Overview
A monopoly is a market in which there is only one player for a given product, and there are barriers to entry for other firms to compete with the monopoly. When there is only one firm, that firm gets to set the price of its product.
Product Demand
The demand curve is the standard downward sloping curve that is common to supply demand modeling.
Marginal Revenue
The marginal revenue can be plotted against the demand. For the first unit, the marginal revenue equals the price. As the price drops and more units are sold, the marginal revenue is the sum of the new revenue from the new units sold minus the loss in revenue from the decreased price on prior units.
Pricing Curves
The following plots the marginal cost and the average total cost against demand and marginal revenue.
- Marginal Cost - is upward sloping. This is a classical assumption that may not always hold. (see firm costs)
- Average Total Cost - initially is declining due to the outsized effects of fixed costs, but eventually is overcome by the increasing marginal costs.