UNIT-08
Monopoly
MONOPOLY:
A monopoly is a market where there is only one seller for a product or service, and no close
substitutes are available.
This single firm controls the entire market — meaning i t decides how much to p ro duce and what pri ce to
charge.
One firm: Only one company makes and sells t he product.
No competition: No rivals are offering the same or very similar product.
Price maker: The monopolist can set t he price, unli ke firms in perfect competi ti on whi ch must accept
the market price.
Barriers to entry: It's very hard for new firms to enter t he market . Barriers could be t hings like:
High startup costs
Legal restrictions (like patents or licenses)
Control over a critical resource
How Monopoly Works:
To sell more, the monopolist must lower the price (because demand slo pes downward).
Profit maximization happens where marginal revenue ( MR) = marginal cost ( MC) .
The price is then found on the demand curve — meaning the monopoly charges higher prices and
produces less output compared to perfect competition.
WHAT IS A SINGLE-PRICE MONOPOLY?
A single-price monopoly is a market structure where:
There is only one seller of a product with no close substitutes.
The monopolist charges the same price to all customers (unlike price discrimination).
The firm controls the market price because it is the sole supplier.
To understand how a single-price monopolist maximizes profit,there are 3 major functions:
1. Demand Curve (D)
Shows the price consumers are willing to pay for each quantity.
The monopolist uses this curve to decide what price it can charge for a given output
level.
[Link] Revenue (MR)
MR is the additional revenue from selling one more unit.
Because the monopolist must lower the price to sell more units, the MR is less than the
price.
MR curve lies below the demand curve.
3. Marginal Cost (MC)
This is the cost of producing one more unit.
Comes from the firm’s cost function.
It increases as output increases (due to diminishing marginal returns).
Why Demand and Marginal Revenue Curves are needed
Demand curve (D) tells the monopolist what price they can charge for any quantity.
Marginal revenue curve (MR) tells the monopolist how much extra money they make for
selling one more unit.
For profit maximization, the monopolist chooses the output where MR = MC, but the
price they charge is found up on the demand curve at that quantity.
DEADWEIGHT LOSS
1. Higher Price Hurts Consumers
Consumers pay more for the product. This shrinks consumer surplus (the
benefit buyers get from paying less than what they’re willing to pay).This
part of the loss goes to the monopoly as extra profit (called producer
surplus).
2. Less Output = Deadweight Loss
Some buyers who would have bought the product at a lower price don’t get
it.
These missed transactions are a loss for everyone — no one gets the benefit.
This is shown as the gray triangle in the graph it’s called deadweight loss.
3. Higher Production Costs
Without competition, monopolies don’t try as hard to be efficient.
They may not produce at the lowest possible cost.
So they use more resources than needed to make the product — this is
wasteful.
Formula: DWL=0.5 ×(QC−QM)×(PM−PC)
Where:
QC = Output in perfect competition
QM = Output in monopoly
PM = Price in monopoly
PC = Price in MC=MR
SINGLE PRICE MONOPOLY VS PERFECT COMPETITION
In perfect competition, there are many small firms, each too small to influence the market price. The price is
determined by the overall market, and each firm simply accepts it — they are price takers. To maximize profit, each
firm produces the quantity where price equals marginal cost (P = MC). This leads to a high total output (Q) and a low
price (P). Because firms are operating efficiently — producing without waste and selling at a fair value perfect
competition results in maximum benefit to society, with no deadweight loss.
In a monopoly, one firm controls the entire market and can choose both its output and the price. But to sell more
units, it must lower the price, which means marginal revenue (MR) is lower than the price. The monopolist maximizes
profit by producing where MR = MC, which results in a smaller quantity (Q) and a higher price (P) than in perfect
competition. This lower output and higher price create a deadweight loss — some consumers who would buy at a fair
price are left out. So, monopoly is less efficient and more costly for consumers compared to perfect competition.
CALCULATING PROFIT
To see a monopoly firm’s profit in a graph, recall that
profit equals total revenue (TR) minus total costs (TC):
Profit = TR - TC.
We can rewrite this as
Profit = (TR/Q - TC/Q) X Q
TR/Q is average revenue, which equals the price, P, and
TC/Q is average total cost, ATC.
Therefore,
Profit = (P - ATC) X Q.
This equation for profit (which also holds for
competitive firms) allows us to mea-
sure the monopolist’s profit in our graph
PRACTICE QUESTION
1 . Consider the market conditions for the single-price
monopoly shown in the diagram
a . Determine the profit-maximizing quantity and price for
Monopoly.
b . What will the profit-maximizing output and price be if
the market turns into a Perfectly competitive market .
c . Calculate and compare the profits for the two different
markets.
d . Calculate the deadweight loss due to the monopolist’s
market power and show the deadweight loss in a
properly labelled diagram.