Monopoly Deadweight Loss
Consumer and Producer Surplus
- The monopoly will produce at an output of ________ and price of ________.
- Consumer surplus is the area above the price but below the demand curve.
- Producer surplus is the area below the price but above the marginal cost. This is because the marginal cost shows us the price the business is willing to sell at and the price is what they actually receive (so the difference is the producer surplus).
Deadweight Loss
- The allocatively efficient point is where Marginal Benefit = Marginal Cost which is at an output of ________. This is also the market equilibrium and where a perfectly competitive market would produce.
- A monopoly will always produce a lower output and charge a higher price which creates a deadweight loss to society. This is the triangle between the quantity of 20 and 30.
Example: Monopoly Deadweight Loss
The demand equation for a monopoly is P = 100 - 2Q, marginal revenue is given by MR = 100 - 4Q, the marginal cost and average total cost are given by MC = ATC = 20. Find the output, price, profit and deadweight loss.
Step 1. Make MR = MC
100 - 4Q = 20
80 = 4Q
Q = 20
Step 2. Plug that Q in demand to get the price
P = 100 - 2(20)
P = 60
Step 3. Find the profit using the formula:
Profit = (P - ATC) * Q
Profit = (60 - 20) * 20 = 800
For deadweight loss first find the point where Demand = MC (which is the point of allocative efficiency)
100 - 2Q = 20
80 = 2Q
Q = 40
Deadweight loss is the triangle base * height * 1/2
DWL = (40 - 20) * (60 - 20) * 1/2 = $400