A Firm with a Patent Facing Consumer Demand

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Computing Profit and Social Cost

When a firm sets a price, p, the firm's profit will be that price multiplied by the demand at that price. The consumer surplus will be the extra value taken by buyers who value the good above p. The social cost, sometimes called dead-weight loss, is the value not consumed by consumers who value the product below p (These consumers do not buy the product because they value it below the price). These three quantities correspond to the labeled areas on the sample demand curve below.

On this graph, p* represents the price that a monopolist sets on her product. q* is the corresponding quantity that is sold at that price. A monopolist would select p* in order to maximize profit, represented by the red area in the graph.

Figure 1: Computing Profit and Social Cost from the Demand Curve

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