Economic : Monoppyoly v. Perfect Agenda

 Societal Welfare/Economic Welfare: Criteria Consumer Surplus Producer Surplus  Compare and Discrimination Economic Welfare

 Consumer surplus measures economic welfare from the buyer/consumer perspective.  PdProducer surpl us measures economic welfare from the seller/producer perspective. Consumer Surplus

 Consumer surplus is the amount a buyer is willinggpy to pay for a product minus the amount the buyer actually pays.  Consumer surplus is the area below the curve and above the price. A lower market price will increase consumer surplus. A higher market price will reduce consumer surplus. Producer Surplus

 Producer surplus is the amount a seller is paid for a product minus the total variable cost of production.  PdProducer surpl us i s equi ilvalent to economic in the long run. Economic Welfare

 Economic welfare can be quantified as the sum of consumer surplus and producer surplus, i.e. equal weights assumed. Consumer Surplus and Producer Surplus: Market Equilibrium

Price A

D

Consumer surplus Equilibrium E price Producer surplus

DdDemand B

C

0Equilibrium Quantity quantity Monopoly v. Perfect Competition

 Monopoly and perfect competition can be compared/contrasted by using consumer surplus and producer surplus (i.e . by using economic welfare/societal welfare measures). Monopo ly v . PeeecCopeorfect Competition

MC For PC, output will b e set at P = P MR = MC Recall that for PC: MR= AR= Demand

Qpc Demand Q Monopo ly v . PeeecCopeorfect Competition

MC Price is Ppc P

Ppc

Qpc Demand Q Monopo ly v . PeeecCopeorfect Competition

MC Recall that for P monopoly, MR  Demand

Output is set Ppc where MC = MR

Qm Qpc MR Demand Q Monopo ly v . PeeecCopeorfect Competition

MC The monopoly output is less than P the perfectly competitive output Pm

Ppc

Q m Qpc MR Demand Q Monopo ly v . PeeecCopeorfect Competition

MC The monopoly output is less than P the perfectly competitive output. Pm P (The monopoly pc price is higher than th e perf ectl y competitive price.)

Q m Qpc MR Demand Q Monopo ly v . PeeecCopeorfect Competition

MC The green area represents the P (triangle) P m of Monopoly Ppc

Qm Qpc MR Demand Q The Deedwegadweight Loss (“Trianggele”)

MC “Loss” in consumer surplus

Demand The green area from the previous diagram hbhas been enl arged . The Deedwegadweight Loss (“Trianggele”)

MC

“Loss” in producer surplus

Demand The green area from the previous diagram hbhas been enldlarged. The Deedwegadweight Loss (“Trianggele”)

MC CS+ PS = welfare loss CS associated with PS monopoly = DWL 

Demand The Deadweight Loss (“Triangle”): Alloca tive I neffi ci ency MC CS+ PS = welfare loss = CS DWL 

PS

Demand Allocative inefficiency: (P  MC) Allocative Inefficiency: DWL  Economic Efficiencies: Monopoly v. Perfect Competition Comment PC v. M Allocative P=MC PC M X Efficiency Productive Minimum point PC MX? Efficiency on AC Curve (Check) Excess profit Rent seeking? PC MX X-inefficiency Cost PC M ? Technical R & D PC ? M ? progress Monopoly v. Perfect Competition

 First degree (perfect) price discrimination – Each consumer pays her/his . The prod/lltducer/ seller captures all consumer surplus – Implication for Monopoly v . Perfect Competition? (MR = AR  P = MC in monopoly, i.e. )  Second degree price discrimination – Bulk discounting – Non-linear pri ci ng  Third degree price discrimination – different to different groups.