We now know that a monopoly is:
A pure monopoly is when there’s only one firm in market. A legal monopoly is when a firm has over 25% market share.
But… when economists are modelling a monopoly, we assume that:
Economists make three assumptions when modelling a monopoly:
First they assume there’s only one firm in the market.
Second, they assume the monopoly will want to profit maximise. Third, they assume there are high barriers to entry which keep new entrants out.
And based on these assumptions, economists created the monopoly diagram!
Economists love diagrams, they just can’t get enough of them.
So all five of our market structures have their own special diagram, but fortunately the monopoly diagram is super simple – in fact, you already know what it looks like!
The monopoly diagram is just a normal costs and revenues diagram!
So where will the monopolist produce?
A OR
Firms profit maximise where MC = MR, at point G. At point G, the quantity is OZ and if we go UP to the DEMAND (AR) CURVE, we see that the price is OF – you’ve gotta go UP TO THE DEMAND (AR) CURVE!!!
B OE
Firms profit maximise where MC = MR, at point G. At point G, the quantity is OZ and if we go UP to the DEMAND (AR) CURVE, we see that the price is OF.
C OT
Firms profit maximise where MC = MR, at point G. At point G, the quantity is OZ and if we go UP to the DEMAND (AR) CURVE, we see that the price is OF. D OF
Firms profit maximise where MC = MR, at point G. At point G, the quantity is OZ and if we go UP to the DEMAND (AR) CURVE, we see that the price is OF.
We assume that the monopolist is a profit-maximiser! So they’ll produce where MC = MR, which gives them Qmax, the profit-maximising quantity.
To find the Pmax, we stack it up like Dr Dre stacks his money, all the way up to the demand or AR curve…slide across and we have our price, Pmax!
So there’s actually nothing new here! To model a monopoly we just use the standard costs and revenue diagram 🙂
