Buy up properties until you own every property in one color group. Then the rent on those lots doubles, you can build houses, and the rent climbs even higher. Players call this having a monopoly.
Today: a monopoly in a real market. If one seller owns the whole market, what price does it charge, and who loses?
Video: Federal Reserve Bank of St. Louis, What is a Monopoly? | Economics Explained (YouTube, Mar. 2025).
definitions
What makes a monopoly?
A monopoly is the only seller of a good that has no close substitutes.
Market power: the ability to raise the price without losing all of your customers.
1 · One seller
The firm’s demand curve is the whole market’s demand curve.
2 · No close substitutes
If buyers can switch to something very similar, the firm is not really alone.
3 · Barriers to entry
Something keeps rivals out, even when the monopoly earns a profit.
Next: why would a market end up with only one seller? Three reasons.
The three reasons on the next pages follow the St. Louis Fed video What is a Monopoly? | Economics Explained (Mar. 2025).
Why only one seller? · reason 1 of 3
The government grants it
A law gives one seller the sole right to sell: a patent (20 years), a copyright (the author’s life + 70 years),
or a license. This is a legal monopoly.
A patent
Humira, a drug for arthritisPhoto: a copy of Humira (Amjevita)
Only AbbVie may sell it. The main patent ran out in 2016, but 132 more patents kept U.S. copies out until 2023.
2023: copies enter. One lists at $995, 85% less. Humira’s U.S. sales: $18.6 billion in 2022, $3.1 billion in 2025.
A law
Ordinary letters: USPSBy law since 1792
Only the Postal Service may carry ordinary letters for pay, and only stamped mail may go in your mailbox.
No end date: the gate stays shut. FedEx and UPS may carry only “extremely urgent” letters, for at least $3.
A patent rewards invention: Humira brought AbbVie $21.2 billion in 2022 alone, and when the patent ends, copies bring the price down. The letter law helps pay for one-price delivery to every address, even remote rural ones.
Sources: AbbVie results (2022, 2025); Baltimore v. AbbVie (7th Cir. 2022); Amgen (2023); Healio (2023); 18 U.S.C. §§ 1693–1699, 1725; USPS Pub. 542; USPS newsroom (Apr. 2026). Photos: Raimond Spekking, CC BY-SA 4.0; EraserGirl, CC BY 2.0; via Wikimedia Commons.
Why only one seller? · reason 2 of 3
Someone controls a key resource
One firm owns an input that every seller needs. No input, no product. This is rare.
Kimberley, South Africa, 1870sDiamonds are found, and thousands of diggers work small claims. Many sellers, so no one controls the price.
1888: De BeersCecil Rhodes merges the mines into De Beers. By 1891 it produces about 90% of the world’s diamonds. For a century it controls the sale of most rough diamonds (about 80% in the late 1980s). Its 1947 slogan: “A Diamond Is Forever.”
Today: lab-grown diamondsLabs make real diamonds with no mine. Of U.S. couples who married in 2025, 61% chose a lab-grown center stone. De Beers: about one third of mined diamonds by value, and rough prices fell 12% in 2025.
The Big Hole, Kimberley, dug for diamonds until 1914.
A key-resource monopoly lasts only until someone finds a new source or a close substitute, like a diamond with no mine. No law keeps rivals out, so this is a natural monopoly.
Sources: Britannica; De Beers Group (company profile; Q4 2025 production report); GIA; The Knot, 2026 Real Weddings Study. Photo: Rudolph Botha, CC BY-SA 3.0, via Wikimedia Commons.
Why only one seller? · reason 3 of 3
The structure of the market
Building the network costs a fortune; serving one more home costs little. So one firm can serve the whole market more cheaply than two. Economists call this economies of scale.
Wire cost per home (made-up numbers)
One company: $80,000 of wires ÷ 8 homes = $10,000 a home.
Two companies: each pays $80,000 for its own wires ÷ 4 homes = $20,000 a home.
Duke Energy
4.8 million customers in the Carolinas, including Raleigh and NC State; 320,000 miles of power lines. The state assigns its service area and approves its rates.
