Transcript Slide
Surplus: Consumer and Producer $ Consumer Consumer Surplus in a Monopoly Supply = MC Surplus PM Deadweight loss in a Monopoly PC Producer Surplus in a Monopoly Producer Surplus QM MR for Monopolist QC Demand = WTP Quantity But How Bad? Here the DWL from monopoly is relatively significant Here it is less significant What’s the Difference Between the Two Pictures? The elasticity of the demand curve. Graphically MR curve closer to the demand curve MC closer to P* at Q* Back to the Picture Intuitively With elastic demand curve, small changes in price cause large changes in demand. Takes away much of monopolist’s power to price above cost. Lerner Index of Monopoly Power L = (P-MC)/P = 1/ where is the elasticity of demand Wait a minute…How did I get from (P-MC)/P to 1/ ? (Not that I’d test you on it -- just so you know its legit.) Remember… TR = P * Q = (A-BQ)Q MR = A-2BQ = A - BQ - BQ Since B = slope of the inverse demand curve, B = P/Q Rewrite MR = P - P/Q *Q which we set equal to MC, so... L = (P-MC)/P = (P - P - P/Q *Q)/P = -P/Q *Q/P = 1/ Interpreting the Lerner Index L = (P-MC)/P = 1/ A high Lerner index implies a high price-cost margin and a low elasticity of demand, which in turn implies lots of monopoly power and deadweight loss. Lerner Index Estimates for Selected Industries Automobiles Tobacco Food Processing Coffee Roasting Aluminum Retail Gasoline Soft Drinks 0.100 - 0.340 0.648 0.504 0.055 0.590 0.100 0.64