Figure 1: A Comparison Of Monopoly And Competition

This graph depicts the competitive and monopoly prices and quantities. Quantity is on the x-axis, and price is on the y-axis. The demand curve starts at a positive price and is a straight line to a positive quantity. The marginal revenue curve starts at the same y-intercept as the demand curve and is a straint line to a positive quantity that is half the x-intercept of the demand curve. The marginal cost curve is a horizontal line starting from the x-axis at a price (P subscript c) that is less than the y-intercept of the demand curve. The marginal cost curve is labeled MC=AC; that is, there are no fixed costs, so marginal cost equals average cost. The competitive price (P subscript c) and quantity (Q subscript c) are found where the demand curve intersects the marginal cost curve. This point of intersection is labeled x. There is a dotted line from this intersection to the x-axis. The monopolist produces the quantity (Q subscript m) where marginal revenue is equal to marginal cost; this intersection is labeled z. A dotted line from the x-axis through z to the demand curve is drawn on the graph; the point on the demand curve is labeled y. The demand curve then determines the price (P subscript m) the monopolist can charge; a dotted line is drawn from the demand curve at the monopoly quantity to illustrate this price. The rectangle created by yz and the monopoly and competitive prices is the monopolist's profits (transfer of consumers' surplus from buyers). The triangle xyz is the deadweight loss of consumers's surplus because of monopoly.

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Updated June 25, 2015

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