4.2 Monopoly

What defines a monopoly

A monopoly is a market with a single seller, no close substitutes, and significant barriers to entry (patents, control of resources, legal licenses, or economies of scale). Because the monopolist IS the market, its demand curve is the downward-sloping market demand curve, making it a price maker rather than a price taker.

MR lies below demand

To sell more, a monopolist must lower price on ALL units, so marginal revenue (MR) < price at every quantity except the first. MR is a separate line below the demand curve, falling twice as fast. The profit-maximizing output occurs where MR = MC, then price is found by going UP to the demand curve at that quantity.

Profit, loss, and inefficiency

Compare P to ATC at the profit-maximizing quantity to find profit or loss. Monopolies can earn positive economic profit even in the long run because barriers block entry. Monopoly produces less output at a higher price than a competitive market, creating deadweight loss and allocative inefficiency (P > MC).

Key terms

Monopoly

A market structure with a single seller, no close substitutes, and significant barriers to entry.

Price maker

A firm that can influence market price by changing its output, unlike a price taker in perfect competition.

Why MR < Price for a monopolist

Selling an additional unit requires lowering the price on all units sold, so marginal revenue falls faster than price.

Monopoly profit-maximizing rule

Produce where MR = MC, then charge the price found on the demand curve at that quantity.

Deadweight loss in monopoly

Lost total surplus from producing less than the competitive quantity and charging a price above marginal cost.

Try an AP-style question

What is the monopolist's profit?

1. $600
2. $15
3. $2,000
4. $1,400