hello and welcome back to our discussion on monopoly till the last class we discussed
uh how does a firm attain the monopoly status and we went on to see what is the equilibrium
level of price and output that the monopolist decides and today we are going to look at
monopoly supply does the monopolist have a supply curve like the perfectly competitive
firm and what is the efficiency level level uh when monopolist uh decides the level of
price and output is it as efficient as the perfectly competitive equilibrium uh outcome
so these are the questions that we are going to ask in todays class
. so supply curve of monopoly now unlike a perfectly
competitive firm there is no supply curve for monopoly because output for a monopoly
is not determined by price as in the case of perfectly competitive firm but jointly
by marginal revenue marginal cost and the demand curve this is what we saw when we looked
at profit maximization for a uh monopoly firm and we saw that the monopoly firm basically
does not have a supply curve because it decides on the basis of intersection of marginal cost
with marginal revenue it decides what level of output to produce
and then basically he traces back to the demand curve and sees what is the willingness to
pay in the market by the buyers for this amount of output .
so basically the monopolist does not have a supply curve unlike the perfectly competitive
firm who has a so in the case of a perfectly competitive firm uh this is the price line
and this is the marginal cost and we saw that the marginal cost till the average variable
cost is the the minimum average variable cost is the supply curve of a perfectly competitive
firm but that is not the case in case of a monopoly
so uh next we also discussed in the case of a perfectly competitive firm that the long
run equilibrium the final market equilibrium that is achieved in the case of a perfectly
competitive market the productive efficiency is reached and allocative efficiency is reached
but in the case of a monopolist unlike in a competitive market where productive and
allocative efficiency are maximized there is welfare loss in a monopoly market
productive efficiency is compromised because output does not minimize average cost or monopolist
does not decide on the level of output uh does not uh produce that level of output which
minimizes its average cost and allocative efficiency is lost because price is more than
marginal cost in the case of a monopoly firm so deadweight loss is created in case of a
monopoly output so lets see what this means like all the points that i have shown in the
slide lets see what uh what we mean by this .
now in case of a monopoly firm it has a negatively sloping demand curve and it has a marginal
revenue curve which is not the same as the demand curve so demand curve is basically
the price line in the market and we have a marginal revenue curve in case of a monopolist
because the monopolist uh because the monopolist knows that if it reduces the amount of output
price is going to increase or if it increases the next uh unit of output price is going
to fall so there is a output effect and there is a price effect which we discussed in the
previous class so this is the so this is the demand curve
that is facing the monopolist and this is the marginal revenue curve and the monopolist
basically this is the marginal cost curve and lets draw the equilibrium output in case
of a monopolist this is the output that the monopolist produces and he charges a price
along the demand curve he charges a price along the demand curve so he charges a price
of p m and he produces amount q m now this is our monopoly outcome what happens
in the case if we imagine this monopolist be a to be a perfectly competitive firm in
that case what is the output that is going to be produced in the case of a competitive
firm the marginal cost is the supply curve of the firm so if marginal cost is the supply
curve and the perfectly competitive firm basically produces at the level where marginal cost
is equal to price so the competitive output is here competitive output is here and price
that is charged is here so p pc is the price that is being charged
in a competitive market and q pc is the amount that is produced in a competitive setup so
now what is happening in the case of the monopolist lets for the time being ignore the competitive
firm and look at the monopolist now what is the monopolist doing here if you remember
we had discussed about uh producer surplus We had discussed about consumer surplus and
we had showed what is the consumer surplus and what is the producer surplus so looking
at the outcome for the monopolist what is the producer surplus that the monopolist is
basically getting so he is charging a price p m so he is getting a revenue of p m multiplied
by q m which means he is getting this rectangle is his revenue out of this here is the marginal
cost . so everything that he gets above the marginal
cost that is his producer surplus so his producer surplus is basically this green region so
the producer surplus that he is getting is basically this
so this green region is his producer surplus and what is the consumer surplus consumer
surplus is this yellow region
so so this yellow region is the consumer surplus so in case of the let me call it region a
b c so c a b c d and e so the region between the abec is the total consumer surplus and
producer surplus . so in case of the in case of monopoly total
welfare tw in the economy is basically equal to pS producer surplus of the monopolist plus
