What region or regions of the graph represent deadweight loss in the monopoly outcome?

Monopoly and Efficiency

The fact that price in monopoly exceeds marginal cost suggests that the monopoly solution violates the basic condition for economic efficiency, that the price system must confront decision makers with all of the costs and all of the benefits of their choices. Efficiency requires that consumers confront prices that equal marginal costs. Because a monopoly firm charges a price greater than marginal cost, consumers will consume less of the monopoly’s good or service than is economically efficient.

To contrast the efficiency of the perfectly competitive outcome with the inefficiency of the monopoly outcome, imagine a perfectly competitive industry whose solution is depicted in Figure 10.7 “Perfect Competition, Monopoly, and Efficiency”. The short-run industry supply curve is the summation of individual marginal cost curves; it may be regarded as the marginal cost curve for the industry. A perfectly competitive industry achieves equilibrium at point C, at price Pc and quantity Qc.

Figure 10.7 Perfect Competition, Monopoly, and Efficiency.

Given market demand and marginal revenue, we can compare the behavior of a monopoly to that of a perfectly competitive industry. The marginal cost curve may be thought of as the supply curve of a perfectly competitive industry. The perfectly competitive industry produces quantity Qc and sells the output at price Pc. The monopolist restricts output to Qm and raises the price to Pm.

Reorganizing a perfectly competitive industry as a monopoly results in a deadweight loss to society given by the shaded area GRC. It also transfers a portion of the consumer surplus earned in the competitive case to the monopoly firm.

Now, suppose that all the firms in the industry merge and a government restriction prohibits entry by any new firms. Our perfectly competitive industry is now a monopoly. Assume the monopoly continues to have the same marginal cost and demand curves that the competitive industry did. The monopoly firm faces the same market demand curve, from which it derives its marginal revenue curve. It maximizes profit at output Qm and charges price Pm. Output is lower and price higher than in the competitive solution.

Society would gain by moving from the monopoly solution at Qm to the competitive solution at Qc. The benefit to consumers would be given by the area under the demand curve between Qm and Qc; it is the area QmRCQc. An increase in output, of course, has a cost. Because the marginal cost curve measures the cost of each additional unit, we can think of the area under the marginal cost curve over some range of output as measuring the total cost of that output. Thus, the total cost of increasing output from Qm to Qc is the area under the marginal cost curve over that range—the area QmGCQc. Subtracting this cost from the benefit gives us the net gain of moving from the monopoly to the competitive solution; it is the shaded area GRC. That is the potential gain from moving to the efficient solution. The area GRC is a deadweight loss.

The red triangle in the above graph represents producer surplus.� Producer surplus exists when the price goods are sold for is greater than what it costs the firms to manufacture those goods.� Producer surplus is defined by the area above the supply curve, below the price, and left of the quantity sold.�

Graph 2

The yellow triangle in the above graph represents consumer surplus.� Consumer surplus exists when the price paid by a consumer is less than what the consumer would be willing to purchase the good for.� Consumer surplus is defined by the area below the demand curve, above the price, and left of the quantity bought.

Graph 3

Graph 3 combines producer surplus and consumer surplus into one graph.�

Graph 4

Graph 4 shows the areas of producer surplus and consumer surplus with a downward sloping demand curve.� The equilibrium price and quantity is at the point were marginal cost (MC) is equal to the demand curve (also marginal revenue � MR).� In a competitive market, Demand=AR=MR=P.� The competitive output is the efficient output for the market.

Graph 5

The monopolist produces where marginal cost equals marginal revenue.� The monopolist quantity is found by going from the point where MC=MR to the x-axis, and the monopolist price is found by going from the point where MC=MR up to the demand curve and then over to the y-axis.� The monopolist quantity is less than the competitive quantity and the monopolist price is greater than the competitive price.� In a monopolistic market, consumer surplus is show by the yellow triangle, which is the area below the demand curve, above the monopolist price, and left of the monopolist quantity.� The producer surplus is now the red area, which is the quantity above the marginal cost curve (also supply curve), below the monopolist price, and left of the monopolist quantity.

Graph 6

When a market does not produce at its efficient point there is a deadweight loss to society.� The yellow triangle represents the lost consumer surplus and the red triangle represents the lost producer surplus when the market operates at the monopolistic output instead of the competitive output.� The lost consumer surplus plus the lost producer surplus is the total deadweight loss to society.�

Graph 7���

The blue rectangle is the amount transferred to the monopolist from the consumers.� By operating at the monopolist output, the monopolist captures some consumer surplus.� Since the monopolist gains the blue rectangle, it is not part of the deadweight loss to society.�� Although the monopolist lost some producer surplus (red area in graph 6), the transfer to him (blue rectangle) is greater than the loss, therefore, he ends up better off.�

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Which region or regions represent the consumer surplus in the monopoly outcome?

Which feature of monopoly causes a deadweight loss?

Why does a monopoly cause a deadweight loss quizlet?

What is the area that represents producer surplus under a monopoly?