# Monopoly Efficiency Deadweight Loss Analysis Monopolies Elasticity Unit

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Monopoly & Efficiency Deadweight Loss Analysis

Monopolies & Elasticity Unit Elastic Ed = 1 Elastic range Inelastic Range --------- ● D Monopolies will: MR 1) Operate only in Elastic Portion of Demand 2) Total Revenue at max when Ed = 1

Efficiency Analysis • Allocative Efficiency is when P = MC – No DWL, socially optimal – Monopolies fail as P > MC – Competitive Firms always pass P = MC • Production Efficiency is when P = Min. of ATC – Monopolies fail as P > min of ATC – Competitive Firms achieve it in long run Monopoly Competitive Firm P > MC (always) P = MC (always) P > min of ATC P = min of ATC (long run)

Deadweight Loss (DWL) • DWL is caused by a monopoly, a tax or subsidy and an effective price floor/ceiling – Unless the tax/subsidy is correcting a market failure! • No DWL when P = MC (MB = MC) – if P > MC => market is too small • Example: misplaced tax or monopoly (or price ceiling…) – if P < MC => market is too big • Example: misplaced subsidy

Inefficiency of Monopoly Price MC DWL Monopoly price Competitive EM P > MC Allocative Efficiency P = MC EC Price For competitive industry P = D= MR Market demand is MR So @ Ec MR = MC D= Market Demand Curve MR 0 Monopoly Competitive quantity Quantity

Deadweight Loss Analysis • Revenue from a tax is transferred from producer/consumer => to Government • Revenue from a subsidy is transferred from Gov’t => to producer/consumer • Monopoly excess profit is a transfer of consumer surplus => to private firm Excess profit => some consumer surplus turns into monopoly profit Monopoly Price ------------------- PC Deadweight Loss -------------- Competitive Price PM QM QC as P > MC

Worksheet • Monopoly & Deadweight Loss

Ray Ban Sunglasses? • https: //www. youtube. com/watch? v=g. Ddq 2 r. Iq. Al. M

Collusion & Cartels • Collusion – An agreement among firms about Qty to produce or price to charge – Antitrust laws prohibit this behavior in USA • Cartel – A group of firms acting in unison – Example: OPEC, De. Beers OPEC Meeting

How to become a price setter

De. Beers Video • http: //www. youtube. com/watch? v=u. RGp 0 x 8 ZE 8 w