Consumer and Producer Surplus in a Monopoly

Consumer Surplus is the difference between the amount that a consumer is willing to pay for a good or service and the amount that they are actually charged. This area can be described by the shaded in blue area on the graph below. Producer surplus is the difference between the amount that a firm is willing to supply for a certain price and the amount that they actually sell it for. This area can be described by the red triangle on the graph below. The picture shows the consumer surplus and producer surplus for goods and services at the equilibrium point. However, in the case of monopolies, the consumer and producer surpluses are not the same.

Monopolies are different than perfect competition firms in that they are the sole provider of their good or service. Therefore, they are considered price-makers, as opposed to price-takers. There are many reasons why monopolies are the only firm in their business ranging from high economies of scale, to difficult entry and exit barriers. These businesses often change the shape of consumer surplus and producer surplus. Monopolies produce less of a product but raise the prices for that product, based on their marginal revenue and demand curves. This results in less consumer surplus. The consumer surplus to the left of the price on the demand curve is deadweight loss. Nothing happens to it, however it is no longer beneficial to the consumer. Monopolies also steal some of the consumer surplus and change it into producer surplus. The consumer surplus below the price line is the area that becomes more producer surplus. This results in much producer surplus, a deadweight loss, and a significantly smaller triangle of consumer surplus. It is for this reason that perfect competition is most desirable for society, although unattainable.


a2-micro-consumer-producer-surplus_clip_image001.gif


external image crying-baby-thumb813125.jpg

This picture represents the dead weight loss calculated (the "crying babies").

Sample Question:

The section of the graph that is wasted when producer and consumer surplus is calculated is:
A.Extra Weight Loss
B.Dead Weight Loss
C.Compund Weight Loss
D.Extra Stuff

Answer: B


Links
Microeconomics:Consumer and Producer Surplus
http://en.wikipedia.org/wiki/Monopoly (scroll down to "Price setting for unregulated monopolies")
www.wku.edu/~dennis.wilson/micro/lecture10.doc