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Equilibriutn in A Monopolistic Market

This document summarizes the key differences between equilibrium in a perfectly competitive market versus a monopolistic market. 1) In a perfectly competitive market, equilibrium occurs at an output of 4 units and a price of $16, maximizing total surplus (consumer surplus + producer surplus) at $48. However, in a monopolistic market the monopolist produces only 3 units at a higher price of $18 to maximize their own profits, reducing total surplus to $45. 2) The reduction in output from 4 to 3 units results in a deadweight loss, shown as the area BWY of $3, representing a loss of efficiency to society from the monopoly power. 3) A monopoly reduces consumer surplus which

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127 views

Equilibriutn in A Monopolistic Market

This document summarizes the key differences between equilibrium in a perfectly competitive market versus a monopolistic market. 1) In a perfectly competitive market, equilibrium occurs at an output of 4 units and a price of $16, maximizing total surplus (consumer surplus + producer surplus) at $48. However, in a monopolistic market the monopolist produces only 3 units at a higher price of $18 to maximize their own profits, reducing total surplus to $45. 2) The reduction in output from 4 to 3 units results in a deadweight loss, shown as the area BWY of $3, representing a loss of efficiency to society from the monopoly power. 3) A monopoly reduces consumer surplus which

Uploaded by

Changuoi YOto
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Equilibriutn in a Monopolistic Market

part A: Equilibrium in a Perfectly Competitive Market


consider Figure 3•12. which shows a perfectly competitive
market. The market supply curve S is
the horizontal sunitnation of the marginal cost (MC) curves
of all the firms in the market, Use Pigure
& 12.1 to answer the questions that follow the graph,

Figure 3-12.1
Equilibrium in a Perfectly Competitive Market

$24
$22
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2

2 3 4 5 6
QUANTITY

l. What is the equilibrium quantity in the market?


4 units

2. What is the equilibrium price?


$16

3. What area of the graph represents consumer surplus in the market? Calculate the dollar value of
consumer surplus.
CS is by ABH, CS .5x4x(24-16)=16

Placement Eeooomio Microeconomics. Student Resource Manual O New


"ducation, NY 183
H3 Microeconomics CTIV
market? Calculate the dollar value of
4. What area of the graph represents producer surplus in the
producer surplus.
PS is represented by area BHE PS =.5x4(16-0)=32

5. What area of the graph represents total surplus (also called social welfare or total welfare)?
Calculate the dollar value of total surplus.
TS represented by ABF. TS=CS+PS=$48

Part B: Equilibrium in a Monopolistic Market


Now consider the same demand and cost curves, but assume the market is a monopoly. Because the
monopoly faces the downward sloping market demand curve, it must reduce its price to sell more
output, which means price will be greater than marginal revenue (MR). We add the firm's MR curve
below its demand curve in Figure 3-12.2, as well as the monopolist's MC curve. Use Figure 3-12.2 to
answer the questions that follow the graph.

Figure 3-12.2
Equilibrium in a Monopolistic Market

$24 MC

$18
x w
$16
o $14
$12
SIO
$8
$6
$4
$2

o 1 2 3 4 5 6 7
QUANTITY

6. What output level will the monopolist produce? Why?


It will prod 3 units at MR=MC

184 AdvancedPlacementEconomicsMicroeconomicsStudent Manual O Council for Economic Education.


New York. N.Y.
Microeconomics
3 A V 3-12 CONTIN
will the monopolist charge for
7. V,hat price this output? Why?
The monopolist will charge a price of $18 because, based on the demand curve, that is the
highest price consumers will payfor 3 units.

S. What area of the graph represents consumer surplus


in the market? Calculate the dollar value of
consumersurplus.
CS by AWX= .5x3(24-18)=9

9. V,hatarea of the graph represents producer surplus? Calculatethe dollar


value of
producer surplus.
PS=18+18=36

10.l,shat area of the graph represents total surplus? Calculate the dollar value of total surplus.
TS represented by area AWYF. TS=CS=PS=45

Part C: Comparing Equilibrium in the Two Markets


I l. How do the price and output of a monopolist differ from those in the perfectly
competitive market?
The monopolist has a higher price and a lower output than a perfectly competitive market.

12.VShatis the dollar value of the portion of consumer surplus in the competitive market that is
transferredto the firm's producer surplus in the monopoly situation?
Note that CS drops from $16 in perfect competition to $9 in monopoly. What happens to the $7
reduction in CS when the market becomes a monopoly?

13. Howdoes a monopoly affect consumer surplus? Is this good or bad from the perspective
of consumers?
Consumer surplus is reduced when a perfectly competitive market becomes a monopoly. This is
bad news for consumers.

area of Figure 3-12.2 represents the deadweight loss resulting from the market being a
monopoly?Calculate the dollar value of the deadweight loss.
Deadweight loss results from the market output being reduced by 1 unit (from 4 units to 3 units)
when the market changes from perfect competition to monopoly. The DWL is represented by the
area BWY. 48-45=3

Ec—s Student Reg•urce Manual O Council for Economic Education, New York. N.Y 185

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