Comparison to Competitive
Equilibrium
• A consumer sets
Monopoly versus Competition
MRS=P
CS
P**
π
DWL
MC
P*
D
MR
Q**
Q*
Lectures in Microeconomics-Charles W. Upton
Comparison to Competitive
Equilibrium
• A consumer sets
MRS=P
• A competitive firm sets
MC = P
Monopoly versus Competition
Comparison to Competitive
Equilibrium
• A consumer sets
MRS=P
• A competitive firm sets
MC = P
• Of course,
MC = MRT
Monopoly versus Competition
Comparison to Competitive
Equilibrium
Monopoly versus Competition
Comparison to Competitive
Equilibrium
MRS = P = MC
MRS = P
Monopoly versus Competition
Monopoly versus Competition
1
Comparison to Competitive
Equilibrium
Comparison to Competitive
Equilibrium
MC = MRT
MRS = P = MC = MRT
MC = MRT
The basic
requirement
economic
efficiency.
MRS
= P =forMC
= MRT
Monopoly versus Competition
The rate at which the consumer is willing to
substitute apples for bananas (say) is just equal to
the rate at which we can transform apples into
bananas.
Monopoly versus Competition
How the Monopolist Does It
How the Monopolist Does It
MRS=P
MR=MC
MRS=P
MR=MC
P > MR⇒ P> MC
Monopoly versus Competition
How the Monopolist Does It
MRS=P
MR=MC
P > MR⇒ P> MC
MC=MRT
MRS>MRT
Monopoly versus Competition
Monopoly versus Competition
How the Monopolist Does It
The monopolist
MRS=Pviolates the
fundamental requirement for economic
efficiency.MR=MC
Price is above Marginal
Cost
P > MR⇒(MRT)
P> MC
MC=MRT
MRS>MRT
Monopoly versus Competition
2
A Graphical Presentation
A Graphical Presentation
CS
MC
P*
MC
P*
D
D
Q*
Q*
Monopoly versus Competition
Monopoly versus Competition
A Graphical Presentation
A Graphical Presentation
P**
CS
P**
MC
P*
MR
MC
P*
D
MR
D
Monopoly versus Competition
Q**
Q*
Monopoly versus Competition
Q**
Q*
A Graphical Presentation
A Graphical Presentation
CS
P**
CS
P**
π
π
MC
P*
MR
Monopoly versus Competition
Q**
Q*
D
DWL
MC
P*
MR
D
Monopoly versus Competition
Q**
Q*
3
A Graphical Presentation
The social cost of a
monopoly: the Dead
Weight Loss
CS
P**
π
A Graphical Presentation
DWL
MC
P*
D
MR
Monopoly versus Competition
Q**
Q*
Suppose we could run the The social cost of a
monopolyCS
without any
monopoly: the Dead
Dead Weight Loss?
P**
Weight Loss
Would monopolies
then be
π
DWL
objectionable?
MC
P*
D
MR
Monopoly versus Competition
Q**
Q*
End
©2004 Charles
W. Upton
Monopoly versus Competition
4