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Market Structure: Perfect Competition and Monopoly
question will be taken up in a later chapter. However, considerations of public welfare and efficiency should be central to regulators’ concerns.
WELFARE EFFECTS OF MONOPOLY Another approach to evaluating the relative merits of firms in perfectly competitive industries against those of a monopoly is by employing the concepts of consumer surplus and producer surplus. CONSUMER SURPLUS
Consider Figure 8.13, which depicts the case of the perfectly competitive market. The area of the shaded region in the diagram 0AEQ* represented the total benefits derived by consumers in competitive equilibrium. Total expenditures on Q* units, however, is given by the area 0P*EQ*. The difference between the total net benefits received from the consumption of Q* units of output and total expenditures on Q* units of output is given by the shaded area 0AEQ* - 0P*EQ* = P*AE. Consumer surplus is given by the shaded area P*AE. Consumer surplus is the difference between what consumers would be prepared to pay for a given quantity of a good or service and the amount they actually pay. The idea of consumer surplus is a derivation of the law of diminishing marginal utility. The law of diminishing marginal utility says that individuals receive incrementally less satisfaction from the consumption of additional units of a good or service and thus pay less for those additional units. Thus, in Figure 8.10, consumers are willing to pay more than P* for the first unit of Q, but are prepared to pay just P* for the Q*th unit. Definition: Consumer surplus is the difference between what consumers are willing to pay for a given quantity of a good or service and the amount
FIGURE 8.13 surplus.
Consumer and producer
