 This is Professor Gerald Friedman, the University of Massachusetts, Department of Economics. And we're here today to talk about rents, profits, surplus, and why monopoly is bad. At some point we'll talk about why you can't have anything but monopoly, but that's another story. Okay, social welfare is the goal of the whole thing. We are interested not in the amount you produce, but the amount you produce, the value of what you produce, the benefits people get minus the course. And that can be illustrated on this graph. Over here we have demand, which is the marginal utility for each one of these things. What is it we're making here? I didn't put a product name. So this is Q of acid. People are into acid. A little bit, they like a lot. At some point down around here, they're so out of it that they don't get any benefit from additional acid. It costs a certain amount to make acid. The first bits are cheap. Marginal productivity is very high. The marginal cost is very low. As you move along to make more, you have to start finding new places. You have to start hiring more and more workers. And marginal costs rise, giving you an upward-sloping marginal cost and downward-sloping marginal utility curve. All very familiar. How much acid do you want them to make? If you were the old gas plan, the people in Moscow who planned the Soviet economy, or if you were the war production board in the United States during World War II, then you would look, would you make the first one? Yeah, benefits high, costs low. Make the second? Yes, benefits high, costs low. Surplus in between. We'd keep going until the surplus on the marginal unit. The marginal surplus was zero. Would you go further? Would you make more acid? Some people at Grateful Dead concerts, or people listening to old tapes of Grateful Dead concerts, would say, yeah, make more acid. But you are a social planner. You would think, no, the cost exceeds the benefit. They have benefits, but the costs are even greater. So you don't. You stop here at QPC, which is where perfect competitors will go. Perfect competitors will keep producing as long as they can sell for more than marginal cost. So they'll produce up to this point. And at this point, QPC, they'll sell at this price. The price equals the marginal cost of production and the marginal utility. And there's surplus. There are two types of surplus. Consumer surplus is the difference between the marginal utility and the price. Remember, we talked about that before. Producer surplus is the difference between the marginal cost and the price. So this whole area, this triangle down here, is producer surplus. This triangle up here is consumer surplus. Add them together and you have total social surplus. The level of happiness in the entire economy coming from acid. People are happy. They've got a big surplus. It's wonderful. They're stoned out of their minds and having a great time of it. Don't tell your parents, I said this. And that's where you'll be with perfect competition. Now mind you, one of these perfect competitors is going to get smart someday. Maybe it's you. Maybe you'll have taken some economics. And you'll say, oh, wait a second. You can increase your profits because you notice this curve, this straight line, marginal revenue. This is the change in total revenue that comes from producing and selling one more unit, one more hit of acid. Marginal revenue is always less than the price because to sell more, you have to lower prices. And since you can't distinguish between dead head over there and dead head over there, if you lower prices to sell to the second dead head, you also give a discount to the first dead head. And that discount translates into the difference between marginal revenue and the marginal utility curve. So the marginal revenue curve is below the marginal utility curve. This is tricky. It's very tricky, it's in the textbook. Think about it. The marginal revenue curve is less than the marginal utility curve, less than the demand curve. Therefore, it will intersect the marginal cost curve, the curve telling you how much each unit costs you to produce at a lower quantity. So you will go along, do you make the first unit? Yes, second unit? Yes, marginal revenue, the extra money you're getting is still greater than marginal cost. And you keep going along here, you're not looking at this one anymore. You're looking at this one, the marginal revenue curve. You're smarter than those other acid heads. You don't use your own stuff, which is always a bad idea. Never use your own stuff. And never use anybody else's stuff either if you wanna make a profit in this business. So you're looking at the marginal revenue curve and you move along here and you stop producing over here. You stop producing at the point where, obviously I misdrew this. You stop producing at the point where marginal revenue equals marginal cost. That's less production than had been the case with the perfect competitor. You're not producing all the way out here, you're just stopping over here at Q Monopoly. You stop over there. This quantity prices a higher because there's a lower quantity. So you can charge higher prices to fewer deadheads. So you have a price over here, forget this one. You produce and sell at that price, higher prices. What does this do to everybody's welfare? Higher prices means some stuff isn't produced. I mean, there's social benefit to these units, to these hits, but you're not making them. So you have a net loss. This is just total loss. We call this the deadweight burden of monopoly. Nobody benefits, it's just loss, it sucks. All this acid just being flushed down the toilet or something, probably contaminating the sewers and you have alligators in the sewers of New York City ingesting acid going crazy. You're kind of coming out of the sewers and dancing down the streets of Times Square and you know the funny thing, nobody notices. It's just like, oh, alligators dancing down the streets. Well, that's New York, what do you expect? Okay, so you have deadweight burden over here, just plain loss. There's also transfer. This higher prices means there's benefit but it's taken from the consumers and given to the producers. So you get a transfer and what's left up here is consumer surplus with monopoly. Total surplus is less, we're worse off, even the alligators are worse off. We're worse off, consumers are especially hurt, the monopolist, you are better off. What you gain from the transfer is greater than what you lose by those units that you're not producing. So you benefit, everybody else is worse off. I hope you're happy. I do and have a nice day. Thank you, bye bye.