Social Cost of Monopoly

A loss in social wefare is caused by too Little output at too high a

price when compared to competitive markets.

Monopoly underproduction— Monopoly firms tendency to restrict

output to increase prices and earn economic profit.
Social cost to employees and suppliers comes in the form of reduced
empoyment and opportunities associated with lower productio in
monopoly input markets .
Monopolies have incentives to restrict output creating scarcity to
earn economic profit.
Formidable entry barriers shelter inefficient monopoly firms from
risks of lossing market share to more efficient rivals.

Deadweight loss—decline in social welfare due to the drop in

mutually beneficial trade activity caused by monopoly

Estos ejemplos son con Perfect Competition o Competitive Market

Competitive Market Supply Curve for Unlimited Monthly Long
Distance Service

QS=-40+4P Resolver para P

4P=40+ QS Cambiar ecuacion
4P/4=40/4+ QS/4 Cancela P: 4 divide 4 y 40; (1)Q/4=0.25
P=$10+0.25QS

Competitive Market Demand Curve for Unlimited Monthly Long

Distance Service
QD=170-2P
2P=170-QD
2P/2=170/2-QD/2
P=85-$0.50QD

To Find Market Equillibrium Levels For P and Q Set MS=MD

Supply =Demand Reagrupa
-40+4P=170-2P Al cambiar de lado signo cambia
4P+2P=170+40 Suma los dos lados
6P=210 Cancela P
6P/6=210/6 Divide entre 6 a ambos lados
P=$35
To Find Market Equillibrium Quantity
Supply=Demand Iguala Supply y Demand
$10+$0.25Q=$85-$0.5Q Ingresa Precios de S y D
$0.25Q+$0.50Q=$85-$10 Reagrupa con Q a la izquierda y Suma o resta
.75Q=$75 Aisla Q: divide entre .75
.75Q/.75=$75/.75 Divide
Q=100(Million) Esto son clientes

Ahora es con Monopoly para Comparar

Optimal Price /output Combination

MR=MC P de Demand es MR; P de Supply es MC
$85-$0.5Q=$10+$0.25Q Ingresa los datos
$0.50Q+$0.25Q=$85-$10 Reagrupa con Q a la izq. suma y resta
$0.75Q=$75 Aisla Q; Divide entre.25
Q=1 ¿Hay error.en el Libra? Usaron 1Q, no.50Q

Ojo: No es error. En el libro dice que Market Demand Curve y

Marginal Revenue Curve corresponden. Imagine que redonda .5
a1.
Q-$0.25Q=$85-$10 Recuerda Q es igul a 1Q
$1.00Q+$0.25Q=$85-$10
$1.25Q+$75 Aisla Q; Divide entre1.25
Q=60
Verifica con calculadora

At Q=$60 (Quiere decir usas $60 en vez de Q y multiplicas)

Como estamos calculando TR usamos el P de Demanda
P=$85-$0.5(Q) Usamos función de Demanda y Q=60
P=$85-$30 Restamos
P=$55 Millones por mes

By comparison
Competitive Market Monopoly
Customers 100 million 60 milion
Market Price $35 $55

In monopoly there is less supply at a higher price which benefits

firms but hurts customers. Firms restrict output to increase price and
and earn economic profits. This DECLINE in SOCIAL WELFARE DUE
TO THE DROP IN MUTUALLY BENEFICIAL TRADE ACTIVITY
CAUSED BY MONOPOLY IS CALLED THE DEADWEIGHT LOSS FROM
MONOPOLY PROBLEM.

Value of Lost Consumer Surplus

Consumer Deadweight Loss=1/2[(100-60)*($55-$35)]

CDL=1/2[(100-60)*($55-$35)] Q de PC-Q de Mon*P de Mon-P de PC

CDL=1/2[40*20] Resta lo de paréntesis y Multiplica
CDL= ½[800] =800/2 La mitad de esa resta es resultado
CDL=$400 million/ month

Producers Deadweight Loss=1/2[(100-60)*($35-$25)]

PDL=1/2[(100-60)*($35-$25)]
PDL=1/2[40*$10]
PDL=1/2(400)=400/2
PDL=$200 million /month

Total Deadweight Loss= Consumer Loss+Producer Loss

TDL=$400+$200
TDL=$600 millions per month