This essay explains how a rational monopolist would determine the price and output that would maximise his profits. A monopoly is defined as one dominant firm in a market that produces a unique good with no close substitutes, for instance, De Beers in terms of the diamond market or Microsoft in terms of software. The market structure that a monopolist faces generally has high barriers to entry, either in terms of natural or man-made barriers to entry, price setting power where the monopolist would set price and take the resulting output or set output and take the resulting price, and often imperfect information exists in the market.
A profit maximising firm, not just a monopoly, would set its pricing and output decisions where MC = MR, the profit maximising rule or loss minimising rule.
[What economics diagram would you draw here? And how would you explain this economics diagram? Economics tutor’s hint – draw a monopoly diagram and be careful to explain how this diagram answers the question posed.]
According to the diagram, the monopolist will set price and output at MC = MR, and the P > AC, thus earning the monopolist supernormal profits. The optimal price would be P* and the optimal output would be Q*, and the shaded area would be the supernormal profits generated from setting MC = MR.
In conclusion, according to economic theory, rational firms which want to maximise their profits will set MC = MR and a monopolist is no exception.
Economics Tutor's Comment - This is an excellent explanation for how the monopolist maximises his profits. It was based on an actual question set for the Economics at A levels. Also, the use of economic theory is strong in this economics essay, but the real question is: how could the theory be used even better with real world examples for each point to illustrate the context? Thank you for reading, and cheers.
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This top-quality model essay with sample comments was contributed by WT, our resident Economics expert who helps students understand the beauty of Economics and its applications in real life. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory, especially applications to real life. This economics post was edited by S. S., the editor of JC Economics Essays. Thank you for reading.
