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Monopoly Efficiency and Deadweight Loss

Monopolies do not produce the efficient quantity.

Monopoly Efficiency and Deadweight Loss

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Alright, So now, let's discuss the idea of consumer and producer surplus in a monopoly, as well as the ideas of efficiency, productive and allocated efficiency, or the lack thereof, let's check it out. So we're gonna see is that a monopoly always produces less than the efficient quantity. Right? The efficient quantity is something like what we saw in perfect competition where they were reaching efficiency. Um, well, here they produce less. Okay, So we'll see that on the graph. And what happens? We're not producing the efficient quantity, we're producing less than that efficient quantity. Well, when we're not producing the efficient quantity, we're gonna have a deadweight loss. Okay, So there's going to be a deadweight loss in the market for a monopoly. Okay, So let's go down here on the graph and let's discuss, um, this this producer and consumer surplus under perfect competition first. So, we'll see how it is efficient. And then we'll move on to a monopoly and see where the deadweight losses and see how our consumer and producer surplus change. So, let's go ahead and label these areas on the graph A, B, C, D, E, and F. Okay. And let's start with perfect competition. I'm gonna ask you not to, to shade stuff in yet, because this is kind of stuff you've seen before. And then we'll shade it in for a monopoly. Okay, so let's start here, um, with the consumer surplus in perfect competition, Right? So in perfect competition. What's our price and quantity gonna be? So our marginal cost curve here. This upward sloping marginal cost. Remember in perfect competition, our supply curve is essentially the marginal cost curve. Okay, so, if this is the supply and the demand, we're gonna see that imperfect competition, whoops wrong thickness there. Okay, right here, our equilibrium quantity is gonna be right there, Right? And I'm gonna put pc here for perfect competition. That's the quantity in perfect competition. And our price would be right here, Right. P Star, that's our equilibrium, perfect competition price right there. Cool. So let's go ahead and mark our consumer surplus first, and that's gonna be everything above price. But below the demand curve, right, This is stuff we've seen before. So it's gonna be something like this above the price. But below the demand curve, it's gonna be this area right here, Right? Everything including A. B and C. Remember not to shade this in yet, because you're gonna shade in the one for the monopoly. Okay, so abc consumer surplus about producer surplus. Everything below the price, but above the supply curve. Right, So that's gonna be this all the way out here. All the trades were made. So it's gonna include everything D. E. And F. Right there. Cool. So our producer surplus is D plus E. Plus F. And that makes our total surplus the sum of those two, right? A plus B plus C plus D plus E plus F. Right? So there's no deadweight loss here. All those trades were made were at the efficient quantity. So that stuff we've seen before. Pretty easy. Right? So let's go ahead and see what happens in a monopoly. Okay, Um, so let's re shade this for a monopoly. But first, we have to think about the price and quantity for a monopoly, right? So, if we were gonna have a monopoly here, now, we're gonna think about that marginal revenue curve and the marginal cost, right, we're gonna produce where marginal revenue equals marginal cost, and that's gonna be right here, right? This point where marginal revenue equals marginal cost. This is going to be our quantity. I'll do it here in green, are quantity, and I'll write mono for monopoly. Our quantity for the monopoly is gonna be this lower quantity, right? Just like we said, above, a monopoly produces less than the efficient quantity, Right? Because they're trying to maximize their profit. They have this market power, market power, market power, they can, uh, they can reduce their output to hike up the price and make some profit. Okay, so that that is the monopoly quantity there. What about the monopoly price, Right. We're gonna need that price to be able to find our consumer and producer surplus. So, where do you think the price is for the monopoly here? I'm gonna give you a second, waiting. All right. So what do you think? So, the price for the monopoly? We're gonna have to go up to the demand curve. Okay, the demand curve tells us the price. So, at this quantity, if we go up and touch the demand curve up here, this is going to be our price. Okay, so our prices over here price, monopoly notice that the monopoly is charging a higher price than the efficient, uh, equilibrium price. Right? And this is because they have restricted the quantity, they're influencing the market to be able to jack up the price and make some profit. Okay, so let's go ahead and see where our consumer surplus is first. So, we've got this higher price. Well, our consumer surplus is everything above the price, but below the demand curve. Right? So this area A is going to be our consumer surplus, and that means consumers have lost surplus, right? They lost B plus C. B plus C. Is no longer consumer surplus. How about producer surplus? Well, the producer surplus is everything below the price, uh, but above the supply curve. Right? So here's our price. It's gonna be everything down all the way to the supply curve. And now we have to stop right here, right? Because this is the quantity that was produced and traded. We didn't go all the way to the efficient quantity. So that is where