tutor2u | Key Diagrams - Monopoly Profit with a Price Cap

Student Videos

Key Diagrams - Monopoly Profit with a Price Cap

A Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 14 May 2022

This video walks through a cost and revenue diagram showing the possible effect of a price cap o a monopoly supplier.

Key Diagrams - Monopoly Profit with a Price Cap

Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare. So a price cap aims to limit the price that a monopoly can charge. To be effective, a price cap needs to be set below the normal profit maximising price for a monopolist.

Capping the price leads to an expansion of demand and an increase in consumer surplus. But the level of monopoly profit is lower. Capped prices can improve allocative efficiency but lower profits might limit how much a firm can spend on investment and research which might have consequences for dynamic efficiency in the market.


AQA A-Level Economics Grade Booster 2022

Student Revision Workshops

Join our experienced presenters for a day of fast-paced revision & essential exam technique advice on the big cinema screen – supported by online help all the way though to your final exam paper.

Learn more

© 2002-2022 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.