Topics

Monopoly: characteristics, pricing and output

Covers AS91400

The characteristics

Again, link each one to a decision rather than listing it.

One firm is the whole industry.
- Therefore the firm faces the entire market demand curve, which slopes down, so AR slopes down and MR lies below it.
High or complete barriers to entry.
- Legal barriers: a patent, a licence, a statutory monopoly.
- Natural barriers: enormous fixed costs, control of an essential input, network effects.
- Therefore supernormal profit can persist indefinitely — no new firm can come in to compete it away. This is the single biggest contrast with perfect competition.
A unique product with no close substitutes.
- Therefore demand is relatively inelastic, so the firm can raise price without losing all its customers.
The firm is a price setter, though it can only choose one point on the demand curve — a price and the quantity that goes with it, not both independently.

Finding price and output

Step 1 — MR = MC fixes the quantity.

Find where the MR curve crosses MC. Mark it with a dot.
Drop a vertical line to the quantity axis. That is Qe.

Step 2 — AR fixes the price.

From Qe, go straight up to the AR curve.
Read across to the price axis. That is Pe.

Step 3 — AC gives the profit.

Read the height of AC at Qe.
Supernormal profit is the rectangle between Pe and AC, out to Qe. Shade it and label it.

Short run and long run for a monopoly

They are the same. This is the answer to one of the most frequently asked questions in this paper, and the 2025 report lists "recognised that a monopoly's short run price, output, and profit are the same as in the long run" as an Achieved bullet.
The reason is the barriers to entry. Supernormal profit normally attracts entry, which competes it away — but no firm can enter, so nothing changes.
The only long-run possibility that differs is if the monopoly makes a loss: with all costs variable in the long run, it would exit the market entirely.

Why a monopoly can make a loss

Being a monopoly does not guarantee profit. If demand for the product is too small relative to costs, AR may lie below AC at every output.
The firm still produces where MR = MC in the short run (loss minimising), but in the long run it closes.

Tips and Tricks

Draw MR falling twice as steeply as AR, and stop MR halfway along. If AR is a straight line, MR has the same intercept on the price axis and hits the quantity axis at half AR's quantity. Drawing MR parallel to AR is a serious error — it destroys the gap that makes the monopoly inefficient.

Mark the MR = MC intersection with a dot before drawing anything else. The 2025 Not Achieved list includes "error in labelling the profit maximising price and quantity for the natural monopoly", and the cause is almost always reading the price off the wrong curve.

When asked about the long run, say WHY it is the same. "The monopoly's short run and long run price, output and profit are identical, because high barriers to entry prevent new firms from entering to compete the supernormal profit away." The reason is the mark, not the observation.

Worked ExampleFinding a monopoly's price, output and profit

An illustrative monopoly supplies a patented product. At each output:

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Find the profit maximising output and price, and calculate the supernormal profit.

Step 1 — Compare MR and MC at each output

Output	MR	MC	Comparison	Decision
2	80	35	MR > MC	Expand — missing marginal profits
3	60	45	MR > MC	Expand — missing marginal profits
4	40	55	MR < MC	Do not produce this unit — marginal loss

At 3 units, MR ($60) is still above MC ($45), so the third unit adds $15 to profit.

At 4 units, MR ($40) is below MC ($55), so the fourth unit would cost $15 more than it earns.

Step 2 — State the profit maximising output

Qe = 3 units. This is where MR = MC most closely — the last output at which MR still exceeds MC.

Written as the four-part chain: at 2 units MR > MC, so the firm is missing out on marginal profits and will increase output to 3 units, the profit maximising point closest to MR = MC.

Step 3 — Find the price from AR, not MR

The price is not $60, the marginal revenue. Read the AR column at 3 units.

Pe = $80.

Note that $80 is well above the MC of $45 — a monopoly always prices above marginal cost.

Step 4 — Calculate supernormal profit

At 3 units, AC is $57.

Profit per unit = Pe − AC = $80 −$ 57 = $23 Supernormal profit = $23 × 3 = $69

Alternatively: total revenue $240 − total cost ($57 × 3 = $171) = $69. The two methods agree.

