Compare Monopoly to Competition

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Compare Monopoly to Competition
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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.
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P
S
Pc
D
Q
Qc
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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.
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Comparison continued
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

S MC
Pm
Pc
D
Q
Qm Qc
MR
where MRMC and charges the price on the demand
curve at that Q.
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P
The graph reproduced
a b c d e f g h
Pm Pc
Q
Qm Qc
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Referring to the previous slide comp monop
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.
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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.