Overview
This lecture discusses efficiency under monopoly compared to perfect competition, focusing on productive and allocative efficiency, and illustrates why monopolies are considered inefficient.
Efficiency Under Monopoly
- Monopoly output is neither productive efficient (minimum cost) nor allocative efficient (maximizes societal well-being).
- Productive efficiency occurs at the lowest point on the average total cost (ATC) curve, where marginal cost (MC) equals ATC.
- In a monopoly, output is not at minimum ATC, meaning goods could be produced more cheaply.
- Allocative efficiency happens when the value to consumers (demand) equals the cost of production (MC).
- Monopolies underproduce because their profit-maximizing quantity is less than the allocatively efficient quantity.
- The benefit to society of producing additional units exceeds the marginal cost, but the monopolist restricts output to maximize profit.
Deadweight Loss and Social Implications
- Deadweight loss is the value of trades that do not occur because a monopoly restricts quantity.
- The area between the monopoly output and the allocatively efficient output represents lost societal welfare.
- Monopolies create higher producer surplus and lower consumer surplus compared to perfect competition.
Comparison: Monopoly vs. Perfect Competition
- Perfect competition yields higher total surplus (consumer plus producer surplus) and no deadweight loss.
- In perfect competition, the market supply equals marginal cost, and the market quantity is where demand meets supply.
- Monopoly price is higher and quantity is lower than in perfect competition.
Key Terms & Definitions
- Productive Efficiency — Producing at the minimum average total cost (ATC); no resources wasted.
- Allocative Efficiency — Producing where the value to consumers (demand) equals the marginal cost (MC).
- Deadweight Loss — The loss of societal welfare due to underproduction in monopoly.
- Consumer Surplus — Benefit to consumers above what they pay for a good.
- Producer Surplus — Profit to producers above their cost of production.
Action Items / Next Steps
- Review lecture notes and the textbook on monopoly efficiency.
- Prepare for this week’s quiz and assignment on market efficiency.