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Characteristics of Monopolistic Competition
MARKET POWER
We saw in Chapter 8 that a firm has market power when a firm’s selling price exceeds the marginal cost of production.Consider,again,Figure 8.10, which depicts the situation of equilibrium in a perfectly competitive market. The shaded area 0AEQ* represents the total benefits derived by consumers in competitive equilibrium.Total expenditures for Q* units of output 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.The area P*AE,which is called the 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.
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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 they actually pay.
Figure 8.10 also illustrates the concept of producer surplus.In the figure, the total cost of producing Q* units of output is given by the area 0BEQ*. Total revenues (consumer expenditures) earned from the sale of Q* units of output is given by the area 0P*EQ*.The difference between the total revenues from the sale of Q* and the total cost of producing Q* (total economic profit) is given by the shaded area 0BEQ* -0P*EQ* = BP*E.The shaded area BP*E is referred to as producer surplus.Producer surplus is the difference between the total revenues earned from the production and sale of a given quantity of output and what the firm would have been willing to accept for the production and sale of that quantity of output.
Definition:Producer surplus is the difference between the total revenues earned from the production and sale of a given quantity of output and what the firm would have been willing to accept for the production and sale of that quantity of output.
Perfect competition represents an ideal market structure in the sense that it guarantees a socially optimal level of goods and services.This occurs because profit-maximizing firms produce up to the point where the market-
FIGURE8.10. Consumer and producer surplus.
