Theory of monopoly, Microeconomics

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Monopoly is that form of market where there is only one firm producing a particular product. Being the sole supplier, the monopoly firm has the power to control prices and output to maximize its profit. Monopoly can be defined as the absence of competition among firms.
Conditions for a monopoly to exist are:

1. Single producer of the product

2. There must be no close substitutes for the product so that there is no competition over market share.

3. Strong barriers to the entry of new firms into the industry.

Maximizing Profit

The principle objective of a monopolist is to maximize profit.

Profit = Total Revenue - Total cost.

So, the problem faced by the monopolist is: max TR - TC.

On carrying out this optimization exercise, we arrive at the following condition:

MR = MC.

That is, the optimal choice of output will be at the point where the marginal revenue is equal to the marginal cost of the firm. If the MR was greater than the MC then the firm could increase its profit by producing a few more units. If the MR was less than the MC then the firm should bring down the level of production and cut down the excess cost.


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