1. Surplus: Consumer and Producer Demand = WTP Supply = MC Quantity $ Consumer Surplus QMQM Producer Surplus in a Monopoly Consumer Surplus in a Monopoly Deadweight loss in a Monopoly MR for Monopolist PCPC QCQC PMPM Producer Surplus

2. But How Bad?  Here the DWL from monopoly is relatively significant Here it is less significant 

3. What’s the Difference Between the Two Pictures? The elasticity of the demand curve. Graphically MR curve closer to the demand curve  MC closer to P* at Q* Intuitively With elastic demand curve, small changes in price cause large changes in demand. Takes away much of monopolist’s power to price above cost. Back to the Picture

4. Lerner Index of Monopoly Power L = (P-MC)/P = 1/  where  is the elasticity of demand Wait a minute…How did I get from (P-MC)/P to 1/  ? (Not that I’d test you on it -- just so you know its legit.) Remember… TR = P * Q = (A-BQ)Q  MR = A-2BQ = A - BQ - BQ Since B = slope of the inverse demand curve, B =  P/  Q Rewrite MR = P -  P/  Q *Q which we set equal to MC, so... L = (P-MC)/P = (P - P -  P/  Q *Q)/P = -  P/  Q *Q/P = 1/ 

5. Lerner Index Estimates for Selected Industries Automobiles Tobacco Food Processing Coffee Roasting Aluminum Retail Gasoline Soft Drinks Lerner Index Estimates for Selected Industries Automobiles0.100 - 0.340 Tobacco0.648 Food Processing0.504 Coffee Roasting0.055 Aluminum0.590 Retail Gasoline0.100 Soft Drinks0.64 Interpreting the Lerner Index L = (P-MC)/P = 1/  A high Lerner index implies a high price-cost margin and a low elasticity of demand, which in turn implies lots of monopoly power and deadweight loss.