HAT Manifesto Part 1/3 - Rubric Cube - 241201 revision

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5  Firm Behavior and the Organization of Industry

Chapter 15 of 36  Monopoly

Section 11 of 34

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Figure 4 here

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Figure 4 - Profit Maximization for a Monopoly

A monopoly firm maximizes profit by choosing the quantity of output at which marginal revenue equals marginal cost, point A.

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Looking at Figure 4, at first the monopoly firm is producing at a low level of output, Q1.

Here, marginal cost (MC) is less than marginal revenue (MR).

If production is increased by 1 unit, the additional revenue would exceed the additional costs, because MR is still above MC, and profit would rise.

Always when MC is less than MR a firm can increase profit by producing more units.

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Conversely at high levels of output, such as Q2, MC is greater than MR.

If the firm reduces production by 1 unit the costs saved would exceed the revenue lost.

Always when MC is more than MR a firm can increase profit by producing fewer units.

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(comment)

All companies but those in the rare perfectly competitive markets have some monopoly power, mainly because their product is at least somewhat unique.

As a result companies don’t want to sell at a lower price to maximize quantity of product sold but rather at a higher price and smaller quantity that maximizes profit.

The higher prices are not necessarily bad because the drive for monopoly profit (economic profit) incentivizes improvement of product quality and development of new products.