Monopolist Optimizing Price (part 3)- Dead Weight Loss.avi

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Monopolist Optimizing Price (part 3)- Dead Weight Loss.avi발음듣기

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Based on the last two videos we've been able to figure out what a marginal revenue curve looks like for the monopolist here, for the monopolist in the orange market.발음듣기

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This is what we got.발음듣기

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Right over here is a line with a slope twice as, twice as steep as the slope of the main curve. and we'll see that's actually generalizable.발음듣기

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

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But it is very important to realize that this marginal revenue curve looks very different than the marginal revenue curve if we were dealing with perfect competition.발음듣기

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If we were dealing with perfect competition there would be some equilibrium price in the market and all the competitors would essentially just have to take that price.발음듣기

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So let's say that the equilibrium price was $3 per pound.발음듣기

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Then our marginal revenue curve would look like this.발음듣기

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If we were not a monopolist.발음듣기

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If we were a one of the many perfect competitors.발음듣기

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I guess you could view it that way.발음듣기

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Because we would have to just take that price.발음듣기

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If we wanted to sell 1000 pounds, each of those, each of those pounds we would get $3 per pound and then if we wanted to sell 1001 we will just get $3 per pound for the next one.발음듣기

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It doesn't change.발음듣기

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We are just taking that price.발음듣기

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With the monopolist things do change because we are the only producer in the market.발음듣기

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The price at what which we can get changes depending on what we produce because we are the entire supplier for the market.발음듣기

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And we have this downward sloping marginal revenue curve.발음듣기

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Now with that all the way, let's think about what would be the optimal quantity for us to produce if we wanted to maximize profit.발음듣기

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And if we think in pure economic terms that's what firms try to do.발음듣기

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They try to, their exist to maximize profit and to do that we are going to think about.발음듣기

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Remember it is not to maximize revenue.발음듣기

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To maximize revenue we would say oh they should just produce 3000 pounds.발음듣기

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But it is not about maximizing revenue.발음듣기

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It's about maximizing profit we have to take the cost into consideration and to do that we'll have to draw a marginal cost curve, and so let's see I did the research, so let's say the owners of this firm.발음듣기

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And we have a marginal cost curve that looks something like this.발음듣기

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Let' say our marginal cost curve looks like this.발음듣기

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It is important to realize we are the market.발음듣기

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We are the only producers here.발음듣기

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So this isn't just our marginal cost curve.발음듣기

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This is the marginal cost curve for the market.발음듣기

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Or in another way to think about it.발음듣기

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This is the supply curve for the market.발음듣기

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It tells you in any given price how much the market is going to supply.발음듣기

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You could view as the marginal cost or you could view it as a supply curve and we have talked about it before - you could view a supply curve as a marginal cost curve.발음듣기

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If you want the market to produce one extra pound what's the minimum price you would have to give and that is the marginal cost.발음듣기

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

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Well you would definitely, you would definitely want to produce something, you definitely start to produce a few, a few pounds right over here because the marginal revenue that you are getting is way above your marginal cost.발음듣기

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Each incremental pound you are producing right over here, you are getting much more revenue.발음듣기

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You are getting you know 5 or 6 dollars of revenue it's only costing you a little over a dollar.발음듣기

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SO you just think, ok I'm gonna keep producing, I'm gonna keep producing over here.발음듣기

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Your still, each incremental unit you are getting, you are getting more revenue than the cost of that incremental unit.발음듣기

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And then it keeps being true all the way until you get to, all the way until you get to 2000 pounds right over here. at this point right over here you don't want to produce an incremental unit.발음듣기

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if you produce that 2001st pound right over here then for that 2001st pound, your cost is going to be slightly higher than the revenue you get in.발음듣기

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You will actually take a slight loss on that.발음듣기

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

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You'll be leaving that little incremental pound where the total revenue was just slightly higher, or the marginal revenue on that incremental pound was just slightly higher than your marginal cost on that incremental pound.발음듣기

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You will produce right over there.발음듣기

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

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If we were dealing with perfect competition, our equilibrium price and quantity would be where our supply and demand curves intersect.발음듣기

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It would be right over here.발음듣기

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

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

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So we can see that there is a dead weight loss.발음듣기

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There is a dead weight loss by being a monopoly although it's good for us.발음듣기

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

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

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

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This right over here is the consumer surplus.발음듣기

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The producer surplus is looking pretty good and this is essentially what we're trying to optimize.발음듣기

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Our producer surplus is this whole area.발음듣기

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Our producer surplus is this whole area right over here.발음듣기

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Producer surplus right over there.발음듣기

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But we have a dead weight cost.발음듣기

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There's a total surplus that we would have gotten, that society would have gotten if we were dealing with perfect competition, right over here that's now being lost.발음듣기

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

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Beyond just having this dead 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.발음듣기

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