1 Compare Monopoly to Competition. 2 Compare monopoly with competition The main results here are the ideas that ----1) a monopoly firm will charge a higher.

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Presentation transcript:

1 Compare Monopoly to Competition

2 Compare monopoly with competition The main results here are the ideas that ----1) a monopoly firm will charge a higher price than would occur in competition and ----2) a monopoly will sell less output than would occur in competition. There seems to be a notion in the world that monopolies will charge us outrageous prices. Economics does not settle this claim, but the science of Economics does tell us that we get higher prices than in competition. But, there are some willing to pay the higher price.

3 Q P D S Pc Qc

4 On the previous slide we have the competitive market. Note the demand is coming from many consumers in the market. The demand from each person is essentially the marginal benefit curve of each person. Note the supply is coming from many suppliers. The supply from each firm is basically the marginal cost curve (that part above AVC). Because there are so many players in the market, none has an influence on price, so the “market” determines the price and each buyer and seller takes the price. Now, if the industry is monopolized, one seller would meet all the consumers. Thus, the monopolist would see a MR curve and treat S as a MC curve.

5 Comparison continued $ Q D MR S = MC Pm Pc Qm Qc If you focus your eyes on the point where S = D you see the competitive point with Pc and Qc. If you focus on the point where MR = MC you see the monopoly point with Qm and Pm (Note Pm is on demand curve above where MR and MC cross.). Assume that a monopolist comes in and buys up all the firms. It then operates where MR=MC and charges the price on the demand curve at that Q.

6 Pm Pc Qm Qc P Q a b c d e f g h The graph reproduced

7 Referring to the previous slide: compmonop con surp a b c d e a b Prod surp f g h c d f g So, consumers lose surplus of b, c, and e due to monopoly. Producers gain c and d from the consumers, but lose h. Overall, there is a deadweight loss of e and h. This loss is a major reason why we have laws against monopoly. The Sherman Act of 1890 is the first law in US to be against monopoly. We have had revisions since, but basically this law is the driving force.

8 Problems of monopoly The problems of monopoly are higher price and less output than in competition. Moreover, 1) The higher price means those who still buy have less money to spend on other things – c and d are surplus areas that consumer used to have for other things but now pays to monopoly. 2) Those who no longer buy must be worse off because they get less than what they were at their liberty to purchase under competition – area e represents the value of lost output to the consumers and is part of the deadweight loss of monopoly.