Monopoly: price and output
A monopolist is the only seller of a product with no close substitutes. It sets output where MR = MC and charges a price above MC.
Features and barriers to entry
- One seller, no close substitutes; the firm is the industry.
- Price maker: it chooses price or quantity, but not both, because it faces the market demand curve.
- Legal barriers: patents, copyrights, exclusive licences and state monopolies.
- Natural monopoly: economies of scale so large that one firm can supply the whole market at the lowest cost (piped water, electricity grids).
- Control of a key raw material or distribution network.
- High start-up costs and strong brand loyalty that deter new entrants.
Why MR is below AR
A monopolist faces the whole downward-sloping market demand curve, which is its AR curve. To sell one more unit, it must lower the price on all units, not only the extra one. So the extra revenue from that unit (MR) is less than its price. For a straight-line demand curve, MR falls twice as fast as AR. When MR becomes zero, total revenue is at its maximum; beyond that MR is negative. A profit-maximising monopolist always produces where demand is elastic (MR positive).
Worked example: the monopolist's price and output
A monopolist has the bakery's cost structure (TC for 1-6 units: Rs. 14,000; 17,000; 19,000; 22,000; 27,000; 34,000). It can sell 1 unit at Rs. 10,000, 2 at Rs. 9,000, 3 at Rs. 8,000, 4 at Rs. 7,000, 5 at Rs. 6,000, 6 at Rs. 5,000. Find TR, MR, profit and the best output.
- TR = P × Q: 10,000; 18,000; 24,000; 28,000; 30,000; 30,000.
- MR = ΔTR: 10,000; 8,000; 6,000; 4,000; 2,000; 0. MR is below price after the first unit.
- MC (from TC): 4,000; 3,000; 2,000; 3,000; 5,000; 7,000.
- Profit = TR − TC: −4,000; 1,000; 5,000; 6,000; 3,000; −4,000.
- Marginal check: 4th unit MR 4,000 ≥ MC 3,000 (produce); 5th unit MR 2,000 < MC 5,000 (stop).
- At Q = 4, price = Rs. 7,000, ATC = 22,000 ÷ 4 = 5,500. Profit = (7,000 − 5,500) × 4 = Rs. 6,000. ✓
Produce 4 units and charge Rs. 7,000. Profit = Rs. 6,000. Price (Rs. 7,000) is well above MC (Rs. 3,000).
Monopoly compared with perfect competition
| Point | Perfect competition | Monopoly |
|---|---|---|
| Number of sellers | Very many | One |
| Demand curve facing the firm | Horizontal (P = MR) | Downward sloping (P > MR) |
| Price and output | Lower price, higher output | Higher price, lower output |
| Price vs MC | P = MC (allocatively efficient) | P > MC (allocatively inefficient; deadweight loss) |
| Long-run profit | Normal profit only | Supernormal profit can persist |
| Possible benefits | Efficiency, low prices | Economies of scale; profits can fund research and innovation |
Price discrimination and regulation
A monopolist may practise price discrimination: charging different prices to different buyers for the same product, not because of cost differences. It needs market power, separate markets that cannot resell to each other, and different elasticities of demand; the higher price goes to the market with less elastic demand. Examples include different electricity tariffs for households and industry, or peak and off-peak rates. Because monopolies can overcharge, governments regulate them. In Sri Lanka, the Public Utilities Commission of Sri Lanka (PUCSL) regulates electricity, and the Consumer Affairs Authority deals with anti-competitive practices.
Electricity transmission and distribution in Sri Lanka is close to a natural monopoly, run by state-owned companies that took over from the Ceylon Electricity Board in 2026. Because customers have no real alternative supplier, tariffs are reviewed by the PUCSL rather than left to the firm alone.
Short answer: “What is a natural monopoly?” An industry where economies of scale are so large that one firm can supply the whole market at a lower cost than two or more firms, e.g. piped water.
Structured question: “From a demand and cost schedule, calculate TR, MR and profit and find the monopolist's price and output.” TR = P × Q, MR = ΔTR; choose Q where MR = MC (profit largest). In the example: Q = 4, P = Rs. 7,000, profit Rs. 6,000.
Essay: “Explain price and output determination under monopoly and compare it with perfect competition.” Features and barriers; why MR < AR; equilibrium at MR = MC with price from the demand curve and a profit rectangle; comparison table; price discrimination and regulation.
Monopoly: MR = MC for quantity, then go UP to the demand curve for price. Price is above MC, so output is too low and a deadweight loss appears.