Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior
and the Organization of Industry
Chapter
15 of 36 Monopoly
Section
6 of 32
…
Figure 2 here
…
Figure 2 – Demand Curves for Competitive and Monopoly Firms
Panel (a) because
competitive firms are price takers, they face horizontal demand curves.
Panel (b) because
a monopoly firm is the sole producer in its market, it faces the downward-sloping
demand curve.
The monopoly must
accept a lower price if it wants to sell more output.
…
The
key difference between a competitive firm and a monopoly firm is the monopoly
can influence the price of its output.
A
competitive firm
· is
small relative to the market in which it operates
· has
no power to influence the price of its output
· takes
the price as given by the market
Because
a monopoly is the sole producer in its market it can alter the price of its
good by altering the quantity it supplies to the market.
…
Consider
the demand curves the competitive and monopoly firm face.
A competitive
firm
· can
sell as much or little as it wants at the given market price
·
sells a product with many perfect substitutes offered by competitors
· faces
a horizontal, perfectly elastic demand curve
A
monopoly firm
· is
the sole producer in its market
·
faces a downward-sloping demand curve
·
will sell less or more of its product if it raises the amount of profit
…
The
market demand curve of a monopoly firm shows the combinations of price and
quantity available to it.
The monopoly
can choose any point on the demand curve by setting
· the
quantity of output
· the
price charged
However,
a monopoly cannot set both quantity of output and price charged.
The
goal of a monopoly firm is to find the optimum quantity supplied and price charged
that results in the most profit.
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