:39 cartels and market structures you can have monopolistic competition where you still have a Large number of buyers and sellers but there were certain assonances of perfect competition are not met Now recall the portion that we made in our discussion of perfect competition we said that there were a large number of buyers and sellers who were all price takers that is they could not affect the market price at which they sold the products there were no entry and exit barriers that is any number of firms could enter the market in the long run so that was an important asson because embedded inside that asson was the asson about

3:27 free mobility of factors than the third umpan was about the nature of products being sold and we not that in perfect competition the asson is that all firms are selling identical and homogenous products so there is no advertising and brand creation and promotion that situation does not arise and finally we not that in perfect Competition Consumers and producers are meant to have perfect information that is producers know what the prices are what the costs are what the market opportunity are where as consumers know the prices, quality and availability

4:14 information of products now given that are for as we attempted to see how a firm operates in a perfectly comparative manner we recalled the rule for profit maximization from our early lectures and that was that the firm should operate at a level of output where the marginal cost is that the marginal addition to costs is equal to the marginal revenue that is the revenue added to the total revenue by selling the last unit and we noted that in the case of a perfectly competitive

5:00 firm we had price is equal to marginal revenue and price was equal to average revenue as well because by definition price and average revenue are equal but we noted That's because of this relationship between price and marginal revenue Because the marginal and average revenue curves are the same horizontal line we had this very interesting thing that is that the firm was producing at a level where price was equal to marginal cost and we will develop the implications of this this particular feature of perfect competition a little bit further down the lecture but we will

5:46 note that this was an important feature of the maximization process of a perfectly competitive firm then we so that once the firm had decided the output that it wanted to produce in order to maximize its profits that was when a was equal to MC we could see whether the firm would make a profit at that output and a loss and zero profits so whether it would make super normal profits that is positive profits and whether it would make Normal profits which we recall we called zero profits because they are the profits that the firm's owners make and this is equal to the cost of

6:32 equity which is paid to the firm's owners and which is required for them to earn in order for them to stay and operate the firm So we note that it was possible in the short run at least for the firm to have these three different scenarios that is to have a loss, to have zero profits and to have super normal profits We also note that the shutdown point for the firm was not where the average cost curve falls below the average revenue curve You remember the average cost curve is a U shaped curve and the average revenue curve was a straight line So the shutdown point was not where the average revenue curve fails below the average cost

7:20 curve No shutdown The point was where the average revenue curve falls below the average variable cost curve and we note why that was the case we note that in the short run the firm would perfectly comparatively like to cover some of its fixed costs and in order to do that it would like to operate and continue operating even if its price and its marginal and average revenue is less than the average cost that it is earning but if the price is higher than its average variable cost the firm's earning can be channelized to cover the fixed cost that the

8:05 firm is earning we will see how the situation will change in the long run but before we move to the long run let me talk about one last part which I could not talk about in our previous lecture and this also relates to the short run we need to talk about the short run supply curve now if you remember The supply curve is simply a curve which relates the quantity supplied with the price that is prevailing in the market right so the quantity supplied by firms at different prices remember also what a marginal cost curve is a marginal cost curve simply relates the

8:52 marginal cost of producing different units at different prices so at different quantities so it relates marginal cost to quantity right and the supply curve relates quantity supplied to price so this basically means that when price is equal to marginal cost then the supply curve and the marginal cost curve become one and the same thing and this is a key feature for the perfectly comparative curve and the marginal cost curve is exactly the same the firm offers to supply at its marginal cost curve and along its marginal cost curve let's develop a

9:40 better understanding of this through the use of a slide For example look at the figure that is shown here If prices were equal to p1, profits would be maximized at q1 Where p1 is it then point A is one point on the supply curve of the firm at a price of p2 q2 Wood would be produced then point B is another point on the supply curve and so on Under perfect competition the firm's supply curve is the end of production This demonstrates also why the firm's supply curve is upward sloping

10:27 Given that marginal cost rises as output rises and this is due to diminishing marginal returns A higher price will be necessary for the firm to increase its output Note that the firm will not produce at a price below the average variable cost The supply curve is only that portion of the marginal cost curve Now point E Now the question that arises here is what will be the short run supply curve of the whole industry well this will simply be the sum of the short run supply curve and hence the marginal cost curves of all the firms in the industry graphically this will be a

