The law of demand states that as the price of a good decreases, the quantity demanded will increase, all other things being equal. Even though the monopolist has market power and can set its price, its pricing decision is still subject to the law of demand. As the only supplier in the market, the monopolist's demand curve is the downward-sloping market demand curve. So, in order to sell more, the monopolist must lower price assuming they are a single-price monopolist. To sell an extra unit the monopolist not only has to lower the price for that unit, it has to also lower the price on all units that it sells. This means that the contribution made to total revenue (MR) by the next unit sold is less than the contribution to total revenue (MR) made by the sale of the previous units. The result is that the marginal revenue curve for the monopolist is downward-sloping.Thus, for the monopolist . The contribution to total revenue for selling an additional unit is less than the price charged for the unit (less by the amount it loses as a result of lowering the price on all units that it was selling already). Like a perfectly competitive firm, a monopolist determines the profit maximizing level of output where . However, unlike a perfectly competitive firm, the monopolist does not face a given market price. With market power, the monopolist gets to set the price. Having set its production to an amount that maximizes profits, it then charges what consumers are willing to pay based on the market demand curve. For example, a monopolist sets its production where , at 200,000 units. Given the monopolist is producing 200,000 units, it sets a price where the quantity demanded is also equal to 200,000 units (this is the price from the demand curve at the profit-maximizing level of output). The point where the quantity demanded meets the amount produced is at point B on the market demand curve, which corresponds to a price of $7. In order to calculate its profit, the monopolist must compare its price to its average total costs at the profit maximizing level of output or quantity. The equation for determining the amount of profit for a monopolist is:
A monopolist will set production at its profit-maximizing quantity and then determine the market price. The monopolist will produce where marginal cost equals marginal revenue, then set the price where quantity demanded equals the monopolist's output.