Principles of Microeconomics / Unit 8 MIC 0730 review, 2 to 3 minutes
The Same Market, Run Twice
The idea
The clearest way to see what monopoly costs is to run one market twice, competitive and then monopolized, on the same demand and costs, and lay the results side by side. Under competition, market supply is the marginal cost curve, and the market clears where the demand price equals marginal cost. Every unit that buyers value at or above its cost is made; the last unit is worth exactly what it cost; consumer surplus is the whole triangle under demand and above the price; producer surplus is the area above marginal cost and below the price. Under monopoly, the firm produces where marginal revenue equals marginal cost, a smaller quantity, and charges the demand price at that quantity, a higher price. Three things change. Consumers who still buy pay more, and that money moves to the monopolist: a transfer, no loss to society but a change in who has it. Consumers who would have bought at the competitive price and no longer do lose their surplus, and so do the producers who would have made those units: the deadweight loss, a triangle between demand and marginal cost over the withheld quantity. And the monopolist's profit is the transfer plus its surplus on the units still sold, minus fixed cost. That is why economists object to the output and not only to the price: the price is a transfer equity may or may not accept; the withheld output is value that goes to nobody.
In practice
Worked example: the medicine, demand from eleven to four dollars across one to eight thousand doses, marginal cost two, two, three, four, five, six, seven, eight, fixed cost ten thousand. Competition: six thousand doses at six dollars. Consumer surplus is five plus four plus three plus two plus one plus zero, fifteen thousand; producer surplus is four plus four plus three plus two plus one plus zero, fourteen thousand; total twenty-nine thousand. Monopoly: four thousand doses at eight dollars. Consumer surplus is three plus two plus one plus zero, six thousand; the firm's surplus on the units it sells is six plus six plus five plus four, twenty-one thousand; total twenty-seven thousand. Eight thousand of consumer surplus became the firm's, a transfer. Two thousand vanished, the deadweight loss on the fifth and sixth thousand doses, worth seven and six dollars to buyers and costing five and six.
Where people slip
Three cautions. The two runs use the same marginal cost curve, so the difference is structure alone. The transfer is not the loss: the eight thousand still exists, in the firm's hands. And on a table of whole units the triangle is a staircase, so the two thousand here is the exact loss on these rows, while video seven twenty-three's smooth-curve formula gives four thousand for straight lines through the same points; either is acceptable with the method stated.
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