11:14 horizontal sum not a vertical sum but a horizontal sum since it is the quantities that are being added so my friends that was the short run note that we discuss two things in the short run we first develop an understanding of where in equilibrium could arrive in the short run and we saw that it can arrive at multiple points it can arrive where the firm is making a loss one the firm is making a zero profit and when the firm is making a super normal profit we then derive the supply curve for the firm now we need to apply exactly the same step

11:59 to the long run we need to see whether it is possible to have multiple equilibrium points in the long run for a perfectly Computing Run Equilibrium We need to recall two important points one is that in the long run there are no fixed costs all costs if you recall your cost well all costs in the long run are variable that was one point the other point is that in the long run firms can enter and exit the industry as well firms can shut down in the short run as well if their

12:47 price falls below the average variable cost but otherwise we assume that it was not possible for new firms to come in that is join the industry but in the long run in the long run there is no such restriction firms can join in and they can come in and set up their plants because they have the time to do that but note that the key difference that this will make to our analysis is that it will not be possible in the long run for assisting firms to make super normal profits now why do I say That's well think of what happens when even a perfectly competing market and a perfectly competing industry

13:33 exist firms start making super normal profits That is their average revenue curves which are horizontal lines are now their average cost curve and the minimum point of their average cost curves Now in this case the firms will be making a super normal profit How ever in the long run When another firm sees this firm making super normal profits they will come in and this will cause the industry supply to expand And when the industry supply expands that is the industry supply curve shifts to the right Then this will cause the price to fall and this will cause what the horizontal average revenue curve that each of the perfectly competitively

14:26 just to touch the base of the average cost curve Let's illustrate this through the use of a slide Now as you Can we start with the situation where firms face an average revenue curve d1 that is a demand curve d1 and this is higher than the long run average cost curve for the firm Now at this point the firm is making super normal profits and that will be measured by the vertical distance between the d1 curve and the LRA curve multiplied by the quantity of the firm Now consider what happens to other firms See this firm making super normal profits Other firms will come

15:14 in and this will lead to an increase in the industry supply Then the supply curve shifts to the right from s1 to s n and this will cause the price to fall for firm p1 to p a On the other hand the lower price a that we now observe will cause a lower average revenue curve to obtain for each individual firm and there for the demand The curve will shift down from d1 to d2 and then the long run average cost curve becomes tangent at again to the demand curve There for the firm will make zero profits and normal

15:59 profits in the long run Now my friends we saw that in the long run the equilibrium occurs at the point where the average revenue curve is tangent at to the average cost curve Now the important point to note here is that the bottom and the base point of the average cost curve is also the point where the marginal curve intersects the average cost curve If you recall your notes on costs you will note that the marginal cost curve intersects the average cost curve at its bottom and minimum point through out the slope

16:45 of the average cost curve So when you see that the average revenue curve and the price will be true in the long run so as to be equal to the bottom most point of the average cost curve You are in a way implying that price will also be equal to marginal cost because that is exactly the point where the marginal cost curve intersects the average cost curve I told you already that this particular point that price is equal to marginal cost in perfect competition is a very important point let me talk a little bit about this what is the marginal cost of any good

17:31 that is being produced if you look at it from the society's point of view the marginal cost of producing an additional unit of good and the cost of producing an additional unit of good is the cost of producing that good for the whole of the society right because firms are operating within the society and that marginal cost which is being incurred that the society bears to produce that could so let's say if the marginal cost of producing something is ₹ thatchi what is the benefit to society of that additional good and How do we measure the benefit that the society derives the good now the society's benefit that the society

18:20 derives the good can be associated with the price the society is willing to pay for that extra good so the price is in a way equal to the marginal benefit that the society derives the good now the optimal point of allocation of resources in the economy will be rich when the price that the society is willing to pay for the product that is the benefit that the society derives the product is exactly equal to the marginal cost of producing the product note here that we are not talking about the profit concerns and the profit profit interest of the firm we are not talking about the whole of the society so from a societal point of view

19:07 the optimal allocation point of resources is where the marginal cost of producing a good equals to the price that the society is willing to pay for it and when we see that in perfect competition this condition is met we can say that yes perfect competition does reach the normative ideal that economists are aspiring for that is perfect competition does give you that allocation of resources at which the society is best of all that is its an optimal point of production for the society remember this point is always the optimal point of production for an

19:54 individual firm is where marginal revenue is equal to marginal cost but the optimal point of production for the society is where price is equal to marginal cost now this marginal cost pricing rule is terribly important in assessing efficiency the different market structures that we talk about so we'll talk about whether this marginal cost pricing rule is satisfied under monopoly and monopolistic competition and oligopoly and if it is not then there is a way to move toward at this point where price is equal to marginal cost but we'll talk about this when we talk about

