A monopoly exists when a single firm is the sole supplier of a product or service with no close substitutes. Think of a town that only has one water company – you have no choice but to pay them for water. In a monopoly, the firm has significant control over price and output.
Monopolists set output where marginal cost (MC) equals marginal revenue (MR). The price is then read from the demand curve at that quantity.
Mathematically:
\$MR = MC \quad \text{and} \quad P = D(Q)\$
Because they can charge a higher price than in competitive markets, monopolists often earn economic profits in the long run.
Monopolies can lead to:
Consider a social media platform that is the only major choice for users in a country. It can set higher advertising rates because advertisers have no alternative platforms to reach the same audience. This gives the platform monopoly power.
Tip: When answering exam questions on monopolies, remember to:
| Structure | Number of Firms | Price Control | Barriers to Entry |
|---|---|---|---|
| Monopoly | 1 | High | High |
| Oligopoly | Few | Moderate | Moderate |
| Monopolistic Competition | Many | Low | Low |
| Perfect Competition | Many | None | None |