Monopoly singleprice: Price & output decisions  Monopoly
Monopoly singleprice: Price & output decisions
Lessons
Notes:
The monopoly sets their output and price at a point in which it maximizes economic profit. There are two ways to do this:
Maximizing Profit with Total Revenue & Total Cost
Suppose we know the demand for the product, and the total cost of producing them. Then we can:
 Draw a table with the following columns: quantity, price, total revenue, total cost and profit.
 Calculate the total revenue ( p × q ).
 Calculate the profit (P = R  C ).
 Find the output with the highest attainable profit.
Price
(p)
Quantity demanded
(q)
Total Revenue
( R = p × q )
Total Cost
(C)
Profit
(P = R  C)
10
0
0
5
5
9
1
9
7
2
8
2
16
10
6
7
3
21
14
7
6
4
24
19
5
5
5
25
25
0
In this case, the highest attainable profit when the output produced is 3, the price is $7.
If we graph total revenue and total cost in a graph, then the highest attainable profit will be the output in which TR and TC have the biggest gap.
Maximizing Profit with MR = MC
Just like in perfect competition, monopolist find the output q and price p that maximizes profit by solving for MR = MC.
To solve p and q graphically, we do the following:
 Graph the MR, MC, ATC, and demand Curve
 Find the intersection point of MR and MC to find output q
 Use output q to find price p on the demand curve.
To solve p and q graphically, we do the following:
 Define formulas for demand curve, MR and MC
 Set MR = MC and solve for output q
 Put output q into the demand formula and solve for p
To calculate economic profit, we find the average total cost ATC at the output q, and use the formula
Economic Profit = (p  ATC) q
Deadweight Loss in SinglePrice Monopoly
Unlike perfect competition, monopolist is inefficient because it creates deadweight loss.
Monopolist produces the output that maximizes profit, but there is a shortage because consumers want more of the product.
Note 1: The deadweight loss and consumer surplus can be calculated by using the area of the triangle formula
A = $\large \frac{bh}{2}$
Note 2: The producer surplus can be calculated by breaking apart the surplus into a triangle and square. Then calculate the areas of each to find the sum.
Price
(p)

Quantity demanded
(q)

Total Revenue
( R = p × q )

Total Cost
(C)

Profit
(P = R  C)

10 
0 
0 
5 
5 
9 
1 
9 
7 
2 
8 
2 
16 
10 
6 
7 
3 
21 
14 
7 
6 
4 
24 
19 
5 
5 
5 
25 
25 
0 

Intro Lesson
Monopoly SinglePrice: Price & Output Decisions Overview: