The level of output in a monopolized industry is less than the level of
output that would be produced if the industry were perfectly
competitive. If the industry is made up of many price-taking firms, the
industry supply curve S is the horizontal sum of the many individual
marginal cost curves. Given the market demand curve D, the competitive
equilibrium quantity is and the price is Now suppose the industry
has a monopolist with marginal costs given by the MC curve shown. In
this case, MR is the monopolist’s marginal revenue curve. The profit-
maximizing monopolist produces units of output and charges a price
of
Notice in the monopoly outcome that for the units of output between
and , the marginal value to society of extra units of the good (as shown
by the demand curve) exceeds the marginal cost of producing extra units,
and thus society would benefit from having these units produced. The
monopolist’s restriction of output below creates a deadweight loss for
society shown by the shaded area. The monopoly outcome is therefore
inefficient.
In Chapter 5 we briefly discussed the meaning of market efficiency and
how it relates to the amount of economic surplus generated in the market.
We will examine these concepts in more detail in Chapter 12. For now
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