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| | Consider the price P at the precise point when a particular unit goes from being sold to being unsold. When consumers were still willing to buy that unit, the overall value of that particular unit to society is P, because someone is willing to buy it for that price. Based on our assumption about this price, when P for this unit is increased slightly, then no one buys it. | | Consider the price P at the precise point when a particular unit goes from being sold to being unsold. When consumers were still willing to buy that unit, the overall value of that particular unit to society is P, because someone is willing to buy it for that price. Based on our assumption about this price, when P for this unit is increased slightly, then no one buys it. |
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| − | How much does society lose in value when the monopoly raises the price of that unit just high enough that no one buys it? Society would pay a price of MC for that good in a perfectly competitive market. But in that transaction society would enjoy a windfall value of (P-MC), because it was willing to pay the price P for that same unit. When the good is withdrawn from the market, society loses the benefit of that extra value (P-MC) that it would have enjoyed in a perfectly competitive market. Thus the loss to society when a monopoly withdraws that particular unit is (P-MC).
| + | In a perfectly competitive market, this particular unit would sell at price P=MC. In that transaction society would enjoy a windfall benefit of (P-MC), because it was willing to pay an extra amount of (P-MC) for that same unit. |
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| − | The overall loss to society imposed by a monopoly is thus the sum of all the individual (P-MC) for each unit withdrawn from the market. Because P is a function of output, the P is different for each unit withdrawn from the market as the monopoly raises its price.
| + | When the good is withdrawn from the market, society loses that same benefit of (P-MC) that it would have enjoyed in a perfectly competitive market. Thus the loss to society when a monopoly withdraws that particular unit is (P-MC). |
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| − | The social loss can be described easily in graphical form as the area under the demand curve between the points P and MC, and above a price line equal to MC. Also, the summation can be performed by using calculus. | + | To find the overall loss to society imposed by a monopoly, we do the same calculation for every unit that goes unsold due to the monopoly's higher price. |
| | + | The overall loss to society imposed by a monopoly is thus the sum of all the individual (P-MC) for each unit withdrawn from the market. Because P is a function of output, the P is different for each unit withdrawn from the market as the monopoly raises its price. The summation must take into account the different prices at which the units go unsold. |
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| | + | The social loss can also be described in graphical form as the area under the demand curve between the points P and MC, and above a price line equal to MC. The summation can be performed by doing an integral in calculus. |
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| | Here is an example: | | Here is an example: |