hey everybody i'm back for the final lecture for chapter nine and i've misplaced my fake glasses so here we go without them uh so the last thing we want to talk about is efficiency under monopoly and as i promised in the last chapter we'll then be able to compare efficiency under monopoly with efficiency under perfect competition to get a better idea of what we mean by perfect competition is efficient so the profit maximizing output the output we found we looked at monopoly is neither productive nor allocative efficient remember the definition between the two productive efficient means you're not wasting anything because you're not wasting any cost any inputs of production you're doing things as cheaply as possible is another way to think about it allocative efficient means that the amount you produce maximizes the well overall well-being for society let me show you over here why these are not true under monopoly okay so remember this is our outcome we're going to produce 175 epipens i lost my cursor just like that that was fast to see that it's not productive efficient we're going to look at the average total cost curve the average total cost curve shows us that this is the minimum point i know the way this is drawn and i apologize it looks like the minimum dips down a little bit farther but remember the minimum of average total cost is where marginal cost hits average total cost so this is the lowest average total cost could be we're not at that minimum point we are at 400 we're not at the minimum of average total cost so what does that mean it means this monopolist could be producing epipens cheaper than they are they could be doing things cheaper and therefore this is not productive efficient okay not productive efficient okay now as for allocative efficiency and this one's a little bit harder to see but what we're going to do is we're going to think about again we're going to think about 175 epipens that's the amount being purchased here and so here's my demand curve at 175 and here's my marginal cost curve and 175 so think about the next epipen the 176th epipen this is what the demand curve says just under 600 let's call it 590 remember what the demand curve tells us the demand curve tells us that that's someone's willingness to pay for this epipen they're willing to pay 590 dollars that means the benefit they receive the utility they receive the satisfaction they receive is worth 590 dollars the marginal cost of that last that next epipen the 176th epipen is let's call it 210 so that's the cost of producing an epipen is 210. that is the benefit of producing that epipen you sell it to somebody who wants it that much so when we talk about allocative efficiency we don't take sides remember i talked about this back in chapter three and look at price ceilings i don't take the side of the monopolist i don't take the side of the consumer i take the side of society and so i look at how is this affect consumers how does this affect the producer and what i say is you know what that is that's an epipen that should be made society wants this made because the cost is 210 and the benefit is 590 but it's not made because we stopped there at 175 we don't go farther so what we would say is all of this this whole area to the right of 175 up to the point where the marginal cost is equal to the demand this is all dead weight loss remember that term deadweight loss this is all deadweight loss because everywhere along the way between 175 and 2 212 and a half between 175 and right here 212 and a half these are epipens that should be made because the benefit received from those epipens is greater than the cost so society wants those made but they're not because the monopolist says no and you might ask yourself why is he saying no like why is he not selling this if someone's willing to pay 590 why isn't he selling it to them um remember the the reason we ended up with this this number 175 is that's where profit is maximized if you go any further than 175 you sell that 176th yes you can sell it for 590 but remember that means those 175 epipens all have to get cheaper too right we're not going to sell 175 of them for for 600 bucks and then one for 590 that's not how it works that means we're going to sell 176 for 590 and that's why we can see that the marginal revenue is actually below the marginal cost so that's that's not good for the monopolist so the monopolist stops at 175 to maximize their profit but from the perspective of society we wish they wouldn't have because if they went a little farther produced a few more epipens made them a little cheaper society would be better off okay so that's what we mean by not being allocative efficient so last thing i want you to do so in if you have trouble following that you can look through the notes and this is written here and also of course read the text if you have trouble following but here i'm comparing a perfectly competitive market to a monopoly market and i drew it this way to simplify things with straight lines because sometimes with the curves it's a little bit hard to see what's going on so i think the straight lines somehow sometimes make it a little easier to see um the outcomes and so this is our perfectly competitive market this is the one we've had since chapter three right remember this is not an individual firm this is the whole market a lot of firms competing and you end up in the market supply market demand here's consumer surplus here's producer surplus hopefully this is not new to you because we saw it in chapter three and this is the monopoly market so now i have a downward sloping marginal revenue curve and the quantity so qm is the quantity for the monopolist is right here this is how many the nobles produces and that's the price up here and so what we see graphically is consumer surplus gets a lot less and that shouldn't surprise you competition is good for consumers a lack of competition is better for the firms and producer surplus increases and it increases a lot and that shouldn't surprise you also right because firms and monopoly are doing better than making more profit so that's what we've witnessed has been increasing producers surplus a decrease in consumer consumer surplus but as a result we get this deadweight loss so that's why we say monopoly market is inefficient and the perfectly competitive market is efficient this is what allocated efficiency is there's no more good trades to be made remember the supply curve is the marginal cost the demand curve is the benefit to consumers so if we go farther than the quantity the perfect competitive quantity if we go any farther notice that the cost to the firm is greater than the benefit to society so society doesn't want this remember we're not taking sides society doesn't want that sale to happen because the cost to the firm is greater than anyone's going to benefit from it that's not the case here we don't want to stop here because for every unit to the right of qm in this whole deadweight loss area the benefit that's the demand curve is greater than supply that's the cost this is something that should have happened the very last thing we're going to do before i close out these lectures is there was too many more questions here at the bottom if this market was productive efficient how many epipens would or how much would epipens cost so if this was productive efficiency instead of allocated efficient then that would be my outcome right there marginal cost its average total cost that's the minimum of average total cost so that would be the cost of epipens it looks like it's about 540 again allocative or sorry productive efficient is the minimum of average total cost so our average total cost hits marginal cost if this market was allocated efficient how much would epipens cost well now we're looking at where the demand hits the supply and remember the supply curve is the marginal revenue so that's this point right here and they'd cost 500 bucks so that's it those are that's the last bit for to find a productive efficient point you look where marginal cost is average total cost to find the allocated efficient point you look where marginal cost hits demand so let me know if you have any questions other than that good luck in this week's uh quiz and assignment bye stop recording oh it's because the album because the