Economic Welfare:
Monopoly
p y v. Perfect Competition
p
Agenda
Societal Welfare/Economic Welfare:
Criteria
Consumer Surplus
Producer Surplus
 Compare Monopoly and Perfect
Competition
 Price Discrimination

Economic Welfare
Consumer surplus measures
economic welfare from the
buyer/consumer perspective.
 Producer
P d
surplus
l measures
economic welfare from the
seller/producer perspective.

Consumer Surplus


Consumer surplus is the amount a buyer
is willing
g to pay
p y for a p
product minus the
amount the buyer actually pays.
Consumer surplus is the area below the
demand curve and above the market 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.
 Producer
P d
surplus
l is
i equivalent
i l
to
g run.
economic profit in the long

Economic Welfare

Economic welfare can be quantified
as the sum of consumer surplus and
producer surplus, i.e. equal weights
assumed.
assumed
Consumer Surplus and Producer Surplus:
Market Equilibrium
Price
A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
D
Demand
d
C
0
Equilibrium
quantity
Quantity
Monopoly vv. Perfect Competition

Monopoly and perfect competition
can be compared/contrasted by
using consumer surplus and
producer surplus (i
(i.e.
e by using
economic welfare/societal welfare
measures).
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
P
For PC, output
will
ill be
b sett att P =
MR = MC
Recall that for PC:
MR AR Demand
MR=AR=Demand
Qpc
Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
Price is Ppc
P
Ppc
Qpc
Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
P
Recall that for
monopoly, MR 
Demand
Output is set
where MC = MR
Ppc
Qm Qpc
MR
Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
P
Pm
Ppc
Qm Qpc
MR
The monopoly
output is less than
the perfectly
competitive output
Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
P
Pm
Ppc
The monopoly
output is less than
the perfectly
competitive output.
(The monopoly
(Th
l
price is higher
th the
than
th perfectly
f tl
competitive price.)
Qm Qpc
MR
Demand Q
Monopoly
o opo y v. Perfect
e ec Competition
Co pe o
MC
P
Pm
Ppc
Qm Qpc
MR
The green area
represents the
deadweight
loss (triangle)
of Monopoly
Demand Q
Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC
“Loss” in
consumer
surplus
Demand
The green area from the previous diagram
h been
has
b
enlarged.
l
d
Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC
“Loss” in
producer
surplus
p
Demand
The green area from the previous diagram
h been
has
b
enlarged.
l
d
Thee Deadweight
e dwe g Loss
oss ((“Triangle”)
ge )
MC
CS
PS
CS+ PS =
welfare loss
associated
with
monopoly =
DWL 
Demand
The Deadweight Loss (“Triangle”):
All ti Inefficiency
Allocative
I ffi i
CS+ PS =
welfare loss =
DWL 
MC
CS
PS
Demand
Allocative inefficiency: (P  MC)
Allocative Inefficiency: DWL 
Economic Efficiencies:
Monopoly v. Perfect Competition
Allocative
Efficiency
Productive
Efficiency
Excess profit
X-inefficiency
Technical
progress
Comment
P = MC
PC v. M
PC
 MX
Minimum point
on AC Curve
PC M X?
(Check)
PC M X
PC
 M?
PC ? M ?
Rent seeking?
Cost inflation
R&D
Price Discrimination
Monopoly v. Perfect Competition



First degree (perfect) price discrimination
– Each consumer pays her/his reservation price.
Th producer/
The
d
/ seller
ll captures
t
all
ll consumer
surplus
– Implication for Monopoly v.
v Perfect
Competition? (MR = AR  P = MC in
monopoly, i.e. allocative efficiency)
Second degree price discrimination
– Bulk discounting
– Non-linear
N
li
pricing
i i
Third degree price discrimination
– different prices to different groups
groups.