Remember that a PC firm is both allocatively and productively efficient. Why?
They are allocatively efficient because they always produce where MR = MC = P. That isn't a problem for them because, like all businesses they are trying to maximize their profit. So they want to produce where MR = MC. Since the MR line and the Price line are the same, it all works out perfectly.
PC firms are also productively efficient. On our MACG graph, a firm is productively efficient if it is producing at the bottom of the ATC curve. Again this happens naturally in a PC firm because it is a price taker. And we know that the market has a long run equilibrium that is at the bottom of the ATC curve. The bottom of the ATC curve is also the point at which the MC line passes through. So once again the firm wants to produce at that location.
What about monopolies?
Because the MR line is no longer the same as the DARP line there is really no way for the monopoly to produce where MR = MC = P. Thus the Monopoly is inherently not allocatively efficient.
Monopolies are also not productively efficient. Because the DARP line is downward sloping, in order for the price line to pass through the bottom of the ATC, there would also have to be an area to the left of that in which the monopoly could earn a profit.
If you owned a monopoly and you had a choice between breaking even at the bottom of the ATC curve or reducing your quantity a little and making a profit, which would you choose? Remember that the monopoly is a price maker so they can set the price wherever they want.
Since we are not allocatively or productively efficient, we can expect that there will also be deadweight loss.
Where is the DWL on the graph?
It is the triangle to the right of the quantity that "points" to the intersection of Demand and MC.
What about Consumer Surplus (CS) and Producer Surplus (PS)? They are still located in the same places. CS is located above the price and below Demand.
Normally we say that PS is below the amount of money the supplier gets to keep (in this case the Price) and above the Supply line. But we don't have a supply line. For monopolies (and monopolistic competition and oligopoly) the MC line is NOT the Supply line. But we still use it to find PS.
On the graph that is above it would be hard to find the PS and CS because of the way it is drawn. However, in some of the work you were given, Activity 3-12 and Activity 3-15, the graphs are drawn in such a way that you can.
You should now be able to do all of the work in the worksheets I handed out. If you can't please ask for help!
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