Monopoly Profit Maximization: This is a fairly long and technical section that presents the basic monopoly model.  It is a good idea to start the discussion by pointing out the ways that a monopoly market differs from the competitive markets in the previous chapter, as well as the ways in which the two are similar.  The differences are probably more obvious: single versus multiple sellers, price taking versus price making, market versus individual demand, etc.  There are, however, some important similarities: profit maximizing behavior, marginal analysis and the MR = MC rule for profit maximization, calculating profits, etc.

 

The starting point of the model should be an acknowledgement that in considering the textbook monopoly case with literally a single seller (as opposed to the more everyday usage of the term ‘monopoly’ as short hand for market power), that the firm is the entire market.  This is more important than it might seem at first glance, because it implies that the firm must react to the entire market demand curve.  This, in turn, implies leaving the world of price taking behavior behind and considering a situation in which firms have some control over the prices that they set.

 

The next important step is the discussion of marginal revenue and the key result that MR < P for any ‘price making’ or ‘price setting’ firm.  In addition, in the simple case of linear demand, this MR < P relationship can be quantified by showing that MR has the same intercept and twice the slope as the inverse demand function.

 

With the MR and inverse demand relationship quantified and clarified, the next step is to add information about cost.  From there, it is very important to point out that no matter what kind of firm is being considered, the rule for profit maximization remains the same: MR = MC.