20:40 monopoly and other types of market structure in a little while before I close the discussion on perfect competition I'd like to talk a little bit about what happens to the long run supply curve and the long run industry supply in a perfectly comparatively way is expanding and contrasting and what is the relationship of this with economies of scale and dis economies of scale at let's illustrate this through the use of a slide each of the diagrams will show an increase in demand in a perfectly comparatively way this

21:28 happens in all of the three graphs now the equilibrium in the short run moves from point a to point b where d2 and s1 intersect after the initial increase in price the resulting super normal profit attracts new firms into the industry the short run supply curve shifts to s2 and the equilibrium moves to point c Then the long run effect of the increase in demand has been seen to move the equilibrium from point a to point c This means there is a difference between the long run supply curve and point

22:14 c This is illustrated in each of the three diagrams Now let's focus on the individual diagrams Now if price falls back to its original level That is if points a and c are at the same price, then the long run supply curve will be horizontal C Diagram A This would be an asymmetric curve If there is no change in the firm average cost curve price would simply return to the bottom of the firm long run average cost curve If how much and now we are talking about diagram B The entry of new firms creates a short factor of production This will

23:00 bid up factor prices The firm long run average cost curve will shift vertically upwards and so the long run The equilibrium price will be higher the long run supply curve of the industry there will slope upwards as shown this is the case of increasing costs and external economies of scale then this is external to any individual firm Finally let's look at the diagram see here If the expansion of the industry lowers the firms long run average cost curve due to the building up of an

23:46 industrial infrastructure and distribution channels and specialist suppliers communication networks and we tucked about this when we discuss external economies of scale then the long run supply curve will slope downwards as shown this of course is the case of decreasing industry costs and external economies of scale So my friends we are now in a position to close discussion on perfect competition and start our discussion on the other pole and the other end of the market structure spectrum and what was monopoly now all of you i'm sure have been in some point of view of your childhood played a game

24:34 called monopoly you know where you have currency notes artificial and you have hotels and houses and then you sort of have throws of dice and then you move along the monopoly line and then you build houses and hotels and tset at sets and the idea there is that you're gradually becoming richer and richer so that you develop monopoly over everybody else who is playing the game now the version and the connotation that that game and that term monopoly there has been quite different from how economists view monopoly in some ways it is similar also but in some ways it's quite different and we'll be talking about

25:21 monopoly and discussing both its advantages and its disadvantages whether it has something to do with control over everybody else and wether it is something that can be naturally desirable in certain situations we will be discussing all these different dimensions in our discussion but let me start with the question of what a monopoly firm is right when do you say that a particular firm is a monopoly now you will say that this is true an obvious question a simple question a monopoly is simply when there is just one firm in the entire fine but this is not as simple as it sounds I will give the example of WADA if you

26:08 might remember WADA is the water and power development authority in Pakistan but when I say that WAPDA is a monopoly institution right it's a monopoly firm in that it is the only firm evolved in the generation and distribution of power in the country is that not true quite there are two points here if you are talking about the whole of pakistan then wada is not responsible for supplying to karachi let's say you have the karachi electric supply corporation electricity supply corporation right the ksc also wada is also not the sole producer and generator of power in the

26:54 country you have the hub power company which is generating thermal power right wada is evolved into generating mostly hydel power through tarbela and mangla dams and other dams but there is thermal power being generated as well so how do you define whether a particular firm is a monopoly or not depends very much on how you define the industry and where you are of the industry let me give you two more very interesting examples think about television pakistan television corporation is the ptv a monopoly firm well all of you say that at least 10 15 years ago ptv was a monopoly firm because it was the

27:43 only television channel that people in pakistan could watch right many people had satellite a dishes installed and they could watch outside channels but for the average pakistani ptv was the only channel that people could watch what is the situation today is ptv a monopoly well certainly not there are very many cable operators operating in pakistan early on people installed dishes and they were watching other channels from all over the world so ptv has lost its monopoly over the years but if you go to very far and remote areas of pakistan let's say if you go to a gilgit and i don't know gawad ptv might still be

28:32 the only television channel for those people and in villages in central and interior punjab and sindh and balochistan and in the frontier provinces so ptv might be a monopoly channel still for some people but when you talk about the whole of pakistan it might not be a monopoly channel so again its how you define the industry Where you draw the boundaries of the industry that will determine whether a particular firm is a monopoly or not let me give you a final example and that is of Pakistan International Airlines pi some of you might have traveled via pi others would get a chance later on now is pi a monopoly firm again it was ants ago when we had

