Explain price and output determination under monopoly and compare it with perfect competition.
How to lay out the answer. Follow the frame, then write it in your own words.
1 · Define monopoly and its features. One seller, no close substitutes, price maker.
2 · Explain barriers to entry.
Legal barriers
Natural monopoly
Control of resources
High start-up costs and brand loyalty
3 · Explain AR and MR. Downward-sloping demand; MR below AR because price must fall on all units.
4 · Draw the equilibrium. [Diagram: AR (demand), MR, MC and ATC; Q* where MR = MC; P* read up on AR; profit rectangle between P* and ATC]
5 · Numerical example. Q = 4, P = Rs. 7,000, ATC = Rs. 5,500, profit Rs. 6,000; MC Rs. 3,000 < P.
6 · Compare with perfect competition. Higher price, lower output, P > MC, deadweight loss, lasting supernormal profit; but possible economies of scale and innovation.
7 · Sri Lankan business link. Electricity supply is close to a natural monopoly; tariffs are regulated by the PUCSL.
8 · Conclude. Monopoly power raises prices and cuts output, which is why it is regulated.
Scoring tip: Mark the profit rectangle clearly: (P* − ATC) × Q*. Many students forget to read price from the demand curve.
