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Robin Naylor, Department of Economics, Warwick 1 Topic 3 : Lecture 17 Perfect competition and Consumer Surplus X p pcpc D Consumer Surplus is given by?

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Presentation on theme: "Robin Naylor, Department of Economics, Warwick 1 Topic 3 : Lecture 17 Perfect competition and Consumer Surplus X p pcpc D Consumer Surplus is given by?"— Presentation transcript:

1 Robin Naylor, Department of Economics, Warwick 1 Topic 3 : Lecture 17 Perfect competition and Consumer Surplus X p pcpc D Consumer Surplus is given by? And Producer Surplus? S XcXc

2 Robin Naylor, Department of Economics, Warwick 2 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: Suppose a monopolist takes over the previously competitive industry. X p pcpc D Consumer Surplus under Monopoly is given by? And Producer Surplus under Monopoly? S XcXc MC AC The Monopolist faces the Market Demand Curve. We assume that the Monopolist’s Cost Curves are simply the sum of those of the individual competitive firms.

3 Robin Naylor, Department of Economics, Warwick 3 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: Suppose a monopolist takes over the previously competitive industry. X p pcpc D Consumer Surplus under Monopoly is given by? And Producer Surplus under Monopoly? S XcXc MC AC MR pmpm XmXm

4 Robin Naylor, Department of Economics, Warwick 4 Topic 3 Lecture 17 Monopoly welfare loss: recap –A monopoly firm takes over. The Market Demand is now the same as that for the individual firm: how much will it produce? Price? D MR LAC LMC Identify: p, X, CS, PS under monopoly. Compare PS and CS under Monopoly and under Perfect Competition. p X S

5 Robin Naylor, Department of Economics, Warwick 5 Topic 3 : Lecture 17 Monopoly and Consumer Surplus: An alternative representation of the Deadweight Loss of Monopoly (see also B&B p. 469): X p pcpc D = MB S XcXc MC AC MR pmpm XmXm

6 Robin Naylor, Department of Economics, Warwick 6 Topic 3 Lecture 17 Algebra of monopoly (this is essentially the same analysis as that of Lecture 12 Slide 13)

7 Robin Naylor, Department of Economics, Warwick 7 Topic 3 Lecture 17 Monopolistic competition –Like Perfect Competition, there are many firms –Unlike Perfect Competition, each faces a downward-sloping demand curve (why?) –Industry equilibrium is when each just breaks even: LMC LAC D MR X p Here the industry is not in equilibrium: Why not? What happens next?

8 Robin Naylor, Department of Economics, Warwick 8 Topic 3 Lecture 17 Monopolistic competition –Like Perfect Competition, there are many firms –Unlike Perfect Competition, each faces a downward-sloping demand curve (why?) –Industry equilibrium is when each just breaks even: LMC LAC D MR X p Here the industry is in equilibrium: Why?

9 Robin Naylor, Department of Economics, Warwick 9 Topic 3 Lecture 17 Oligopoly –Few firms (in our models, we’ll typically assume 2 for simplicity) –Interdependent (Why?) –Various possible behaviours Collusive Cournot (quantity) Competition

10 Robin Naylor, Department of Economics, Warwick 10 Topic 3 Lecture 17 Collusive Oligopoly –Here the firms simply act as if they were a single monopolist –They determine profit-maximising output and each produce, say, half of that output. The price is the monopoly price and the welfare loss, compared to perfect competition, is the monopoly welfare loss. –Example: if p=a – bX and MC=AC=c, then each firm produces: –So total output is (a – c)/2b, the same as under monopoly. –It is not then difficult to work out market price, supernormal profits, Consumer Surplus, and Welfare (Loss) –Note, under Perfect Competition, output is (a – c)/b. (Because c=p=a – bX)

11 Robin Naylor, Department of Economics, Warwick 11 Topic 3 Lecture 17 Oligopoly with Cournot Competition

12 Robin Naylor, Department of Economics, Warwick 12 Topic 3 Lecture 17 Oligopoly with Cournot Competition

13 Robin Naylor, Department of Economics, Warwick 13 Topic 3 Lecture 17 Oligopoly with Cournot Competition

14 Robin Naylor, Department of Economics, Warwick 14 Topic 3 Lecture 17 Oligopoly with Cournot Competition

15 Robin Naylor, Department of Economics, Warwick 15 Topic 3 Lecture 17 Oligopoly with Cournot Competition

16 Robin Naylor, Department of Economics, Warwick 16 Topic 3 Lecture 17 Oligopoly with Cournot Competition

17 Robin Naylor, Department of Economics, Warwick 17 Topic 3 Lecture 17 Oligopoly with Cournot Competition

18 Robin Naylor, Department of Economics, Warwick Topic 3: Lecture Now read B&B 4 th Ed., pp , , , , You might also consult: Frank, Chapters Estrin, Laidler and Dietrich, Chapters 11-13, 15, 16


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