2.11.4 (HL)—Monopoly

A monopoly faces the market demand curve.

With one dominant supplier, the firm chooses output where MR=MC and then reads the highest price buyers will pay from demand.

Example

If demand is P=20−Q and MC=4, the profit-maximizing output solves MR=4, then price is found from demand rather than set equal to MC.

Separate the output decision from the price read-off, and compare the result with the competitive benchmark.

A monopoly is not automatically a public firm, and natural monopoly conditions depend on cost structure, not simply on being the only seller.

A monopolist maximizes at $MR=MC$ and reads price from AR/demand. If $P=AR>MC$, output is below and price above the competitive $P=MC$ quantity, creating allocative inefficiency and welfare loss. Abnormal profit, normal profit or loss depends on AR relative to AC at that output. A natural monopoly has falling average cost across the relevant market demand because one large supplier can exploit economies of scale more cheaply than multiple firms.