Monopolist optimizing price: Dead weight loss | Microeconomics | Khan Academy

Based on what we've donein the last 2 videos we've been able to figure out what the marginal revenue curve looks like for the monopolist year, for the monopolist in the orange market and this is what we got.

Right over here, itwas a line with a slope twice as steep as theslope of the demand curve, we'll see that's actually generalizable.

There's an optional video that I'll do very shortly where I prove it with alittle bit of calculus.

It's very important to realize that this marginal revenue curve looks very different thanthe marginal revenue curve if we were dealing withperfect competition.

If we were dealing withperfect competition there would be someequilibrium price in the market and all of the competitors would essentially justhave to take that price.

Let's say that that equilibriumprice was $3 per pound then our marginal revenuecurve would look like this if we were not a monopolist, if we were one of themany perfect competitors.

I guess you could view it that way.

Because we would justhave to take that price.

If we wanted to sell 1000 pounds, each of those pounds wewould get $3 per pound and then if we want to sell 1001, we'll just get $3 perpound for the next one.

It doesn't change.

We're just taking that price.

With the monopolist things do change because we are the onlyproducer in the market.

The price at which we can get changes depending on what we produce because we are the entiresupply for the market and we have this downward sloping marginal revenue curve.

Now, with that out of the way, let's think about what willbe the optimal quantity for us to produce if wewanted to maximize profit? If we think in pure economic terms, that's what firms try to do.

They exist to maximise profit.

To do that, we're goingto have to think about, and remember, it's notto maximize revenue.

To maximize revenue we would have said, “Oh, they should justproduce 3000 pounds.

” It's not about maximizing revenue, it's about maximizing profit.

We have to take thecost into consideration.

To do that, we'll have todraw a marginal cost curve.

Let's say I did the research.

Let's say we're the owners of this firm and we have a marginal cost curve that looks something like this.

Let's say our marginalcost curve looks like this.

It's important to realize, we are the market.

We are the only producers here.

This isn't just our marginal cost curve.

This is a marginal costcurve for the market.

Another way to think about it, this is the supply curve for the market.

It tells you at any given price how much the market is willing to supply.

You could view it as a marginal cost or you could view it as a supply curve and we've talked about it before.

You could view a supply curveas a marginal cost curve.

If you want the marketto produce 1 extra pound, what's the minimum priceyou would have to give? that is the marginal cost.

Now, with this out of the way, let's think about what you would produce.

Well, you would definitelywant to produce something you definitely start to producea few pounds right over here because the marginalrevenue you're getting is way above your marginal cost.

Each incremental pound you'reproducing right over here, you're getting much more revenue, you're getting $5 or $6 of revenue and it's only costing youa little over a dollar.

It's like, “Okay, I'mgoing to keep producing.

“I'm going to keep producing.

” Over here, you're still, each incremental unit you're getting, you're still getting more revenue than the cost of that incremental unit.

That keeps being true all the way until you get to 2000pounds right over here.

At this point right over here you don't want to producean incremental unit because if you produce one more unit, if you produce that 2001stpound right over here then for that 2001st pound, your cost is going to be slightly higher than the revenue you get in.

You will actually takea slight loss on that.

Your total profit will start to go down and you don't want toproduce less than this because you'll be leaving alittle money on the table.

You'll be leaving thatlittle incremental pound where the total revenuewas just slightly higher, or the marginal revenueon that incremental pound was just slightly higherthan your marginal cost on that incremental pound.

You will produce right over there.

Now, this is interesting because this is a different equilibrium, or I guess we say thisis a different price or this is a different price and quantity than we would get if we were dealing withperfect competition.

If we were dealing withperfect competition, our equilibrium price and quantity would be where our supplyand demand curves intersect.

It would be right over here.

It would be a price of $3 per pound and a quantity of 3000 pounds.

Now, in order to maximize profit, we are intersecting betweenthe marginal revenue curve or our quantity that we want to produce as the monopolist is the intersection betweenour marginal revenue curve and our marginal cost curve which is right over here.

So we can see that thereis a dead weight loss.

There is a dead weightloss by being a monopoly although it's good for us.

It's good for the monopolist, it's not good for a societyat least in this example and there's very few whereI can imagine it being good but I guess there are a few if you're trying to protectthe national industry or something like that.

Over here, this is the quantity that we are deciding to produce.

The consumer surplus isthe area above the price and below the demand curve.

This right over here isthe consumer surplus.

The producer surplusis looking pretty good and this is essentially whatwe're trying to optimize.

Our producer surplus is this whole area.

Our producer surplus is this whole area right over here.

Producer surplus right over there.

But we have a dead weight cost.

There's a total surplusthat we would have gotten, that society would have gotten if we were dealing withperfect competition, right over here that's now being lost.

But as we lose that, we were able to increase the producer surplus and decrease the consumer surplus.

Beyond just having thisdead weight loss over here, it's also obviously given much more value to the producer, to the monopolist and given much less value to the consumer.


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