This lesson explains what makes a firm a monopoly and why a monopolist faces a different demand curve from a perfectly competitive firm. Understanding the market definition and demand constraints is essential for analyzing a monopoly’s choices.
A monopoly is a firm that sells all or nearly all of the goods or services in a particular market. It is protected from competition by barriers to entry, such as legal restrictions, control of a key resource, or other obstacles that make it difficult for new firms to enter.
All flashcards
What is a monopoly?
A firm that supplies all or nearly all of a good or service in a defined market, typically protected from competition by barriers to entry.
What does market definition determine?
It determines which products and firms count as substitutes and competitors, affecting how much market power a firm appears to have.
What is a price taker?
A firm that accepts the market price as given because its own output is too small relative to the market to change that price.
What demand curve does a monopolist face?
The downward-sloping market demand curve, because the monopolist is the sole producer in its market.
Why can’t a monopolist choose any price and quantity independently?
Consumers’ willingness to buy constrains the firm. The monopolist must select a price and quantity that lie along its demand curve.
Quiz questions
Why is a monopolist’s marginal revenue generally below its price when it sells an additional unit?Answer: It must lower the price on units it was already selling as well as the additional unit.
If the marginal revenue from one more unit exceeds its marginal cost, what should a profit-seeking firm do?Answer: Expand output, because the additional unit adds more revenue than cost.
After a monopolist chooses its profit-maximizing quantity, how does it determine the corresponding price?Answer: It reads the price from the demand curve at that quantity.
How can barriers to entry affect a monopolist’s economic profits over time?Answer: They can prevent new firms from entering and eroding those profits.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.