Consumer Surplus and Prices in Perfect Competition and Monopoly

Abstract

It is well known that existence of monopoly is accompanied by economic inefficiency in the form of dead weight loss and reduced consumer surplus. The consumer surplus that exists in case of perfect competition gets reduced in case of monopoly; as a part of it goes to the monopolist in the form of monopoly profit, a part of it is lost in the form of deadweight loss while the rest remains as consumer surplus in monopoly. This paper shows that under specific conditions there is a definite relationship (in case of monopoly) between monopoly profit, dead weight loss and consumer surplus and between prices in perfect competition and monopoly.

Keywords: Perfect Competition, Monopoly, Consumer Surplus, Dead Weight Loss, Monopoly Profit, Price

JEL Classification: D41, D42