A small town is served by many competing supermarkets, which...

A small town is served by many competing supermarkets, which have the same constant marginal costs. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the dead-weight loss?

A small town is served by many competing supermarkets, which have the same constant marginal
costs.
a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the dead-weight loss?

Key Concepts

Competitive Equilibrium

Competitive equilibrium occurs in a market where many buyers and sellers interact, and no single participant can influence the market price. In this state, the market price is determined by the intersection of the supply and demand curves, leading to an allocation of resources that maximizes total surplus. This equilibrium is efficient in the sense that it minimizes wasted resources and ensures that goods are produced and consumed at levels where marginal benefit equals marginal cost.

Consumer Surplus

Consumer surplus is the difference between the maximum price consumers are willing to pay for a good and the price they actually pay. It represents the benefit or extra utility that consumers obtain from purchasing a product at a market price lower than their willingness to pay. On a supply and demand graph, it is depicted as the area between the demand curve and the market price up to the quantity consumed.

Producer Surplus

Producer surplus is the difference between the market price at which a good is sold and the minimum price producers are willing to accept to supply the good. It serves as a measure of the benefit producers receive by selling at a market price above their marginal cost. On a supply and demand diagram, producer surplus is represented by the area above the supply curve and below the market price, up to the quantity sold.

Total Surplus

Total surplus is the sum of consumer surplus and producer surplus and is a measure of the overall welfare generated by a market. It represents the net benefit to society from the production and consumption of goods and services. A competitive market equilibrium maximizes total surplus, ensuring that the resources are used in the most valuable way from a societal perspective.

Monopoly Equilibrium

A monopoly equilibrium arises when a single firm dominates the market, exerting significant control over the price and output levels. Unlike competitive markets, a monopolistic firm restricts output to raise prices and maximize profits, leading to a different allocation of resources. This can result in a reduction in consumer surplus and overall inefficiency compared to a competitive market equilibrium.

Deadweight Loss

Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achieved. In the context of a monopolistic market, the reduction in output relative to the efficient level results in lost consumer and producer surplus that is not transferred to any party, manifesting as a net loss to society. This inefficiency is graphically represented as the area between the supply and demand curves that is not captured in the monopolistic outcome.

Surplus Transfer

Surplus transfer occurs when a change in market structure, such as the switch from a competitive market to a monopoly, redistributes surplus from one group to another without improving overall total surplus. In the case of a monopoly, part of the consumer surplus is transferred to the producer in the form of higher profits, even though the total surplus is reduced due to the associated deadweight loss. This transfer reflects the shift in market power from consumers to the sole provider.

Transcript

00:01 Okay, guys, this is chapter 15 problem 2.

00:05 In this question, we're given that we're in a town with many grocery stores in each of the stores face the same marginal cost.

00:12 And for the first part of the question, we're asked to assume that they're now in a competitive industry where all the grocery stores are competing with each other and we want to draw the graph of the industry and show the consumer and producer in total surplus.

00:31 Here we have the graph.

00:33 We have quantity and we have price.

00:37 We have as always a downward facing demand curve.

00:41 And now we have, because we're in a competitive industry, the marginal revenue is going to equal demand and we have this constant marginal cost.

00:50 And so we're going to produce here at a price that's equal to the marginal cost.

00:56 All of this is going to be the consumer surplus.

01:02 There's going to be no producer surplus because we're in a perfectly competitive industry and we have a cost and marginal cost.

01:10 And so there's no difference between the price charged and the marginal cost for any quantity.

01:18 And so consumer surplus is going to equal total surplus and there's going to be zero dead weight loss.

01:25 Dead, zero dead weight loss.

01:29 For the second part of the question, we are being told that now all of those grocery stores have become one big monopoly grocery store and draw the same graph again, showing the producer surplus, consumer surplus, total surplus, as well as the dead weight loss...

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