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Topic 3 : Lecture 17

Topic 3 : Lecture 17. Perfect competition and Consumer Surplus. p. S. p c. D. X. X c. Consumer Surplus is given by? And Producer Surplus?. Topic 3 : Lecture 17. Monopoly and Consumer Surplus: Suppose a monopolist takes over the previously competitive industry. p. MC.

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Topic 3 : Lecture 17

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  1. Topic 3 :Lecture 17 Perfect competition and Consumer Surplus p S pc D X Xc Consumer Surplus is given by? And Producer Surplus? Robin Naylor, Department of Economics, Warwick

  2. 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 Monopolist’s 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? Robin Naylor, Department of Economics, Warwick

  3. 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 Xm Xc Consumer Surplus under Monopoly is given by? And Producer Surplus under Monopoly? Robin Naylor, Department of Economics, Warwick

  4. 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 p LAC Identify: p, X, CS, PS under monopoly. Compare PS and CS under Monopoly and under Perfect Competition. S D MR X Robin Naylor, Department of Economics, Warwick

  5. Topic 3 :Lecture 17 Monopoly and Consumer Surplus: An alternative representation of the Deadweight Loss of Monopoly (see also B&B p. 469): p MC AC pm S pc D = MB MR X Xm Xc Robin Naylor, Department of Economics, Warwick

  6. Topic 3 Lecture 17 • Algebra of monopoly (this is essentially the same analysis as that of Lecture 12 Slide 13) Robin Naylor, Department of Economics, Warwick

  7. 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 Robin Naylor, Department of Economics, Warwick

  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 Robin Naylor, Department of Economics, Warwick

  9. Topic 3 Lecture 17 • Oligopoly • Few firms (in our models, we’ll typically assume 2 for simplicity) • Interdependent (Why?) • Various possible behaviours • Collusive • Cournot (quantity) Competition Robin Naylor, Department of Economics, Warwick

  10. 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 p=a – bX and MC=AC=c, 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 c=p=a – bX) Robin Naylor, Department of Economics, Warwick

  11. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  12. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  13. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  14. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  15. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  16. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  17. Topic 3 Lecture 17 • Oligopoly with Cournot Competition Robin Naylor, Department of Economics, Warwick

  18. Topic 3: Lecture 17 • Now read B&B 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 Robin Naylor, Department of Economics, Warwick

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