Lectures in Microeconomics-Charles W. Upton

Monopoly versus Competition

D

MCP*

Q*

MR

P**

Q**

DWL

CS

Monopoly versus Competition

Comparison to Competitive Equilibrium

• A consumer sets

MRS=P

Monopoly versus Competition

Comparison to Competitive Equilibrium

• A consumer sets

MRS=P• A competitive firm sets

MC = P

Monopoly versus Competition

Comparison to Competitive Equilibrium

• A consumer sets

MRS=P

• A competitive firm sets

MC = P

• Of course,

MC = MRT

Monopoly versus Competition

Comparison to Competitive Equilibrium

MRS = P

Monopoly versus Competition

Comparison to Competitive Equilibrium

MRS = P = MC

Monopoly versus Competition

Comparison to Competitive Equilibrium

MC = MRT

MRS = P = MC = MRT

Monopoly versus Competition

Comparison to Competitive Equilibrium

MC = MRT

MRS = P = MC = MRTThe basic requirement for economic efficiency. The rate at which the consumer is willing to

substitute apples for bananas (say) is just equal to the rate at which we can transform apples into

bananas.

Monopoly versus Competition

How the Monopolist Does It

MRS=P

MR=MC

Monopoly versus Competition

How the Monopolist Does It

MRS=P

MR=MC

P > MR P> MC

Monopoly versus Competition

How the Monopolist Does It

MRS=P

MR=MC

P > MR P> MC

MC=MRT

MRS>MRT

Monopoly versus Competition

How the Monopolist Does It

MRS=P

MR=MC

P > MR P> MC

MC=MRT

MRS>MRT

The monopolist violates the fundamental requirement for economic

efficiency. Price is above Marginal Cost (MRT)

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

CS

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

CS

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

CS

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

DWL

CS

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

DWL

CSThe social cost of a monopoly: the Dead

Weight Loss

Monopoly versus Competition

A Graphical Presentation

D

MCP*

Q*

MR

P**

Q**

DWL

CSThe social cost of a monopoly: the Dead

Weight Loss

Suppose we could run the monopoly without any Dead Weight Loss?

Would monopolies then be objectionable?

Monopoly versus Competition

End

©2004 Charles W. Upton