5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Profit Maximization

While demand looks different for the monopolist, the mechanism for maximizing profit is

the same for both the monopolist and the perfectly competitive firm. The firm must set

output at the level where MR =MC. At this level of output (Qm), the monopolist sets

the price (Pm) from the demand curve.Profit is found in the same way by creating the

profit rectangle with average total cost. This is seen in Figure 9.12.

The positive monopoly profits illustrated in Figure 9.12 are likely, due to the entry bar-

rier, to last into the long run. Though P>0 is usually the case for a monopoly firm, you

might imagine a case where demand plummets, or perhaps production costs increase, to the

point where P<ATC and losses are incurred. In the event of persistent losses, we expect

the monopolist to exit the industry.

Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 129

D

Quantity

$

12

6

5

TR lost from lowered price

TR gained from increased quantity

Figure 9.10

• Demand is horizontal, and P=MR in perfect competition.


• Demand is downward sloping, and P>MR in monopoly.


• The monopolist operates in the elastic (or upper) range of demand.

TIP

Demand

Quantity

$

3.5

Marginal Revenue

Total Revenue

3.5

7

7

Ed = 1

Figure 9.11

KEY IDEA

“Understand the
profit max rule
well. It will help
you throughout
economics.”
—Nick,
AP Student