Draw a monopoly's price, output and profit, and show why it is inefficient
6 min
4 questions
Key terms
Monopoly
A monopoly is a firm that sells all or nearly all of the goods and services in a given market, so it faces the market demand curve.
Price taker
A price taker is a firm that must accept the prevailing equilibrium price in its market, because the pressure of competing firms forces it to.
Choosing output, then price
1 of 3
OutputMR cuts MC at Qm: the output that makes profit as large as it can be.
At output Qm, where MC = MR, go up past average cost C1 to the demand curve for the price Pm; the gap is profit per unit.
The monopoly first chooses the output where marginal revenue equals marginal cost, Qm. Below it each unit adds to profit, and beyond it each unit takes profit away.
It then charges what the market will pay for Qm, read straight up at the demand curve: Pm. No monopolist can make buyers take more than they want at that price.
Total revenue is Pm × Qm and total cost is C1 × Qm, so supernormal profit is the rectangle between Pm and C1, out to Qm.
In the long run the monopoly keeps this profit. Barriers to entry stop the new firms that would erode it in a competitive market.