to understand why a monopolist charges more for their product we need to evaluate their cost curves here is the normal situation where price is on the vertical axis and quantity is on the horizontal axis marginal costs are the cost of producing each additional unit and marginal revenue is the money earned by selling one additional unit we know that in order to maximize profits affirm any firm whether a monopolist or not is going to want to choose where marginal cost is equal to marginal revenue in a competitive market marginal revenue is flat like this because no matter how much we produce we can sell our product at the market price if a farmer grows corn it doesn't really matter how big their Farm is there's still a small fraction of the total market and so their supply won't significantly impact the market price sometimes we say that demand facing the firm is perfectly elastic meaning that the producer can't really impact the price at all they're price takers no one is willing to pay more than the market price for this Farm's corn but that isn't the case for the monopolist since they're the sole producer of The Good the quantity they choose will be the whole market supply and so they do not face a perfectly elastic demand curve they face the actual demand curve nevertheless this point where demand crosses marginal cost would still be the optimal outcome here everyone who's willing to pay more than the cost of producing the unit they will consume would be able to get one but this is no longer where marginal cost crosses marginal revenue if this is our demand curve marginal revenue looks like this let's illuminate that with a numerical example let's say demand is given by this equation QD equals 100 minus p let's chart that out at a price of one hundred dollars this monopolist will sell zero units because if we plug one hundred dollars in for p we get that QD the quantity demanded is zero but at a price of 99 they would sell one unit if they charge ninety eight dollars they would sell two units they charge ninety seven dollars they would sell three units if they want to attract enough customers to sell four units they need to drop the price to ninety six dollars and on and on we go with this we can calculate revenue and marginal revenue revenue is just price times quantity 100 times zero is zero 99 times 1 is 99 98 times 2 is 196 and so on marginal revenue is the additional Revenue we get from selling one more unit when we produce and sell one unit we increase our Revenue by ninety nine dollars that is the marginal revenue if we produce two units our Revenue rises from ninety nine dollars to one hundred and ninety six dollars which is a difference of ninety seven dollars the marginal revenue of the second unit is only ninety seven dollars because while we gain ninety eight dollars selling the second unit we lose one dollar because we drop the price of the first unit as well because we have to lower the price for All units when we increase production marginal revenue Falls faster than the price if we put this on a graph we get this demand is in dark blue and the marginal revenue is the light blue line when a monopolist produce more they have to lower what they charge in order to sell it and they have to lower that price for all the units they sell if they tried to hold out and charge 99 for the first unit and 98 dollars for the second unit customers would catch on they would just wait for the monopolist to produce the 99th unit and all try to be the 99th customer paying one dollar for it and just to be clear this doesn't happen in a competitive market because firms cannot impact the price they earn from each unit only monopolists are able to reduce production in order to raise the price up to what consumers are willing to pay The Profit maximizing rule is true no matter what kind of firm you are it just doesn't make fiscal sense for a monopolist to produce at this point here where they exhaust all possible mutually beneficial trades again where the dot is now would be the best outcome because it satisfies as much demand as possible while still respecting the opportunity costs of the resources used but profits would be higher if the monopolist reduced production letting their marginal costs fall until they're equal to marginal revenue the reason they want to cut back on production is because it allows them to raise the price in a competitive market it would have no effect on the price if one firm reduced production there would be dozens of others ready to increase production to fill in the gap but for the monopolist reducing production means making your product more scarce and the price will be bid up by consumers willing to pay the most the monopolist will be able to charge whatever the marginal consumer is willing to pay at this quantity which is found by just following this point up to the demand curve and over to the price the problem with this outcome aside from it just feeling like a nasty thing to do is that there's dead weight loss in this gray triangle are consumers willing to pay more than what it costs for a monopolist to produce something but the monopolist is unwilling to sell it to them because it would mean they would have to lower the price for everyone else consider the Apple iPhone apple is the only company that makes the Iphone and so in a sense they have a monopoly over it it isn't a true Monopoly because there are many substitutes for iPhones and apple faces many competitors like Samsung and Google and LG but we can see dead weight loss in the market for iPhones the iPhone 14 pro retailed between 799.99 but it only cost about five hundred dollars to make now in microeconomics we know better than to take these numbers at face value the five hundred dollars likely only represents the explicit costs of making the iPhone and not the implicit costs which would raise that number nevertheless there are surely lots and lots of consumers who'd be willing to pay say 699 dollars for an iPhone 14 pro and apple would be happy to sell them one at that price because it still leaves them with a hefty profit but they refuse those consumers are denied iPhones because if apple offers it to them for 699 dollars then they have a huge incentive to buy a bunch which they can resell to others at a discount from Apple's normal price the law of One Price unfortunately applies here and for that reason lots of mutually beneficial trades will go unsatisfied to recap the efficient price would be found where marginal cost crosses with demand in a competitive market this is the point reached and the point where all mutually beneficial trades are exhausted on our graph that price is labeled p e the monopolist will find it advantageous to restrict production however because they will trade fewer sales for higher prices and lower costs and it will just always be the case that some amount of restriction will increase profits the monopolist's price is labeled pm on our graph the difference between them is the monopolist markup an increase in the price brought about by a lack of competition