4.2 Monopoly

A monopoly exists when one firm supplies the whole market and barriers keep rivals out: legal barriers like patents and licenses, control of a key resource, or economies of scale. A natural monopoly is the scale case, ATC keeps falling over the relevant range of output, so one firm can serve the market at lower cost than several could.

The monopolist produces the quantity where MR = MC, then reads the price straight up on the demand curve, not at the MR = MC intersection. Profit per unit is P minus ATC at that quantity, so total profit is (P − ATC) × Q. A profit-maximizing monopoly always operates on the elastic portion of its demand curve, where MR is still positive.

Compared with perfect competition, a monopoly charges a higher price and produces less output. Because P > MC at the chosen quantity, some units that buyers value above their cost never get made, that lost total surplus is the deadweight loss of monopoly, and it is why monopoly is allocatively inefficient.