Lecture on Monopoly Economics

Demand and Revenue in Monopoly

• Monopolist's Demand Curve
  • Downward sloping and represents the market demand, as the monopolist is the sole firm.
  • Equal to the average revenue curve.
• Marginal Revenue Curve
  • Falls below the demand curve.
  • Twice as steep as the demand curve.

Cost Equations

• Average Total Cost (ATC) and Marginal Cost (MC)

Profit Maximization

1. Set Marginal Revenue (MR) equal to Marginal Cost (MC)
   • Intersection gives the quantity (Q) for profit maximization.
2. Determine Price from Demand Curve
   • Monopolist chooses quantity, not price.
   • Consumers' willingness to pay determines price.
3. Calculate Profit
   • Profit = (Price - ATC) × Quantity.
   • Determine ATC at profit-maximizing Q for graphical profit area.

Impacts on Society

• Monopolist's Pricing and Quantity
  • Charges a price higher than MC.
  • Produces less quantity compared to perfect competition.
  • Limits consumer choice, reducing societal welfare.
• Rent-Seeking and Resource Misallocation
  • Inefficient production leads to misallocated resources.
  • Fails to maximize total surplus.

Deadweight Loss

• Definition
  • Loss of surplus due to monopolist setting price above MC and producing less than socially optimal quantity.
  • Creates a wedge between consumer's willingness to pay and producer's cost.
• Graphical Representation
  • Consumer surplus: area below demand and above price up to the consumed quantity.
  • Producer surplus: area below price and above supply curve up to the produced quantity.
  • Identifying Deadweight Loss Triangle
    • Corner 1: Intersection of MC and demand curve (socially optimal quantity).
    • Corner 2: Intersection of MC and MR (monopolist's quantity).
    • Corner 3: Intersection of price and demand curve (price above MC).

Final Points

• Steeper demand curves result in greater deadweight loss.
• The deadweight loss triangle is defined by the above three points, identifying areas of loss in the market.