Discussion 6  Microeconomics

Discuss how a monopoly transfer consumer surplus to itself?

SAMPLE SOLUTION

A monopoly arises when a particular organization is the only supplier of a specific product. A monopoly has little or no competition in goods production or service delivery. Monopolies have the power to charge consumers high prices (Hayes, 2021). Consumer surplus refers to the difference between the fees that consumers pay and what they are willing to pay (Pettinger, 2019). It represents the area between the demand curve and the equilibrium price. Companies can minimize consumer surplus if they control the market. Reducing the consumer surplus allows organizations to charge prices that exceed the competitive equilibrium (Misra, 2013). In monopolies, companies maximize profits by minimizing the consumer surplus. Monopolies transfer consumer surplus to themselves by raising prices through decreasing the number of product offers (Misra, 2013). Decreasing the number of products increases the price relative to the competitive market. The other way of reducing consumer surplus is engaging in discrimination of price. Price discrimination entails setting different prices to various consumer groups (Pettinger, 2019). Companies experiencing inelastic demand will have a reduced consumer surplus. Organizations will require engaging in first-degree discrimination…