our uh, our surplus is going to end their right. We don't include C, or E. Because those trades were not made, we did not produce those, and uh, those were not traded there. So our producer surplus is now B plus D plus F. So notice the producers gave up that section E. Right? He used to be their surplus, but they took away this bigger section, that big chunk B from the consumers. Right? So the producers gained B. But lost E. Right? So they by restricting the quantity, they lose some of their surplus of trades they could have made, but they're getting more surplus because they're selling everything else at a higher price. Okay, So they exchange that E surplus for the B surplus. And what do we see as our total surplus now? Well, it's gonna be the sum of these, right? A plus B plus D plus F. Right, So our total surplus has decreased by C plus E. Right, C plus E. That's right behind me. So C plus E. Is no longer total surplus, and that is our dead weight loss. C plus E becomes our dead weight loss. So that has increased by C plus E. And that's this section on the graph, right here, Right? The trades that were not made. Well, that surplus is lost. Right? Okay, So let's go ahead and make some conclusions down here about this efficiency. Alright, let's do that here. So, what did we see we saw that the monopoly quantity first. Let's deal with quantity. That quantity for monopoly is always less than the competitive quantity, Right? They restrict it to make profit. How about consumer surplus? We saw that the consumer surplus a monopoly causes a decrease in the consumer surplus. Right? Thank you. And that's because there's that higher price, uh, the output is restricted, Right? So there's a decrease in the consumer surplus and then increase in the producer surplus, Right? But for this to happen, we also have a deadweight loss. So the monopoly causes a deadweight loss, which represents that loss of economic surplus, right? There's some of that surplus that was lost because of um because of the monopoly situation. Cool. So, let's just reiterate these things about productive efficiency and allocated efficiency. We already know that, um, monopolies don't reach that, right? We have deadweight loss. They're not efficient. So, remember, productive efficiency is producing at the lowest possible cost. And we've discussed at the lowest possible cost, that's gonna be the minimum of our average total cost curve. Okay, So the minimum of our average total cost curve, remember, has a U. Shape. It's decreasing, hits, a minimum starts increasing again. So that lowest cost is gonna be that minimum. Right? So we we can say that productive efficiency is where price equals average total cost, right? And that is what we saw in perfect competition. And we're being efficient there. But here in monopolies, um, we don't produce at minimum average total cost, right? We produce somewhere on the downward sloping part of the average total cost curve. Because if you think of this, uh, theoretically here, when when we were able to get to the minimum average total cost. That's because we had a flat curve here, right? And we were able to touch the minimum because of the because of the flat curve, right? Because it was flat, we can touch the minimum, but with any downward sloping curve, we're not gonna be able to touch that minimum point as at just one point. Right? So the idea is it's gonna look something like this, right? We're gonna have the demand curve, doing something like this and average total cost, right? We can't touch the middle the bottom at just one point like that, right? We would have to be something where we're tangent to it and we could only be tangent to this line somewhere along the downward sloping part, right? There's no way for for this red line to touch just the bottom part of the curve, right? To be only able to touch it only once. Okay, so that would never work right. The idea here, just like I drew before. So if we had this this demand curve like this and then this curve going like this, right? It looks like it's only touching it once. But if we were to continue going up here, yeah, it's gonna touch it again. Right? So um the only way for it to be tangent and only touching the curve once, which is basically what matters here, um is for it to be on the downward sloping part. Okay, So what we see is that we're not at the minimum of average total cost. So we have no productive efficiency. Okay, so there's no productive efficiency for a monopoly. How about allocated efficiency? Remember that allocated efficiency means that production represents consumer preferences, right? And that's where we reach a point where the marginal benefit to the consumers equals the marginal cost to the producers. Right? Marginal benefit equals marginal cost. But that's not happening in a monopoly, Right? The monopoly is producing less than that efficient quantity. So the marginal benefit exceeds the marginal cost to the producer. The marginal benefit to the consumer still exceeds the marginal cost. If it was competitive, they would be producing more to get to that efficient quantity. Okay, so there's no allocated efficiency either. Alright, so monopoly, no productive efficiency, no allocated efficiency. And we saw all those things that happen with our surpluses here. Cool. Alright, so let's go ahead and do a little bit of practice and then we'll move on to the next topic. Cool, let's do that now.

An unregulated monopoly will sell: 


If the monopolist’s fixed cost is $25, the monopoly’s total costs when maximizing profit is: 


If the monopolist’s fixed cost is $25, the monopoly’s total economic profit when maximizing profit is: 


The deadweight loss created by the monopoly is: