Question

Suppose a firm, benefiting from an extraordinary technological discovery, takes over what had been a perfectly competitive industry. The industry is suddenly transformed from perfectly competitive into a monopoly industry. What will happen to (1) price, (2) output, (3) consumer and producer surplus, and (4) deadweight loss?

Answer 1

When the industry transforms from a perfect competition to Monopoly,

1) the prices would rise. This is because it is a monopoly (single seller) and has the control over prices. So in order to maximise the profits, the price will be higher than perfect competition.

2) The output would reduce because the monopolists can either control the prices or the output. In case it is increasing the prices, the output would reduce.

3) Consumer and producer surplus: in case of consumers, they end up paying a higher price because there is a single seller in the market. So consumer surplus would reduce.

The producer surplus increases because the increase in price would be higher than reduction in output. So producer surplus is higher than in perfect competition.

4) Deadweight loss : The deadweight loss would be existing in monopoly because there is distortion in the market and there is some loss in welfare of the society as a whole which is the deadweight loss.

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