Monopoly Demand and Marginal Revenue: Price and Profit

Quantity comes from MR. Price comes from demand.

Read Three Quantity-and-Price Examples

Build the Single-Price Monopoly Graph

For the usual straight-line demand example, draw downward demand and a steeper MR below it, then the stated MC curve. The MR-MC intersection gives monopoly quantity. Move vertically to demand for price. The efficient quantity lies where demand meets MC, so the units between monopoly and efficient quantity generate deadweight loss.

Add ATC for Monopolistic Competition

For monopolistic competition, add ATC. Short-run analysis looks like monopoly. Long-run entry shifts demand until it is tangent to ATC. Price equals ATC, but demand’s tangency occurs left of minimum ATC.

Explain the Revenue Lost on Earlier Units

A firm with market power faces a downward-sloping demand curve. To sell more output, it must generally lower price, so marginal revenue lies below price. For a linear demand curve, MR shares the vertical intercept and falls twice as fast, but this shortcut does not apply mechanically to every nonlinear demand schedule.

Choose Quantity Before Reading Price

Use a two-step procedure. First identify the appropriate MR-MC crossing under the usual smooth interior conditions, checking feasible boundaries and the alternative of not producing. Second move vertically from that quantity to demand to find the highest price consumers will pay. Reading price from the MR curve is a classic distractor because MR selects quantity but is not the price charged.

Use Demand and ATC to Calculate Profit

MR equals MC at 40 units. Demand at 40 units shows a price of $30, while ATC is $22. The firm charges $30, earns (30-22)(40)=$320, and does not charge the lower MR value. If demand meets MC at 55 units, monopoly’s restriction from 55 to 40 creates deadweight loss.

Use Elasticity Under the Stated Conditions

Use elasticity as a diagnostic after locating the monopoly choice. For a smooth, unconstrained interior single-price choice with nonnegative marginal cost, an output on the inelastic segment cannot maximize profit: a small output reduction would increase revenue while also avoiding production cost. Therefore the chosen point must be on the elastic segment, except for the zero-MC boundary case at unit elasticity.

Keep Price Discrimination Separate

Price discrimination changes the revenue logic. If a firm can charge different buyers according to willingness to pay and prevent resale, it may expand output. Perfect first-degree discrimination converts consumer surplus into producer surplus and produces the efficient quantity where demand meets MC in the basic model. It does not eliminate market power. It changes distribution and output.

Interpret Free Entry and Excess Capacity

Monopolistic competition uses the same short-run demand-MR-MC method, but free entry shifts each firm’s demand left and makes it more elastic until it is tangent to ATC. Long-run economic profit is zero, yet price exceeds MC and output is below the ATC-minimizing scale. This is excess capacity, not a short-run shutdown signal.

Check Whether Rivals’ Responses Matter

For oligopoly, one-firm curves may be insufficient because each firm’s payoff depends on rivals’ choices. A payoff matrix, best-response analysis, or kinked-demand story may replace the simple monopoly graph. Always identify the market structure before applying a picture. Downward demand alone does not prove pure monopoly. Many differentiated sellers face downward demand.

Separate Fixed-Cost and Marginal-Cost Changes

Cost changes have precise effects. A lower fixed cost shifts ATC downward but leaves MC and the best positive-output price and quantity unchanged in this short-run model, conditional on operating. Profit rises. A lower marginal cost shifts MC downward, usually increasing quantity and lowering price. A demand change alters the relevant demand and MR relationships and can change both quantity and price; the exact outcome depends on their shapes and costs. These comparative-static patterns are stronger than vague claims that “lower cost always lowers price.”

Check the Pricing Model Before Applying the Graph

OpenStax’s monopoly output-and-price section separates the quantity choice from the demand price. The twice-as-steep MR shortcut applies to straight-line inverse demand. With a discrete schedule, calculate the actual change in total revenue between feasible quantities rather than assuming every MR entry is the sale price.

The monopolistic-competition section distinguishes product differentiation from pure monopoly and explains entry-driven erosion of economic profit. The familiar long-run tangency diagram uses smooth curves and the standard free-entry model; it is not a universal prediction about every real differentiated business.

The University of Hawaiʻi monopoly chapter also discusses perfect price discrimination. In that ideal benchmark, the seller captures each buyer’s willingness to pay and expands output to the efficient level, assuming the usual social-cost conditions. Real pricing schemes need not achieve that result. Keep the model’s distributional result separate from a claim that every buyer benefits.

Calculate Added Revenue When Every Unit Gets the New Price

A hypothetical single-price seller can sell 4 units for $18 each or 5 units for $16 each. What is the extra revenue from choosing 5 instead of 4 units, and why is it less than the new unit’s price?

Try Three Monopoly Revenue-and-Price Questions

Connect Price, Profit and the Level of the Graph

Compare firm output and profit with firm and market curves. Use the CLEP Microeconomics learning hub for the course map.