Monopoly

You’ll be able to

Explain why a monopolist’s marginal revenue lies below price
Find the monopoly price and quantity using MR = MC
Analyze the efficiency loss and deadweight loss from monopoly

The single price maker

A monopoly is a market with a single seller of a product with no close substitutes, protected by high barriers to entry (economies of scale, control of a key resource, patents, or government grants). Unlike a price taker, a monopolist is a price maker: it faces the entire downward-sloping market demand curve. To sell more, it must lower the price on all units, not just the last one. This is the defining feature that shapes everything about monopoly pricing and its inefficiency.

Why marginal revenue is below price

Because a monopolist must cut price on every unit to sell one more, the extra revenue from that unit — its marginal revenue — is less than the price. MR reflects the higher quantity sold minus the revenue lost by lowering price on all previous units. So the MR curve lies below the demand curve (and falls twice as steeply for a linear demand curve). The firm still maximizes profit where MR = MC, but then charges the price read off the demand curve above that quantity — so P > MR = MC at the monopoly output.

Monopoly inefficiency

Compared to perfect competition, a monopoly produces less output at a higher price. Because it stops where MR = MC but MR is below price, the monopoly quantity is below the allocatively efficient level (where P = MC). The unproduced but socially valuable units create deadweight loss — a triangle between the demand and MC curves at the restricted quantity. The monopolist can also earn long-run economic profit, since barriers to entry block the competition that would compete profit away. Monopoly is thus allocatively inefficient: P > MC at the profit-maximizing output.

Monopoly pricing

Profit-max: MR = MC, then set price from demand: P > MR = MC · Allocative efficiency would require P = MC

Because P > MC at the monopoly output, output is below the efficient level, creating deadweight loss. For linear demand, MR has the same intercept but twice the slope.

Worked example

A monopolist faces demand P = 100 − 2Q, giving marginal revenue MR = 100 − 4Q. Its marginal cost is constant at MC = 20. Find the profit-maximizing quantity and price.

1.Set MR = MC: 100 − 4Q = 20.
2.Solve for Q: 80 = 4Q → Q = 20 units.
3.Find price from the demand curve (not MR): P = 100 − 2(20) = 100 − 40 = $60.
4.Confirm P > MC: $60 > $20, and P > MR, consistent with monopoly pricing.

Answer: The monopolist produces Q = 20 and charges P = $60 (read off demand, not MR). Because price ($60) exceeds marginal cost ($20), output is below the efficient level and the market suffers deadweight loss.

Checkpoint

For a profit-maximizing single-price monopolist, which relationship holds at the output where it produces?

Watch out

A monopolist sets quantity where MR = MC, but reads the price off the demand curve above that quantity — never off the MR curve. Pricing at the MR–MC intersection height understates the monopoly price and is a frequent graphing error.

Checkpoint

Relative to a perfectly competitive market with the same costs, a single-price monopoly generally results in:

On the exam

Draw the monopoly graph with demand above MR, find output at MR = MC, then go straight up to the demand curve for price. Mark the deadweight-loss triangle between demand and MC from the monopoly quantity out to the efficient (P = MC) quantity.

Answer the 2 checkpoints as you read.