29:21 private competition coming in through lets say Bhoja Airlines and Aero Asia and Shaheen Airways right so all these private airline companies have now put up competition for pi at least in domestic flights I am not talking about foreign flights that flights are going to London and to Dubai and to the US and to Africa no talking strictly about domestic flights so PI was a monopoly hasn't come in but after the private airlines came in PI has lost its monopoly has it what about the route from Islamabad to Gilgit how many airlines

30:07 fly that route no one so for the customer and for the traveler who is traveling from Islamabad to Gilgit PI is still the monopoly firm think about the route from Lahore to Quetta how many airlines do that route hardly any may be in the next few years some airlines start that route but it's not as profitable a route from Lahore and Karachi and Islamabad and Karachi so you might not see another company taking people across to Quetta in the next few years so PI might still remain the monopoly firm for certain segments of domestic travel let me now give you another side of the

30:56 problem so far we've been talking about different parts of the country different routes but we haven't talked about how the industry as a whole can be defined so we haven't talked about let's say air travel and that weather pi is a monopoly firm in air travel and not but what about the transport industry as a whole that is also an industry right so is pi a monopoly firm in the transport industry hardly you have Pakistan Railways which is operating you have buses which run from one city to another city and all the cities are virtually connected through bus travel right and then people also have their own cars and

31:43 this is also a source of competition for pi so when you talk about the industry and what you say it's the transport industry and what is its a sub industry which is the airline industry it makes a lot of difference on what a particular firm is seen as being a monopoly or not similarly when I say that PTV is a monopoly channel and a monopoly a way of providing information and news to people what about the information industry as a whole you have the radio you have a word of mouth communication of news people traveling to villages and telling them about events that have happened in other parts of the city you also have newspapers so you have

32:29 different rival firms overall in the information industry so it depends very much on how you define the industry and whether a firm is a monopoly or not and can be called a monopoly or not depends very much on how you have drawn those bounds now given that explanation let me give you a small example of what economists are really interested in when they talk about monopolies one of the things that they are interested in and this is what goes in very well with the monopoly game that you have played is that they are more interested in how much monopoly power a particular firm has whether a firm has a lot of

33:15 power or very little power it's very similar to the position in the game you try to become very powerful you try to become the most powerful and wealthiest person of all the players who are playing the game you're not trying to become the only player you try to become the biggest player and the player who has the most influence similarly in economics and in our real world we're sometimes interested in how much monopoly power different firms have exercise so let me give you an example think about someone a particular food item very well it might be that there are other firms and many other firms produce the same food item within

34:01 that industry but it might be that that person produces that food item in a way that gives him monopoly power that is he only produces it with a taste and a flavor that people who buy it from him don't want to buy it from anybody else so that person will have sufficient monopoly power to be able to charge the prices that he wishes to charge and I will give you the example being a lot of fudge de pie now if you go to fudge de pie and take the pies from there they will have a particular flavor and if you are hooked on to that flavor you will not go to any other pie producer even if he might claim that he is producing the best pies in town if you like fudge de pie you will

34:48 continue going to that outlet to buy your quantity of pies so that particular firm which is fudge has a lot of monopoly power in that he can charge whatever price he wants to and to within a certain range he can charge whatever price he wants to and he will not run the risk of people Leaving him and going to someone else now there are two important things to note from what we've just discussed one is that it does not matter whether the number of firms in a particular end a particular industry is large or small you can have very many firms with in an industry but you can still have one or two firms which have

35:36 monopoly power and who face inelastic demand of consumers now when I say in elastic demand what am I referring to remember that in the case of perfect competition each firm faced a horizontal demand curve remember the average revenue curve it was a straight line and what does this mean in terms of demand demand was infinitely elastic and what it meant was that you could sell as much as you wanted to at that particular price but if you increased your price a little bit you would not be able to sell anything zero okay now in a monopoly situation and when a firm has some monopoly power it will

36:23 not face a perfectly elastic demand curve its demand and the demand for its product will be relatively inelastic so you're already beginning to talk about some kind of a slope for the average revenue curve and the demand curve and we note that when we have a price making firm what is what a monopoly firm is when a monopoly and when a firm can influence the price at which it can sell its product you will have a downward slope demand curve and so automatically the demand that the firm faces is more inelastic than what a perfectly comparatively

