See how a monopolist restricts output and raises price — and the deadweight loss that market power creates.
See how a monopolist restricts output and raises price, and why that creates deadweight loss.
Switch the market structure from Perfect competition to Monopoly.
Before you act, predict what will happen. What happens to the quantity produced and the price charged? Then do it — did your prediction match what happened?
Price, output, and deadweight loss
A monopolist sets marginal revenue equal to marginal cost — producing less and charging more than perfect competition (price = marginal cost). The shaded triangle is the lost surplus.
In perfect competition, many small firms sell the same product and none can influence the price — each takes the market price as given and, in the long run, price ends up equal to the cost of making one more unit (marginal cost). That outcome is efficient: everything worth making to someone who values it above its cost gets made. A monopoly is the opposite: a single seller with no close competitors and the power to set its own price. Because a monopolist faces the whole downward-sloping demand curve, selling one more unit means lowering the price on all units, so it deliberately holds output below the competitive level and charges more. The result is a transfer from buyers to the monopolist and, crucially, a deadweight loss: mutually beneficial trades that simply never happen because the price is above marginal cost. Some buyers who value the product above what it costs to make still don't buy it. This lost value — not the higher price itself — is why economists worry about market power, and why competition policy and regulation try to limit it.
You compare the same market run two ways — as perfect competition and as a monopoly — and watch the monopolist cut output, raise the price, and open up the deadweight-loss triangle. Seeing the lost trades appear is the clearest way to understand why market power reduces total welfare, not just who gets the money.