Chapter 15 Blog

In this chapter, Mankiw explains how a market works when a monopoly exists within a market. A monopoly is defined as a firm in a market where they are the sole seller of the good in the market (any competition is negligible). A monopoly can arise when the government grants a firm the exclusive right to produce a good, a firm owns a key resource for producing the good, or if a single firm is able to supply the entirety of the market of the good at a smaller cost than more than one firm would be able to. This last example is called a natural monopoly. Because a monopoly acts as the only producer for the entire market for a good, the demand curve for the firm functions as the demand curve for the entire market. This means that the demand curve for a monopoly is downward sloping, as most demand curves are, but different from the flat demand curve of a firm in a competitive market. However, a monopoly is similar to a firm in a competitive market in that it wants to maximize profit, and it does this by producing at the quantity where the marginal revenue and marginal cost curves intersect. The monopoly then is able to choose the price they want to sell the good for, and they choose a price above the marginal revenue and marginal cost in order to maximize profit. This level of production is often below the level that maximizes total surplus in a market because it raises the price and lowers the demand for the good, so some buyers don’t purchase the good and the market shrinks. This also causes a deadweight loss.