econ 1020 - monopoly

define a monopoly

a market with one firm supplying the entire market, downward-sloping market demand, and the firm has market power: chooses quantity, and price follows from demand.

what does a monopolist maximise

profit π(q)=p(q)⋅q−C(q)

why is marginal revenue below price for a monopolist?

to sell an extra unit the monopolist must sell one more unit and lower the price on all previous units (loss)

where does the monopoly MR curve lie?

MR lies below the demand curve. MR steeper than demand curve.

what condition determines monopoly output?

MR=MC if MR>MC → increase output, If MR<MC → decrease output

how does monopoly differ from perfect competition (price)

monopoly: p > MC, competitive, p = MC

how does monopoly differ from perfect competition (output)

monopoly: lower, competitve: higher

how does monopoly differ from perfect competition (consumer surplus)

monopoly: lower, competitive: higher

how does monopoly differ from perfect competition (profit)

monopoly: positive (long run), competition: zero (long run)

how does monopoly differ from perfect competition (efficieny)

monopoly inefficient, pareto efficient

why is monopoly allocatively inefficient ?

efficiency requires MV = MC but monopoly sets p > MC. some units valued above MC are not produced, mutually beneficial trades are missed

dwl under monopoly

the lost total surplus from underproduction.

intuition behind monopoly dwl

consumers are willing to pay mor the MC, but less than monopoly price, these trades would occur under competition but are blocked by monopoly pricing. surplus is lost.

how to draw a full monopoly diagram

• Demand (downward sloping)

• MR (below demand)

• MC (upward or horizontal)

• q_m​ where MR = MC

• p_m from demand at q_m​

• Competitive outcome q_c​ where Demand = MC

• DWL triangle between q_m​ and q_c

does monopoly profit = social welfare loss

no , profit is a transfer, DWL is a real loss

what is monopoly rent

extra profit earned only because competition is blocked , not becasue the firm is better but the consumers have no alternative.

what is rent seeking

Rent-seeking is when firms spend money lobbying, protect monopoly power, create barriers to entry. This behaviour does not create output and makes society worse off.

what is perfect prie discrimination

when the monopolist charges each buyer what they are willing to pay

why is there no DWL in perfect price discrimination

every unit where willingness is more than or equal to the marginal cost is sold and output equals the efficiency level.

who gains under perfect discrimination

consmers - 0 surplus, firms - all surplus, society, efficient outcome. monopoly power does not equal ineffiecncy by necessity.

give a summary of monopoly welfare

A monopolist maximises profit by producing where MR = MC and charging the price given by the demand curve.

This results in higher prices and lower output than perfect competition, creating a deadweight loss due to underproduction.