An Example A monopoly differs from competitive firms in that it is not a price taker. Because it is the only supplier in the market, it faces a downward sloping demand curve, the market demand curve. As a result, the monopoly is free to choose its price and quantity according to market demand. Monopolies are still profit maximizing firms and are thus going to satisfy the profit maximizing condition that marginal cost equal marginal revenue. The key to understanding monopolies and monopoly power is the marginal revenue calculation. In a perfectly competitive market, there exists a market price. Marginal revenue is simply equal to price in this market; every additional unit that is sold brings the market price. In a monopoly, however, every quantity is associated with a different price. The marginal revenue is not simply the price. For example, I may be able to sell 10 guitars at 100 each , butinordertosell 11 guitars , Iwillhavetoofferapriceof 95. Unfortunately, it's very difficult to sell 10 guitars at
This is the end of the preview. Sign up
access the rest of the document.