A monopoly price is set by a monopoly.[1][2] A monopoly occurs when a firm is the only firm in an industry producing the product, such that the monopoly faces no competition.[1][2] A monopoly has absolute market power, and thereby can set a monopoly price that will be above the firm's marginal (economic) cost, which is the change in total (economic) cost due to one additional unit produced.[1]

The monopoly will ensure a monopoly price will exist when it establishes the quantity of the product it will sell.[1] As the sole supplier of the product within the market, its sales establish the entire industry's supply within the market, and therefore the monopoly's production and sales decisions can establish a single monopoly price for the industry without any influence from competing firms.[1][2][3] The monopoly will always consider the demand for its product as it considers what price is appropriate; such that it will choose a production supply and price combination that will ensure a maximum economic profit.[1][2] It does this by ensuring the marginal cost (determined by the firm's technical limitations that form its cost structure) is the same as the marginal revenue (as determined by the impact a change in the price of the product will impact the quantity demanded) at the quantity it decides to sell.[1][2] The marginal revenue is solely determined by the demand for the product within the industry, and is the change in revenue that will occur by lowering the price just enough to ensure a single additional unit will be sold.[1][2] The marginal
Per Unit Economic Costs for a Firm - Short Run with a Fixed Cost
revenue is positive, but it is lower than the price associated with it because lowering the price will:

(a) increase the demand for its product, thereby increasing the firm's Sales Revenue,[1] and (b) Lower the price paid by those who were willing to buy the product at the higher price, thereby ensuring a lower Sales Revenue on the Product Sales to those who were willing to pay the higher price.[1] Marginal Revenue = {\displaystyle MR=P+P'(Q)*Q} MR=P+P'(Q)*Q[2] where {\displaystyle 0>P'(Q)} 0>P'(Q)[2]

Reduction in Price increases the Quantity Demanded, but Reduces Payments by those who would be willing to pay a higher price - MR < P "Marginal Cost" solely relates to the firm's technical "Cost Structure" within production, and indicates the rise in Total (Economic) Cost that must occur for an additional unit to be supplied to the market by the firm.[1] "Marginal Cost" is higher than "Average Cost" because of the existence of "Diminishing Marginal Product" in the "Short Run".[1]

Marginal Cost = {\displaystyle MC=C'(Q)} MC=C'(Q)[2] where {\displaystyle 0<C'(Q)} 0<C'(Q)[2][4]

Diminishing Marginal Product ensures the Rise in Cost from producing an additional Item (Marginal Cost) is always greater than the Average Variable (Controllable) Cost at that level of production. Since some costs cannot be controlled in the "Short Run", the Variable (Controllable) Costs will always be lower than the Total Costs in the "Short Run". Samuelson indicates this point on the Consumer Demand curve is where Price is equal to one over one plus the reciprocal of the price elasticity of demand.[5] This rule does not apply to competitive firms since such firms are price takers, and don't have the market power to control either prices or Industry-Wide Sales.[1]

Although the term "markup" is sometimes used in economics to refer to difference between a Monopoly Price and the Monopoly's Marginal Cost (MC),[6] the term markup is frequently used in American Accounting and Finance to define the difference between the Price of the Product and its per unit Accounting Cost. Accepted Neo-Classical Micro-Economic Theory indicates the American Accounting and Finance definition of markup, as it exists in most Competitive Markets, solely ensures an "Accounting Profit" that will be just enough to solely compensate the Equity owners of a "Competitive Firm" within a "Competitive Market" for the "Economic Cost" ("Opportunity Cost") they must bear when they decide to hold on to the Firm's Equity.[3] The "Economic Cost" of holding onto Equity at its Present Value is the "Opportunity Cost" the Investor must bare when he gives up the Interest Earnings on Debt of similar Present Value (He holds onto Equity instead of the Debt).[3] Economists would indicate a Markup rule on Economic Cost used by a Monopoly to set a "Monopoly Price" that will maximize its Profit, is excessive markup that leads to inefficiencies within an economic system.[1][2][7][8]

Ad blocker interference detected!

Wikia is a free-to-use site that makes money from advertising. We have a modified experience for viewers using ad blockers

Wikia is not accessible if you’ve made further modifications. Remove the custom ad blocker rule(s) and the page will load as expected.