Monopoly

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In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it

Definition

Monopoly: Sole seller of a product with no close substitutes.

Why Do Monopolies Rise

1. A key resource is owned by a single firm
2. The government gives a single firm the exclusive rights to produce a type of commodity
3. The costs of producing goods and services that makes production by one large firm more efficient than many small firms

Monopoly Profit

Demand curves for a Monopoly

Unlike a competitive firm, a monopoly faces a downward sloping demand curve because it is the sole producer in the market. In other words, a monopoly has to lower its price in order to sell more output.

This is consistent with the law of demand.

Profit Maximization for a Monopoly

Like any other firm, the profit maximization point is where the marginal revenue curve intersects the marginal cost curve.

However, because the monopoly faces a downward sloping demand curve, it can charge a price higher than the profit maximization price at the profit maximization quantity.

Measuring the Profit Area

Profit = TR - TC

This can be rewritten as:

$Profit=({\frac {TR}{Q}}-{\frac {TC}{Q}})\cdot Q\$

From this we know that ${\tfrac {TR}{Q}}$ is the price and ${\tfrac {TC}{Q}}$ is the ATC

Therefore,

$Profit=(P-ATC)\cdot Q\$

This equation can be represented on the graph as the rectangle for the monopoly profit

The height of the rectangle is price

The ATC is equal to the profit per unit sold

The width of the box is the number of units sold

The equation is therefore the area of the rectangle

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