the consumer surplus of the monopolist is equal to the region apmd plus pmced so which
is basically aced is the region called aced now what so having said that now had it been
a competitive equilibrium had it been a competitive equilibrium we know that production would
have happened here there would be intersection between the demand and the supply curve and
total output would be pc and total price charge would be p total quantity would be q pc and
total price charge will be would be p pc so in that case producer surplus would increase
by this blue amount but this green rectangle would then go to the consumer surplus so this
rectangle of so let me put say i call it o so this rectangle would now then go to the
consumers because so watch carefully now in case of had it been a competitive output then
the price that the firm would be charging would be p pc and in that case everything
above the line bppc that is this line everything above this line would go to the consumers
so the consumers would get this yellow triangle plus this green rectangle plus the consumers
would get this pink region as well so the consumers surplus in case of perfectly competitive
output would be this entire triangle would be this entire triangle
so writing the so let me write the competitive total welfare in the economy would be equal
to consumer surplus in case of perfect competition plus producer surplus in case of perfect competition
now consumer surplus in case of perfect competition would be the triangle apcb so would be ap
pc b plus now the producers in that case the producer would lose this small rectangle which
has gone to the consumers so now the producer gets continues to get this green region plus
the blue triangle plus the blue triangle so now the producer surplus in case of a perfect
competition is the triangle p pc cb so now the producer surplus is this region
so clearly the monopoly total welfare is only this region monopoly total welfare is this
region while perfectly competitive output welfare has a additional triangle of edb so
this region of edb is lost when the market is a monopoly market and this region is basically
that the pink triangle and the blue triangle together this region is the deadweight loss
that the economy is suffering when the market has a single seller when the market has a
single seller or market has a monopoly this is the deadweight loss that is happening in
that case so basically welfare loss happens when the
economy shifts from a perfectly competitive setup to a monopoly setup so this is what
we were trying to explain in this slide and if you may remember we have defined productive
efficiency and productive efficiency is compromised because output does not so uh productive efficiency
is compromised why because the monopolist does not end up producing at the minimum level
of the of its average minimum cost average uh total cost
so so because of that since the monopolist is not operating at its minimum cost hence
it it is possible to still reduce cost further and keep on producing so productive efficiency
is not achieved secondly what happens here in this case this is monopoly price so p m
is clearly more than the marginal cost so p m is clearly more than the marginal cost
so since this is p m and this is the marginal cost since price is more than the marginal
cost it is possible so what does that mean when price is more than marginal cost that
means it is possible for the monopolist to keep on producing and it there will be people
in the market who would be willing to pay for this keep on the the price in that case
would keep on falling Yet one would have customers or consumers in the market to purchase that
good so this amount of output q m q pc this amount
of output is not getting produced in this market because the monopolist is uh trying
to only maximize its profit and its charging a price which is more than the competitive
price as a result the monopolist is eating away from the consumer surplus so the monopolist
although the monopolist is getting a high producer surplus if you can see from here
what is it like one might think then uh what is the what is the interest of the monopolist
to curtail output so clearly if we see from here for the monopolist
the monopolist output is better in a monopolistic output the seller is better off than the buyer
the seller is even better off in the absolute sense because this triangle is much the triangle
that is he is that he is uh losing by producing less amount of output is much smaller than
the rectangle that he is gaining by charging a high price in the market
so since this is happening so the for the monopolist it makes sense to produce a smaller
amount of output charge a higher price eat away from some of the consumer surplus and
uh still be able to stay in the still be able to stay in the market
so that is the reason that it is a uh inefficient outcome because for the entire economy as
a whole so many buyers are getting left out the seller is not producing the optimum quantity
although he would be able to so that is the reason that the monopoly outcome is considered
as inefficient and there is a deadweight loss happening here
so we are going to discuss more on this later and see what uh what can what happens when
the monopolist tries to we are going to discuss something called price discrimination and
we are going to see what happens when the government tries to intervene in a monopoly
market because the monopoly outcome is inefficient thank you