Answer to Question #106098 in Microeconomics for liz

Question

Explain the output and price level determination behaviors for a monopoly firm both verbally
and graphically. Explain verbally and graphically how the consumer and producer surpluses
change to compare with a market of perfect competition

Answer 1

Monopoly is a market structure where there is only one seller selling unique product in the market. In this kind of market structure, the seller faces no competition as he is the sole seller with no close substitute in which a single producer controls the whole supply of a single commodity which has no close substitute.

Price-output determination under monopoly:

A producer under monopoly is called monopolist. An organization under monopoly constitutes the demand curve of the entire industry. The demand curve of the monopolist is Average Revenue which slopes down. Notably, since the average revenue falls as more units of output are sold; the marginal revenue is less than the average revenue.

The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost.

A producer under monopoly will continue to produce good as long as the Marginal Revenue (MR) revenue exceeds Marginal Cost (MC). When MR is equal to MC the profit is always at maximum and at this time, the monopolist will stop producing.

Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay while producer surplus is P the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price as indicated below:

The sum of consumer surplus and producer surplus is the total surplus. When the total surplus increases, the people in the society are better off. The total surplus is maximized at the market equilibrium quantity. Since a perfectly competitive market produces the market equilibrium quantity, perfect competition maximizes the sum of consumer and producer surplus.