HAT Manifesto Part 1/3 - Rubric Cube - 250406 edit

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 15 of 32 - Monopoly

Section 18 of 34

Figure 8 - The Inefficiency of Monopoly

In a monopoly situation

· a price is charged above marginal cost

· not all consumers who value the good at more than its cost can buy it

· the monopoly quantity supplied is less than the efficient quantity

The resulting deadweight loss is shown by the shaded triangle area between

· the demand curve, which shows the value of the good to consumers

· the marginal cost curve, which shows the costs of the monopoly producer

…

If a benevolent social planner was running a monopoly firm the firm could achieve the efficient outcome for the economy and society where total surplus is maximized, with no deadweight loss.

This would be done by charging price M at the intersection of the demand and marginal cost curves.

Price M would result in maximized total surplus and elimination of the deadweight loss.

However, at price M the firm would lose all of its profit, in effect the monopoly firm would become a competitive one.

…

We can evaluate the welfare effects of monopoly by

· comparing the level of output the monopolist chooses: the monopoly quantity, here Q1

· to the level of output a social planner would choose: the efficient quantity, Q2

The monopolist chooses to produce and sell the monopoly quantity of output where the marginal revenue and marginal cost curves intersect, Q1.

…

At any quantity greater than Q1

· the cost of the marginal product

· is more than the marginal revenue it generates

· profit can be increased by decreasing output quantity

At any quantity less than the monopoly quantity

· the cost of the marginal quantity

· is less than the marginal revenue it generates

· profit can be increased by increasing output quantity

At monopoly price D and monopoly quantity Q1 profit for the firm is maximized, area DEFG.

At efficient outcome price M and quantity Q2 profit for the firm becomes zero.

…

In a monopoly situation where there is only one producer in the market is the resulting deadweight loss completely reduced consumer surplus or half-half reduced consumer surplus and producer surplus?

ChatGPT:

In a monopoly situation, the deadweight loss (DWL) represents the total loss in economic efficiency compared to a perfectly competitive market.

It's the value of the trades that no longer happen due to the monopolist setting a higher price and producing a lower quantity than what would occur in a competitive market.

Breakdown of Deadweight Loss:

Consumer surplus shrinks because:

Consumers pay a higher price.

Some consumers who would have bought at the competitive price no longer buy.

Producer surplus may increase (compared to perfect competition) because:

The monopolist earns higher profit per unit.

But it produces fewer units, so total gain depends on the elasticity of demand.

Deadweight Loss Origin:

The DWL is not a transfer from consumer to producer.

It represents a total net loss to society — trades that would have generated mutual benefit don’t happen.

So the DWL is neither entirely from consumer surplus, nor split evenly.

It typically comes more from consumer surplus, but some can come from producer surplus too, depending on cost structures.

In Summary:

Deadweight loss in monopoly is not entirely lost consumer surplus, nor is it evenly split with lost producer surplus.

It is a net loss that primarily comes from consumer surplus, but part may also come from producer surplus depending on the specific market dynamics.

… …

efficient and inefficient

kōritsuteki to hikōritsuteki

効率的と非効率的