Step 5 — The long run

Because the product is patented, there are complete legal barriers to entry. No competitor can enter to compete the $69 of supernormal profit away.

The long-run price, output and profit are therefore identical to the short run: $80, 3 units and $69.

Monopoly: characteristics, pricing and output

Covers AS91400

The characteristics

Again, link each one to a decision rather than listing it.

One firm is the whole industry.
- Therefore the firm faces the entire market demand curve, which slopes down, so AR slopes down and MR lies below it.
High or complete barriers to entry.
- Legal barriers: a patent, a licence, a statutory monopoly.
- Natural barriers: enormous fixed costs, control of an essential input, network effects.
- Therefore supernormal profit can persist indefinitely — no new firm can come in to compete it away. This is the single biggest contrast with perfect competition.
A unique product with no close substitutes.
- Therefore demand is relatively inelastic, so the firm can raise price without losing all its customers.
The firm is a price setter, though it can only choose one point on the demand curve — a price and the quantity that goes with it, not both independently.

Finding price and output

Step 1 — MR = MC fixes the quantity.

Find where the MR curve crosses MC. Mark it with a dot.
Drop a vertical line to the quantity axis. That is Qe.

Step 2 — AR fixes the price.

From Qe, go straight up to the AR curve.
Read across to the price axis. That is Pe.

Step 3 — AC gives the profit.

Read the height of AC at Qe.
Supernormal profit is the rectangle between Pe and AC, out to Qe. Shade it and label it.

Short run and long run for a monopoly

They are the same. This is the answer to one of the most frequently asked questions in this paper, and the 2025 report lists "recognised that a monopoly's short run price, output, and profit are the same as in the long run" as an Achieved bullet.
The reason is the barriers to entry. Supernormal profit normally attracts entry, which competes it away — but no firm can enter, so nothing changes.
The only long-run possibility that differs is if the monopoly makes a loss: with all costs variable in the long run, it would exit the market entirely.

Why a monopoly can make a loss

Being a monopoly does not guarantee profit. If demand for the product is too small relative to costs, AR may lie below AC at every output.
The firm still produces where MR = MC in the short run (loss minimising), but in the long run it closes.

Tips and Tricks

Worked ExampleFinding a monopoly's price, output and profit

An illustrative monopoly supplies a patented product. At each output:

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Find the profit maximising output and price, and calculate the supernormal profit.

Step 1 — Compare MR and MC at each output

Output	MR	MC	Comparison	Decision
2	80	35	MR > MC	Expand — missing marginal profits
3	60	45	MR > MC	Expand — missing marginal profits
4	40	55	MR < MC	Do not produce this unit — marginal loss

At 3 units, MR ($60) is still above MC ($45), so the third unit adds $15 to profit.

At 4 units, MR ($40) is below MC ($55), so the fourth unit would cost $15 more than it earns.

Step 2 — State the profit maximising output

Qe = 3 units. This is where MR = MC most closely — the last output at which MR still exceeds MC.

Written as the four-part chain: at 2 units MR > MC, so the firm is missing out on marginal profits and will increase output to 3 units, the profit maximising point closest to MR = MC.

Step 3 — Find the price from AR, not MR

The price is not $60, the marginal revenue. Read the AR column at 3 units.

Pe = $80.

Note that $80 is well above the MC of $45 — a monopoly always prices above marginal cost.

Step 4 — Calculate supernormal profit

At 3 units, AC is $57.

Profit per unit = Pe − AC = $80 −$ 57 = $23 Supernormal profit = $23 × 3 = $69

Alternatively: total revenue $240 − total cost ($57 × 3 = $171) = $69. The two methods agree.

Step 5 — The long run

Because the product is patented, there are complete legal barriers to entry. No competitor can enter to compete the $69 of supernormal profit away.

The long-run price, output and profit are therefore identical to the short run: $80, 3 units and $69.

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59

Output (units)	Price / AR ($)	Total revenue ($)	MR ($)	MC ($)	AC ($)
1	100	100	—	30	90
2	90	180	80	35	62
3	80	240	60	45	57
4	70	280	40	55	56
5	60	300	20	70	59