37:12 how a monopoly firm is and now we will stick to the definition the strict definition of monopoly that there is only one firm in the market and in the industry seeks to Maximize Its Profits Now Profit Maximization under a Monopoly Situation Happens in Exactly the Same Way as We Studied in the Case of a Price Making Firm in Our Discussion of Profit Maximization A Two Lecture Arlift Identification And Then We Will See at That Quantity What

38:01 Price The Firm Can Charge That Is What Is the Point of Intersection Between the Line That Is the Quantity That Is Being Produced and the Average Revenue Curve And We Can Read the Price That The Firm Will Charge from the Vertical Axis Note That Because the Firm Now Influences the Price That It Sells Its Products At It Can Not Sell Additional Goods Additional Units of Its Output Or the Price That Is Because You Have a Downward Sloping Demand Curve You Cannot Sell an Infinite Quantity of Goods at the Same Price If You Want to Sell More Than You Need to Lower Your Price Similarity If the

38:48 Monopolist Raises Its Price Raises His Price Then That Will Result in a Slightly and Very Much Lower Demand for That Product Now note also that I said that a monopolist's demand curve and the demand curve that he faces is more inelastic than a perfectly comparatively line a demand curve and the demand curve that a monopolist faces is downward sloping where as the demand curve that is a perfectly comparatively line so definitely a monopolist's demand curve is more inelastic how ever not also that a monopolist because now he is also involved in the price making

39:33 mechanism there is an imbricate link between the price that he charges and the quantity that is demanded by the market the quantity demanded will not be infinite at any given price as he changes his price the quantity The demand for his product will rise or fall Now the more monopoly power that a particular monopolist has the less will be the quantity impact of his increase in price So if he increases his price a lot of people will not reduce the quantity at which the quantity that they purchase from him that is the more monopoly power he has the more vertical will his average revenue and demand curve be Let us illustrate profit

40:20 maximization by a monopolist through some graphs and tables Now as you can see in the table we have price in the first column the quantity that can be sold at that particular price in the second column we have the monopolist's total revenue in the third column the marginal revenue that he makes in the fourth column These are the figures for a hypothetical monopoly Now the other values in the table can be derived given that is From columns 1 to 3 and 5 the monopolist maximizes total profits at 3.75 That is why it cannot produce and sell

41:07 2.5 units of output at the price of 5.5 This we can see from the table Now at this output marginal revenue is equal to marginal cost is equal to $3 Now as soon as marginal revenue increases marginal cost the monopolist will expand output and sales because doing so adds more to total revenue than to total cost and then for profits will rise The opposite is true when marginal revenue is less than marginal cost The total profits are maximized there for When m is equal to

41:53 mc6 can be presented graphically as if in the figure you can see that the best level of output is at the point where m intersects the MC curve at this best output level of 2.5 units the monopolist makes a profit of 1.5 per unit which is the vertical distance between d and a At 2.5 units of output there for the total profit is 3.75 That is 2.5 units of output multiplied by the $1.5 profit per unit Note that since price increases marginal revenue at the point where

42:39 marginal revenue is equal to marginal cost The rising portion of the marginal cost curve does not represent the monopolist's supply curve That is, the supply curve for the monopolist is not the same thing as the marginal cost curve and this is where a monopoly has a major departure point from perfect competition You remember in perfect competition the marginal cost curve and at least the rising portion of the marginal cost curve was equal to the supply curve but here you can see the relationship of price to quantity that the firm has in order to determine its supply is different from the Marginal Cost Curve

43:25 Now the Key Point about the Discussion that We've Just Headed on Profit Maximization is that Price does not be equal to Marginal Cost in a Monopoly as it did in Perfect Competition and the Implication of That was that the Marginal Cost Curve and the Supply Curve are not the Same in a Monopoly This is a Key Distinguishing Point Between a Monopoly and Perfect Competition Second Note that a monopoly can make super normal profits but this might not be eliminated in the long run compare this with perfect competition in perfect competition when a monopoly makes one when one firm makes some super normal profits that is positive

44:12 profits other firms will come in and there will be a reason why the industry supply to expand and there will be a reason why the price to go down untouched where the price is equal to marginal cost but in a monopoly it's the monopolist who decides what to supply and how much to supply then there is no other firm which can enter and exit and there for it is possible for a monopolist to maintain his super normal profits in the long run as soon as true there is no need for us to separate the short run equilibrium of a monopolist from the long run equilibrium they are essentially the same now what I want to discuss next

