Topic 3 : Lecture 17

1
Topic 3 Lecture 17
Perfect competition and Consumer Surplus
p
S
pc
D
X
Xc
Consumer Surplus is given by? And Producer
Surplus?
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Topic 3 Lecture 17
Monopoly and Consumer Surplus Suppose a
monopolist takes over the previously competitive
industry.
p
MC
The Monopolist faces the Market Demand Curve.
AC
S
pc
We assume that the Monopolists Cost Curves are
simply the sum of those of the individual
competitive firms.
D
X
Xc
Consumer Surplus under Monopoly is given by? And
Producer Surplus under Monopoly?
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Topic 3 Lecture 17
Monopoly and Consumer Surplus Suppose a
monopolist takes over the previously competitive
industry.
p
MC
AC
pm
S
pc
D
MR
X
Xc
Xm
Consumer Surplus under Monopoly is given by? And
Producer Surplus under Monopoly?
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Topic 3 Lecture 17

• Monopoly welfare loss recap
• A monopoly firm takes over. The Market Demand is
  now the same as that for the individual firm how
  much will it produce? Price?

LMC
LAC
p
Identify p, X, CS, PS under monopoly. Compare PS
and CS under Monopoly and under Perfect
Competition.
S
D
MR
X
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Topic 3 Lecture 17
Monopoly and Consumer Surplus An alternative
representation of the Deadweight Loss of Monopoly
(see also BB p. 469)
p
MC
AC
pm
S
pc
D MB
MR
X
Xc
Xm
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Topic 3 Lecture 17

• Algebra of monopoly (this is essentially the same
  analysis as that of Lecture 12 Slide 13)

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Topic 3 Lecture 17

• Monopolistic competition
• Like Perfect Competition, there are many firms
• Unlike Perfect Competition, each faces a
  downward-sloping demand curve (why?)
• Industry equilibrium is when each just breaks
  even

p
LAC
LMC
Here the industry is not in equilibrium Why
not? What happens next?
D
MR
X
8
Topic 3 Lecture 17

• Monopolistic competition
• Like Perfect Competition, there are many firms
• Unlike Perfect Competition, each faces a
  downward-sloping demand curve (why?)
• Industry equilibrium is when each just breaks
  even

p
LAC
LMC
Here the industry is in equilibrium Why?
D
MR
X
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Topic 3 Lecture 17

• Oligopoly
• Few firms (in our models, well typically assume
  2 for simplicity)
• Interdependent (Why?)
• Various possible behaviours
• Collusive
• Cournot (quantity) Competition

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Topic 3 Lecture 17

• Collusive Oligopoly
• Here the firms simply act as if they were a
  single monopolist
• They determine profit-maximising output and each
  produce, say, half of that output. The price is
  the monopoly price and the welfare loss, compared
  to perfect competition, is the monopoly welfare
  loss.
• Example if pa bX and MCACc, then each firm
  produces
• So total output is (a c)/2b, the same as under
  monopoly.
• It is not then difficult to work out market
  price, supernormal profits, Consumer Surplus, and
  Welfare (Loss)
• Note, under Perfect Competition, output is (a
  c)/b.
• (Because cpa bX)

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Oligopoly with Cournot Competition

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Topic 3 Lecture 17

• Now read BB 4th Ed., pp. 370-377, 389-390,
  469-471, 530-541, 558-560.
• You might also consult
• Frank, Chapters 11-13
• Estrin, Laidler and Dietrich, Chapters 11-13, 15,
  16