Monopoly

Economic Profit

• P > MC → DWL

• P > ATC → positive economic profit

• P = ATC → zero economic profit

• P < ATC → negative economic profit

• Economic Profit = (P - ATC) x Q

Optimizing Price

TR

• TR peaks/maximizes when MR = 0

• a monopoly will never produce where MR is negative because then TR is falling and profit shrinks

• MR is positive when TR is rising

• MR is zero when TR is at its max

• MR is negative when TR is falling

MR

• change in TR/change in Q

• MR can go negative if the firm keeps lowering price too far. But monopolies won’t operate there — because:

  • TR would be decreasing

  • Profit would drop

• Monopoly never produces where MR < 0

DWL

• In a monopoly, output is where MR = MC, but P > MC

  • This means:

    • Some consumers who value the product more than its cost of production don’t get it

    • Those missed trades = deadweight loss

• Monopoly causes DWL because:

  • It restricts output

  • Charges a higher price

  • Prevents mutually beneficial trades