Economics Made Economical

The Monopoly’s Effect on Society

Supply vs. Demand

Supply Curve, Demand Curve, and Equilibrium Point

The graph to the left shows a perfectly competitive market with an equilibrium point at a price of $200 per item and a total quantity of 3100 items being produced and sold. Because the industry is perfectly competitive, long-term net profits made by the producers are zero. For this reason, the Supply Curve is also the cost of production. The cost of producing zero items is approximately $60–this is the point where the Supply Curve “begins” on the graph’s left side (that is, its Y-intercept).

The $60 is therefore a Fixed Cost for the industry. Fixed Costs must be paid regardless of whether any product is sold and include costs like rent, employee paychecks, and any raw materials, technology, or equipment (investment) that needs to be maintained regularly. The slope of the Supply Curve represents the producers’ Variable Cost, or the additional amount of money it takes to produce an additional unit of product.

Supply vs. Demand in a Monopoly
How Monopolies Profit at Society’s Expense

The graph on the right shows a perfectly competitive market that has become a monopoly or near-monopoly. The perfectly competitive Supply Curve is the same light purple one as on the left. And the new monopolistic Supply Curve is the higher steeper dark purple one. For whatever reason, the one company’s Fixed Cost is approximately $150. Maybe they’re the rare monopoly that actually cares to spend a little bit more–who knows? But the monopoly isn’t being so generous when it comes to estimating their Variable Cost. They’ve jacked up their prices because they can, and because we the average citizen doesn’t get to look at their Supply Curve calculations, they can basically charge whatever they want and pretend it’s necessary to keep them in business.

With their new Supply Curve, they intersect the customers’ Demand Curve at a much lower quantity and much higher price. On the lefthand graph, the markets’ producers sold 3100 items at $200 apiece, for a total gross income of $620,000. However their production costs were also $620,000, therefore they made no net profit.

In the monopoly, the company is able to sell 1800 items at $280 apiece for a gross income of $504,000. Although the company’s gross income is now lower than the same market’s had been, a large chunk of this income is pure profit. The difference between the Cost Curve (the old Supply Curve) and the new Supply Curve represents that profit. This is shown by the purple shaded trapezoid region. Meanwhile, the red and green shaded triangles represent the efficiency loss on the production and consumption sides, respectively. In other words, it is the net loss of $116,000 worth of the product, the loss of 1300 items that would have otherwise been produced and bought had the market remained competitive.



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