MONOPOLY
Definition:
A monopoly is a market structure where there is only one seller of a product or service that
has no close substitutes, giving the firm significant market power to set prices.
Key Features of a Monopoly:
Single seller: One firm controls the entire market supply.
No close substitutes: Consumers have no alternatives.
High barriers to entry: New firms cannot easily enter the market.
Price maker: The monopolist can influence or set the market price.
Downward-sloping demand curve: The monopolist faces the market demand curve
directly.
Demand in Monopoly
A monopolist is the only seller, so the firm’s demand curve is the market demand
curve.
The demand curve is downward-sloping, meaning:
o To sell more, the monopolist must lower the price.
o This means price and quantity are inversely related.
💰 Revenue in Monopoly
There are two key revenue concepts:
1. Total Revenue (TR):
Formula: TR = Price × Quantity
At first, as quantity increases, TR increases.
But eventually, lowering the price too much causes TR to fall.
2. Marginal Revenue (MR):
Marginal Revenue is the change in total revenue from selling one more unit.
In a monopoly:
Relationship Between Demand & Revenue:
The MR curve lies below the demand curve.
, When demand is elastic (price-sensitive), MR is positive → increasing output increases
revenue.
When demand is inelastic, MR is negative → increasing output reduces total revenue.
The monopolist maximizes profit where: MR = MC (Marginal Revenue = Marginal
Cost)
MR < Price (because the monopolist must lower the price on all units to sell one more)
Demand Equation (Ceteris Paribus):
The demand equation expresses the relationship between the quantity demanded (Qd) and the
price (P) of a good or service, assuming all other factors remain constant — which is what
ceteris paribus means.
🧮 General Form:
Qd=a−bP
Where:
Qd = quantity demanded
P = price
a = intercept (quantity demanded when price is 0)
b = slope (how much quantity falls when price increases by 1 unit)
🔍 Ceteris Paribus means:
All other influences on demand (like income, tastes, prices of other goods, expectations, etc.) are
held constant.
📊 Example:
Let’s say:
Qd=100−2P
If P=10P then Qd=100−2(10)=80
Definition:
A monopoly is a market structure where there is only one seller of a product or service that
has no close substitutes, giving the firm significant market power to set prices.
Key Features of a Monopoly:
Single seller: One firm controls the entire market supply.
No close substitutes: Consumers have no alternatives.
High barriers to entry: New firms cannot easily enter the market.
Price maker: The monopolist can influence or set the market price.
Downward-sloping demand curve: The monopolist faces the market demand curve
directly.
Demand in Monopoly
A monopolist is the only seller, so the firm’s demand curve is the market demand
curve.
The demand curve is downward-sloping, meaning:
o To sell more, the monopolist must lower the price.
o This means price and quantity are inversely related.
💰 Revenue in Monopoly
There are two key revenue concepts:
1. Total Revenue (TR):
Formula: TR = Price × Quantity
At first, as quantity increases, TR increases.
But eventually, lowering the price too much causes TR to fall.
2. Marginal Revenue (MR):
Marginal Revenue is the change in total revenue from selling one more unit.
In a monopoly:
Relationship Between Demand & Revenue:
The MR curve lies below the demand curve.
, When demand is elastic (price-sensitive), MR is positive → increasing output increases
revenue.
When demand is inelastic, MR is negative → increasing output reduces total revenue.
The monopolist maximizes profit where: MR = MC (Marginal Revenue = Marginal
Cost)
MR < Price (because the monopolist must lower the price on all units to sell one more)
Demand Equation (Ceteris Paribus):
The demand equation expresses the relationship between the quantity demanded (Qd) and the
price (P) of a good or service, assuming all other factors remain constant — which is what
ceteris paribus means.
🧮 General Form:
Qd=a−bP
Where:
Qd = quantity demanded
P = price
a = intercept (quantity demanded when price is 0)
b = slope (how much quantity falls when price increases by 1 unit)
🔍 Ceteris Paribus means:
All other influences on demand (like income, tastes, prices of other goods, expectations, etc.) are
held constant.
📊 Example:
Let’s say:
Qd=100−2P
If P=10P then Qd=100−2(10)=80
