in this video we're going to think about the economic profit of a monopoly of a monopoly firm and to do that we're going to draw our standard price and quantity axes so that's quantity and this is price and this is going to of course be in dollars and we can first think about the demand for this monopoly firm's product and the demand curve would look similar to other demand curves we've seen multiple times that at a high price people wouldn't want a lot wouldn't be demanding a lot and then at a lower price as price goes lower people are going to demand a higher and higher quantity the market will demand a higher and higher quantity so that might be the demand curve now what's interesting about any imperfectly competitive firm in the extreme case is a monopoly is what the marginal revenue curve looks like given this demand curve in a perfectly competitive firm the marginal revenue curve is equal to the demand curve and in that situation it's actually a horizontal line but here because when the monopoly firm reduces price it doesn't just reduce it on that incremental unit it would be typical that would have to reduce its price on all of the units and we've studied this in other videos you have a marginal revenue curve that would go down faster than the demand curve it would look something like this and if this is unfamiliar to you i encourage you to watch some of those videos that go into depth why this is happening so it's a monopoly or actually any imperfectly competitive firm its marginal revenue curve will go down faster than the demand curve so what would be a rational quantity for this firm to produce well to think about that we have to think about its marginal cost curve so it's marginal cost curve the typical way we often think about it is at first you get some economies of scale but then you start having coordination costs and maybe some diseconomies of scales your inputs start getting more expensive and so your marginal cost curve might look something like that and the rational quantity you produce is as long as your incremental revenue for every unit is higher than your incremental cost for every unit you would want to produce more and more and more and more until the point that your marginal cost is equal to your marginal revenue and so the rational quantity to produce right over here would be right over there i'll do that q i could call that q for the firm i could also call that q sub m because we're doing a situation where the firm is at least on from the producer side it is the market is the only producer it's a monopoly but what's the price here well to know that we just have to look at the demand curve at this quantity the price is right over here so the price is right over here once again we could call that the market the market price and so something interesting has happened here for the monopoly firm in a perfectly competitive firm where the marginal cost and demand curves intersect that's what dictated the demand because the demand curve and the marginal revenue curve were the same but here we are now producing a quantity less than that we're producing a quantity where price is greater than marginal cost you can see it right over there that this quantity price is greater than marginal cost and so you can view this difference right over here as kind of a markup that is possible for a monopoly firm to do that would not be possible with a perfectly competitive firm and this also introduces an idea of deadweight loss because at least in theory at a higher quantity people were willing to pay more than the marginal cost so you would you would think that there is some type of a benefit that the market as a whole could gain from that incremental unit or those incremental units and then even some more incremental units it feels like there's to gain but because of the what is rational for this monopoly firm and there's insurmountable barriers for entry for other people to enter this is not going to be captured until you have this dead weight loss now an interesting question and this is where i started off is is what would be the economic profit for this monopoly firm and to think about that we have to think about the average total cost curve and so the average total cost i'll draw a typical average total cost curve it might look something it might look something like this as while marginal cost is below the average total cost the average total cost will trend downwards and as soon as marginal cost is higher than average total cost well now of course average total cost is going to start trending upwards so marginal cost intersects the average total cost curve at the minimum point right over there and so based on this average total cost curve it looks like this monopoly firm is earning an economic profit because at that quantity this is the price per unit it's getting this is the average cost per unit so on average per unit it's getting this height it's getting it's getting it's getting this this difference right over here and then if you were to multiply it times the number of units well that's going to give you its economic profit so you could view the economic profit in this situation as being this shaded area of this rectangle so i'll leave you there the big thing to appreciate is when we're dealing with imperfect competition in the extreme form of a monopoly your marginal revenue curve is no longer your demand curve and your marginal revenue curve is downward sloping like this it's not the flat curve that we saw with the perfect competition and because of that your marginal cost is going to intersect marginal revenue at a quantity where price is greater than marginal cost which introduces deadweight loss in the market and this and the way to think about the economic profit is to compare what that price in the market is of that quantity to the average total cost at that quantity and what's also interesting about this monopoly firm is because of the bearish entry we talked about in the long run with perfect competition if there's economic profit going on more entrants would enter into the market but that's not going to happen in a monopoly because the the bearish to entry are so high so this monopoly is sitting pretty it's going to be able to keep earning this type of economic profit unless something dramatically changes in in the market somehow