Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter
15 of 36 Monopoly
Section
16 of 33
…
Figure 5 here
…
Total
Surplus figure here
…
Per
Figure 5 a monopoly firm, unlike a competitive firm, charges a price above
marginal cost.
For
example, it only costs a pharmaceutical company to make $.50 make an additional
(marginal) medication pill, but because of its patent giving it a monopoly it can
charge $5.00 per pill.
For
consumers, this high price makes a monopoly undesirable.
For
the monopoly firm, it is earning profit from this high price, making the
monopoly desirable.
…
The
question arises:
Do
the benefits to the monopoly firm's owners at least equal the costs imposed on
consumers making the monopoly desirable for society as a whole?
Recall
total surplus measures the economic well-being of buyers and sellers in a
market.
Per
Total Surplus figure
·
total surplus = consumer surplus + producer surplus
·
consumer surplus = consumers' willingness to pay for a good minus the amount
they pay for it
·
producer surplus = the price producers receive for a good minus their costs of
producing it
…
The
equilibrium of supply and demand in a competitive market is not only a natural
outcome but also a desirable one.
The natural
forces of the market leads to competitive markets.
This
results in an allocation of resources that maximizes total surplus.
Because
a monopoly market differs from a competitive market the allocation of resources
must also differ from a competitive market
Therefore
the outcome must fail to maximize total surplus and economic well-being.
… …
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