44:59 is how can a monopoly retain its monopoly and the second monopoly is related to the game monopoly that you play that is how can a particular monopoly retain its monopoly position and its powerful position why is it that there is only one WADA and there was till a very long time very recently only one Pakistan international airline and only one national television channel why this is the question that we must ask and there are number of regions that I will go through at least six and seven but the fundamental region relates to costs think about why you

45:44 and I and any other big businessman in Pakistan cannot think about running and launching a new airline suddenly why is it I mean some people have launched new airlines but why is it a difficult thing to think about the main region is the existence of large fixed costs the airplanes that you need to take a people from one city to another cost a lot of money and not every person has that kind of money note that these are fixed costs so that as the number of passengers increases the fixed cost gets divided on an increasing number of people and there for your

46:31 average cost falls as the number of passengers increases so for example if a plane is going from Lahore to Karachi and it is it has full fuel and there is only one passenger in the plane what is the average cost of taking that plane from Lahore to Karachi it will be the cost of the entire fuel the cost of the pilot and everybody else is divided by just one person because that person is the output for the airline right it has only been able to sell one ticket so that the average cost is very high now imagine that the firm adds another passenger and there is another person who buys the ticket the

47:17 average cost will become half and then four as the number of passengers increases the average cost will become smaller and smaller and smaller and this is a very important feature of most monopolies that is they are characterized by falling average costs over a large portion of their quantities that they produce so for a very large quantity a profile their average cost curve is in its falling shape we know that the average cost curve is a saucer shaped curve but for a monopoly this portion of the saucer is very very long this is the major difference between a Monopoly and Other Types of

48:04 Market Structures Now if you remember from the discussion on long run costs when the average costs of any firm are falling in the long run that is consistent with economies of scale and increasing returns to scale and this is exactly the case for an average monopoly and what a natural monopoly is is that it is experiencing economies of scale as the size of the firm becomes bigger and bigger and bigger the average costs for the firm become smaller and smaller and smaller and there for it might some times be beneficial for society as a

48:49 whole to have a single firm operating and produce the entire output because it can operate at a level of average cost which is lower than what two firms and three firms and four firms can achieve together let us illustrate this through the use of a small slide note here That we have two firms on the left each of which faces an identical total average revenue curve that is A1 for the first firm and A2 in the second one and they are identical total Both the firms face an identical total long run average cost curve and this is a typical long run average cost curve for the case of a monopoly That is the

49:34 average cost is falling for a large portion of the output Now as you can see in both cases for both firms One and Two No level of output can allow the firm to break even That is no level of output allowing the firm to make zero profits The firm is destined for losses at any price Okay what happens if you combine these two firms into a single firm and this is seen in this new graph This is now the market demand curve which has been obtained by adding the average revenue curves of the individual firms So

50:21 when the combination of the average revenue curves the long run average cost curve is still the same because it should not change that is specific to the industry and for any firm that should still remain the same now note that crudely from point A to point B all the points all the output points are now feasible so when two firms are combined together to form a single firm that is when the market becomes a monopoly output levels which were earlier are now very much profitable and this is the trick that monopoly has done it has

51:06 allowed the production of a good which would not have been possible if it had been left for many firms to produce that good because each of that firm would have looked at the long run average costs and said no it is not possible for me to produce this good because I would not be able to cover my costs but when all those firms combine together combined they have the ability to produce at a level where they can make profits and there for produce that good now the example that was just given was that of what is called a natural monopoly that is a monopoly situation in which there

51:51 is a natural tendency for just one firm to produce the output if there are more than one firms then it is not cost efficient to produce the good at all there for if the industry is to exist there can only be one firm that is why some of the public utilities that you see PTCL and WADA and PI and organizations on utilities when is which give utilities to a lot of people are usually one firm industries that is there is only one firm which produce for the entities and the reason as you Remember what was economies of scale that is you have a large amount of fixed cost that you earn in the

52:37 beginning and those costs get divided up upon the increasing number of customers and there for you have a declining average cost curve for a large portion of the output range so my friends with that we come to the end of today's lecture now in our next lecture we will talk a little bit more about how monopolies retain their monopoly power economies of scale are just one reason why monopolies can retain their monopoly position there are other reasons there are active strategies that monopolists use to ensure that no other firm enters the

53:24 industry and the market we will see what implications this has for the general public the public welfare and the public interest and what the government can do that is if there is a role for the government to insure that the public Interest is safeguarded in the case of a monopoly so till tomorrow's lecture and our next lecture it is Khuda Hafiz and Assalam Walekum B