1. Deadweight Loss Analysis
Monopoly & Efficiency
Deadweight Loss Analysis

2. Monopolies & Elasticity
Unit Elastic Ed = 1
Elastic range D MR
Inelastic Range ●
Monopolies will:
Operate only in Elastic Portion of Demand
Total Revenue at max when Ed = 1

3. Efficiency Analysis Allocative Efficiency is when P = MC
No DWL, socially optimal
Monopolies fail as P > MC
Competitive Firms always pass P = MC
Production Efficiency is when P = Min. of ATC
Monopolies fail as P > min of ATC
Competitive Firms achieve it in long run
Monopoly
P > MC (always)
Competitive Firm
P = MC (always)
P > min of ATC
P = min of ATC (long run)

4. Deadweight Loss (DWL)
DWL is caused by a monopoly, a tax or subsidy and an effective price floor/ceiling
Unless the tax/subsidy is correcting a market failure!
No DWL when P = MC (MB = MC)
if P > MC => market is too small
Example: misplaced tax or monopoly (or price ceiling…)
if P < MC => market is too big
Example: misplaced subsidy

5. Inefficiency of Monopoly
Price MR
D = Market Demand Curve MC
DWL
P > MC EM
Allocative Efficiency
P = MC
Monopoly
price
quantity EC
Competitive
Price
Competitive
quantity
For competitive industry
P = D= MR
Market demand is MR
Ec MR = MC
Quantity

6. Deadweight Loss Analysis
Revenue from a tax is transferred from producer/consumer => to Government
Revenue from a subsidy is transferred from Gov’t => to producer/consumer
Monopoly excess profit is a transfer of consumer surplus => to private firm
Excess profit => some consumer
surplus turns into monopoly profit
Deadweight Loss
as P > MC
Monopoly Price PM -
Competitive Price PC QM QC

7. Worksheet
Monopoly & Deadweight Loss

8. Ray Ban Sunglasses?

9. Collusion & Cartels Collusion Cartel
An agreement among firms about Qty to produce or price to charge
Antitrust laws prohibit this behavior in USA
Cartel
A group of firms acting in unison
Example: OPEC, DeBeers
OPEC Meeting

10. How to become a price setter

11. DeBeers Video