Monopoly Pricing and Output

A single-price monopolist chooses an output where marginal revenue equals marginal cost, provided that output is preferable to shutdown:

It then moves vertically to the demand curve to find the highest uniform price buyers will pay for that quantity. The order matters: choose quantity with MR and MC, then read price from demand.

A complete decision procedure

1. Derive market demand and the associated MR curve.
2. Find the quantity where rising MC meets MR.
3. Use demand to obtain price.
4. Compare price with ATC to calculate profit and with AVC to check shutdown.

Economic profit is

A monopolist is not guaranteed profit. Weak demand or high cost can produce a loss, and a monopolist may shut down or exit. Monopoly describes market position, not financial success.

Why monopoly has no independent supply curve

A competitive firm's supply maps price to quantity using MC. A monopolist's quantity depends on both demand and cost because MR depends on the shape of demand. Two demand curves can produce the same price but different MR and quantities. There is therefore no unique monopoly quantity associated with price alone.

Changes in demand do not always move monopoly price and quantity in the same simple way. Recompute MR, compare it with MC, and return to the new demand curve.

Solve a monopoly from beginning to end

Let demand be $P=40-Q$, so $MR=40-2Q$, and let MC equal 8. Setting MR equal to MC gives $Q=16$. Returning to demand gives $P=24$. If fixed cost is 36, profit is $(24-8)16-36=220$.

The competitive benchmark would set demand price equal to MC, giving $Q=32$ and $P=8$. Monopoly therefore chooses half the benchmark quantity in this simple linear example. This comparison is not a universal “half” rule; it comes from these particular linear curves.

Use a four-line worksheet

Write demand, derive MR, solve $MR=MC$, then use demand for price. Only after those lines should you calculate profit and check shutdown. This order prevents three errors: setting demand equal to MC for monopoly quantity, charging the MR value as price, and forgetting fixed cost in profit.

Because demand helps determine MR, monopoly has no supply curve independent of demand. If buyer preferences change, repeat the entire worksheet rather than moving along a fixed monopoly supply curve.