econ unit 9 - ch. 12

Market Structure

Firms

Price

Quantity

Efficiency

Perfect Competition

___ small firms

Low (Pc)

High (Qc)

✅

many, efficient

Market Structure

Firms

Price

Quantity

Efficiency

Single-Price Monopoly

One firm

High (Pm)

__ (Qm)

❌ Inefficient

low

A ___charges the same price to all buyers for all units of output.

single-price monopoly

Step 1: Price and Output Comparison

Perfect Competition

• Market demand = D

• ***Market supply (S) = sum of firms’ ___ curves

Equilibrium where D = S
→ Price = Pc, Quantity = Qc

marginal cost

perfect competition

Each firm:

• Takes market price as given.

• Produces where P = ___.

• Earns ___ economic profit in the __ run.

MC, zero, long

perfect competition - ✅ Result: Efficient allocation → ___ = ___, total surplus maximized.

MSB=MSC

___-Price Monopoly

Now imagine one firm buys out all competitors and becomes the only seller.

• Demand curve (D) stays the same (consumers unchanged).

• The former market supply curve becomes the monopoly’s ___ ***curve.

Monopoly faces a downward-sloping demand curve, so MR __ P.

single, marginal cost, <

To maximize profit: __= __

• Produces Qm (where MR = MC)

Charges Pm (from the demand curve at Qm)

MR=MC 

single-price monopoly -___ price, __output 

higher, smaller

	Perfect Competition	Single-Price Monopoly
Price	Pc	↑ Pm(marginal price) __ Pc
Quantity	Qc	↓ Qm __ Qc

>, <

Perfect Competition

Single-Price Monopoly

Efficiency

Efficient (__ = ___)

Inefficient (___ MSC)

MSB=MSC, MSB > 

Perfect Competition

Single-Price Monopoly

Surplus

__ maximized

__ appears

total surplus, deadweight loss

Conclusion: A single-price monopoly produces ___and charges __than a perfectly competitive industry.

less, more 

Step 2: Efficiency Comparison (Figure 12.6)

(a) Perfect Competition (Efficient)

• D = __ → represents consumer valuation.

• S = __ → represents cost of production.

• Equilibrium:

  • Price = Pc

  • Quantity = Qc

  • MSB = MSC

Total Surplus (TS) = CS + PS → maximized

MSB MSC

Consumer Surplus (CS): Green triangle below __, above Pc.

demand

Producer Surplus (PS): Blue area above __, below Pc.

supply

Long-Run Efficiency:

• Firms produce at minimum ATC → productive efficiency

• No __

DWL

Monopoly (Inefficient)

• Monopoly produces Qm, where MR =___

• Charges Pm from the demand curve

Because Pm > ***Pc and Qm < Qc, total surplus decreases.

MC

Why Inefficient?

• MSB ___ MSC → society values the good more than it costs to produce, but monopoly _____output.

Lost trades between Qm and Qc = social loss.

>, restricts

Aspect	Perfect Competition	Monopoly
Quantity	Qc	Qm < Qc
Price	Pc	Pm > Pc
MSB vs MSC	Equal	MSB _ MSC
Consumer Surplus	Large	Smaller
Producer Surplus	Moderate	__
Total Surplus	Maximum	Reduced
Deadweight Loss	None	Exists
Productive Efficiency	Yes (min ATC)	No
***Allocative Efficiency	Yes	No

>, larger 

Step 3: Redistribution of Surpluses

Monopoly reallocates existing surplus:

• Some consumer surplus transfers to producer surplus:

  • Area between Pm and Pc up to Qm → consumers pay more → monopoly gains.

The rest of consumer surplus (from lost output Qc − Qm) becomes __

So: Consumer Surplus ↓Producer Surplus ↑ slightlyTotal Surplus ↓ overall

DWL

 Step 4: Why Monopoly Damages Consumer Welfare

Monopoly harms consumers in 3 distinct ways:

1. Produces less than ___ efficient quantity (Qm < Qc)

2. Raises cost of production (not at minimum ATC)

3. Raises ___** above cost (Pm > MC)

→ Allocative and productive inefficiency

socially, price

 Step 5: Rent Seeking

Rent seeking = the pursuit of wealth by capturing existing economic rent (___) rather than creating new value.

surplus

Economic rent includes:

• Consumer surplus

• Producer surplus

• Economic __

profit

A monopoly’s economic profit is a form of ___.
Thus, monopoly behaviour and efforts to obtain monopoly power = __ seeking.

rent rent

Type	Description	Example	Social Cost
1. Buying a monopoly	Purchasing rights to an existing monopoly to gain profit	Buying a ___license in a regulated city	Wastes resources used to __& purchase rights

taxi, find 

2. Creating a monopoly

Using political influence to obtain monopoly power

___ for exclusive rights or restrictions (CRTC cable monopolies)

Costly lobbying diverts resources from __

lobbying, production

Summary: Rent-seeking activities consume real resources (time, money, lobbying), creating additional ____ cost ___the deadweight loss.

social, beyond 

Step 6: Rent-Seeking Equilibrium (Figure 12.7)

Mechanism

• Monopoly profits attract rent seekers.

• Competition among rent seekers drives up the cost of obtaining ___ power.

These rent-seeking costs are __ costs, added to ATC.

monopoly, fixed

Eventually: rent seeking equilibrium

• ATC rises until it just touches the ___ ***curve.

Monopoly’s economic profit = 0 (completely used up maintaining monopoly status).

demand

Result: rent-seeking equilibrium 

• No __ profit remains.

• ___ loss increases — includes both:

  • Original DWL (lost consumer + producer surplus)

  • Lost producer surplus from higher costs (grey area enlarges)

economic, DWL

moving to rent-seeking equilibrium

Consumer surplus doesn’t change (same Pm, Qm), but society’s total __falls further due to wasted rent-seeking effort.

welfare

Feature	Perfect Competition	Single-Price Monopoly
Price	Low (Pc)	High (Pm)
Quantity	High (Qc)	Low (Qm)
Consumer Surplus	Large	Smaller
Producer Surplus	Moderate	Larger
Total Surplus	Maximum	Reduced
Deadweight Loss	0	> 0
Efficiency	✅ Allocative & Productive	❌ Neither
Long-Run Profit	0 (entry/exit)	__ (if barriers)
Entry/Exit	Free	Blocked
Rent Seeking	None	__; raises cost & DWL

positive, common

Why does a monopoly produce less and charge more than perfect competition? Because the monopoly faces a downward-sloping demand, so MR ___ P. It restricts output (Qm) where ___= MC to raise __ (Pm).

<, MR, price

How does a monopoly transfer consumer surplus to itself? By charging a higher price (Pm > Pc) on the units sold, shifting part of consumer surplus into __surplus.

producer 

What is rent seeking, and how does it increase inefficiency? Rent seeking = using resources to acquire or preserve ___power (through lobbying, licensing).
These efforts add fixed costs and expand deadweight loss, raising total social cost.

monopoly 

• Perfect Competition:

  • P (supply) = ___**, Q = Qc

  • MSB = MSC → Allocatively efficient

P = min ATC → Productively efficient

MC 

• Single-Price Monopoly:

  • P _ MC, Q < Qc

  • MSB > MSC → __inefficient

Not at min ATC → __inefficient

>, allocatively, productively 

• Rent Seeking:

  • Converts monopoly profit into wasted costs.

  • Increases total social loss (DWL + ___ cost).

rent-seeking

Conclusion: A ___-price monopoly harms economic welfare by:

1. Restricting output,

2. ___prices,

3. **Reducing total surplus,

4. Encouraging unproductive __seeking.

single, raising, rent