Poughkeepsie is served by many competing supermarkets, which have the same constant
marginal cost.
a. Using a graph of the market for groceries, show the consumer surplus, producer
surplus, and total surplus. (3 pts)
b. Now suppose that the independent supermarkets combine into one chain. Using a
new graph, 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 deadweight loss? (2 pts)
a.
In a competitive market with many supermarkets, the equilibrium price and quantity will be determined by the intersection of the demand and supply curves. The consumer surplus is represented by the area below the demand curve and above the price, producer surplus is represented by the area below the price and above the supply curve, and total surplus is the sum of consumer and producer surplus.
b.
When the independent supermarkets combine into one chain, the new graph will show a monopoly market with a higher price and lower quantity compared to the competitive market. The consumer surplus will decrease, producer surplus will increase, and total surplus will decrease. The transfer from consumers to producers will be the increase in producer surplus, which comes at the expense of consumer surplus. The deadweight loss is the loss in total surplus due to the monopoly market structure.
Overall, the transfer from consumers to producers and the deadweight loss represent the inefficiencies that arise from monopoly power in the market.