Ten Principles of Economics - Part 32. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 15 MONOPOLY 321 perfect substitutes the products of all the other firms in its market the demand curve that any one firm faces is perfectly elastic. By contrast because a monopoly is the sole producer in its market its demand curve is the market demand curve. Thus the monopolist s demand curve slopes downward for all the usual reasons as in panel b of Figure 15-2. If the monopolist raises the price of its good consumers buy less of it. Looked at another way if the monopolist reduces the quantity of output it sells the price of its output increases. The market demand curve provides a constraint on a monopoly s ability to profit from its market power. A monopolist would prefer if it were possible to charge a high price and sell a large quantity at that high price. The market demand curve makes that outcome impossible. In particular the market demand curve describes the combinations of price and quantity that are available to a monopoly firm. By adjusting the quantity produced or equivalently the price charged the monopolist can choose any point on the demand curve but it cannot choose a point off the demand curve. What point on the demand curve will the monopolist choose As with competitive firms we assume that the monopolist s goal is to maximize profit. Because the firm s profit is total revenue minus total costs our next task in explaining monopoly behavior is to examine a monopolist s revenue. A MONOPOLY S REVENUE Consider a town with a single producer of water. Table 15-1 shows how the monopoly s revenue might depend on the amount of water produced. The first two columns show the monopolist s demand schedule. If the monopolist produces 1 gallon of water it can sell that gallon for 10. If it produces Quantity of Water Price Total Revenue Average Revenue Marginal Revenue Q P TR P X Q AR TR Q MR ATR AQ 0 gallons 11 0 10 1 10 10 10 8 2 9 18 9 6 3 8 24 8 4 4 7 28 7 2 5 6 30 6 0 6 5 30 5 -2 7 4 28 4 -4 8 3 24 3 A Monopoly s Total Average and Marginal Revenue .
