Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Monopoly: one seller, no close substitutes, price maker. Its demand curve is the market demand curve.
- It exists because of barriers to entry: legal (patent, licence), control of a key resource, or economies of scale (natural monopoly).
- It maximises profit where MR = MC, and charges the price on the demand curve above that quantity. Because MR < P, P > MC.
- It can earn economic profit in the long run, because barriers block entry. It can also make a short-run loss if P < ATC.
- It produces where demand is elastic (MR > 0). Revenue would be largest where MR = 0, but that is beyond the profit-maximising quantity.
Key relationships
| Quantity | Formula or area |
|---|---|
| Profit (loss) | (P − ATC) × Qm: rectangle between Pm and ATC at Qm |
| Consumer surplus | triangle below D, above Pm, from 0 to Qm |
| Producer surplus | area above MC, below Pm, from 0 to Qm (larger than profit if there is fixed cost) |
| Deadweight loss | triangle between D and MC from Qm to Qe (where D = MC) |
| Straight-line demand P = a − bQ | MR = a − 2bQ |
| Outcome | Perfect competition | Monopoly |
|---|---|---|
| Price and quantity | P = MC, higher Q | P > MC, lower Q |
| Consumer surplus | larger | smaller |
| Deadweight loss | none | yes |
| Long-run profit | zero | can be positive |
Natural monopoly: long-run ATC falls over the whole range of market demand, and MC lies below ATC. One firm supplies the market more cheaply than two or more. If forced to charge P = MC, it would make a loss.
Mistakes to avoid
- Reading the price where MR meets MC, instead of going up to demand.
- Calculating profit with MC instead of ATC.
- Drawing the deadweight loss to the left of Qm, or using MR instead of D as its top edge.
- Choosing the quantity where TR is largest.
- Calling any resource-based monopoly “natural”.
- Treating monopoly profit as deadweight loss: profit is a transfer, the DWL is lost to everyone.
Quick self-check
- Demand P = 50 − Q, MC = ATC = $10. Find Qm, Pm and profit. (MR = 50 − 2Q = 10, so Q = 20; P = $30; profit = (30 − 10) × 20 = $400.)
- For the same firm, find the deadweight loss. (D = MC at Q = 40; DWL = ½ × (30 − 10) × (40 − 20) = $200.)
- Why is P > MC at the monopoly’s quantity? (Because MR is below P, and the firm sets MR = MC.)
Next: practice questions.