Monopoly
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Figure 3 Demand and Marginal-Revenue Curves for a
Monopoly
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
Demand
(average
revenue)
Marginal
revenue
1
2
3
4
5
6
7
8
Quantity of Water
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Profit Maximization
•  A monopoly maximizes profit by producing the
quantity at which marginal revenue equals
marginal cost.
•  It then uses the demand curve to find the price
that will induce consumers to buy that quantity.
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Figure 4 Profit Maximization for a Monopoly
Costs and
Revenue
2. . . . and then the demand
curve shows the price
consistent with this quantity.
B
Monopoly
price
1. The intersection of the
marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity . . .
Average total cost
A
Demand
Marginal
cost
Marginal revenue
0
Q
QMAX
Q
Quantity
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Profit Maximization
•  Comparing Monopoly and Competition
•  For a competitive firm, price equals marginal cost.
P = MR = MC
•  For a monopoly firm, price exceeds marginal cost.
P > MR = MC
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Figure 5 The Monopolist’s Profit
Costs and
Revenue
Marginal cost
Monopoly E
price
B
Monopoly
profit
Average
total D
cost
Average total cost
C
Demand
Marginal revenue
0
QMAX
Quantity
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THE WELFARE COST OF
MONOPOLY
•  In contrast to a competitive firm, the monopoly
charges a price above the marginal cost.
•  From the standpoint of consumers, this high
price makes monopoly undesirable.
•  However, from the standpoint of the owners of
the firm, the high price makes monopoly very
desirable.
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INEFFICIENCY OF PURE MONOPOLY
P
An industry in pure competition
sells where supply and
demand are equal
S = MC
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
Pm
Pc
D
MR
Qm
Qc
Q
Figure 7 The Efficient Level of Output
Price
Marginal cost
Value
to
buyers
Cost
to
monopolist
Value
to
buyers
Cost
to
monopolist
Demand
(value to buyers)
Quantity
0
Value to buyers
is greater than
cost to seller.
Value to buyers
is less than
cost to seller.
Efficient
quantity
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The Deadweight Loss
•  Because a monopoly sets its price above
marginal cost, it places a wedge between the
consumer’s willingness to pay and the
producer’s cost.
This wedge causes the quantity sold to fall short of
the social optimum. The monopolist produces less
than the socially efficient quantity of output.
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Figure 8 The Inefficiency of Monopoly
Price
Deadweight
loss
Marginal cost
Monopoly
price
Marginal
revenue
0
Monopoly Efficient
quantity quantity
Demand
Quantity
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The Deadweight Loss
•  The deadweight loss caused by a monopoly is
similar to the deadweight loss caused by a tax.
•  The difference between the two cases is that the
government gets the revenue from a tax,
whereas a private firm gets the monopoly profit.
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