Even with no law, a second wire company could not compete: the costs keep it out. This is a natural monopoly, so the state regulates its price (more at the end of today). A cousin: network goods, like a phone network, are worth more when more people use them, so one firm tends to win the whole market.
Sources: Duke Energy, Fast Facts (Apr. 2026); N.C. Gen. Stat. §§ 62-110.2, 62-130. Photo (Duke substation, Durham): Ildar Sagdejev, CC BY-SA 4.0, via Wikimedia Commons.
Check · hands up
Which reason keeps rivals out?
Reasons: 1 the government grants it · 2 a key resource · 3 the structure of the market. Vote on each.
A
The only vet in a small town
Anyone with a license may open a clinic.
Market structureNo law keeps a second vet out. The town is too small for two clinics to cover their costs.
B
A company patents a new weed killer
No one else may make it for 20 years.
GovernmentThe patent is the barrier. When it expires, other makers can enter.
C
The town water company
One set of pipes; the town licenses one company.
BothOne set of pipes is cheapest (market structure), and the town licenses only one company (government). That is why its prices are regulated.
D
The only well in a dry valley
One ranch owns it, and the neighbors’ cattle need water.
Key resourceNo well, no water to sell. If a neighbor strikes water, the monopoly is over.
Reason 1 makes a legal monopoly; reasons 2 and 3 make a natural monopoly. A firm can also keep rivals out with predatory pricing: slash prices until a new rival quits, then raise them.
price taker vs price maker
A monopoly faces the whole market’s demand
Unit 8b: one sardine boat
Sell 8 or 18 at the same $5. One penny more and you sell nothing. MR = P.
Town Animal Clinic
It can charge $160 or $80, but not with the same number of visits. To get more checkups, it must lower its price.
A monopoly can pick any price it likes—but demand decides how many it sells at that price. No one is forced to buy.
We assume the clinic charges every customer the same price.
Why is MR below the price?
Whose crates get the lower price?
2,000 crates land each day and sell for $50. One more crate lowers the price by 1¢, on every crate.
Sellers:
Land one more crate
Predict: the price falls 1¢ on all 2,000 crates. How much of that hits you?
Your new crate sells for $49.99+$49.99
Your 2,000 old crates get 1¢ less each−$20.00
Your MR (extra revenue)$29.99
MR is far below P. Every crate on the beach is yours, so you bear the whole $20.00.
Your new crate sells for $49.99+$49.99
Your 200 old crates get 1¢ less each−$2.00
Your MR (extra revenue)$47.99
MR is below P. You bear $2.00 of the $20.00; the other 9 sellers bear $18.00.
Your new crate sells for $49.99+$49.99
Your 20 old crates get 1¢ less each−$0.20
Your MR (extra revenue)$49.79
MR is just below P. You bear $0.20; the other 99 sellers bear $19.80.
Your new crate sells for $49.99+$49.99
Your 2 old crates get 1¢ less each−$0.02
Your MR (extra revenue)$49.97
MR ≈ P. You bear 2¢; the other 999 sellers bear $19.98. This is the price taker from Unit 8.
Made-up numbers. Coast demand: P = $70 − 1¢ × crates. When you land one more crate, other sellers land the same as before. BigCatch Co. is from Unit 8b.
Why is MR below the price?
Same 1¢ price cut, a different share
MR = price of the new crate − 1¢ × crates you already sell
Sellers
Your crates
Your share of the 1¢ cut
Your MR
Compared with P = $50
1 (monopoly)
2,000
−$20.00 (100% of $20.00)
$29.99
far below P
10
200
−$2.00 (10% of $20.00)
$47.99
below P
100
20
−$0.20 (1% of $20.00)
$49.79
just below P
1,000 (≈ perfect competition)
2
−$0.02 (0.1% of $20.00)
$49.97
≈ P
Every time, the 1¢ cut costs the 2,000 crates already on the beach 2,000 × 1¢ = $20.00 in all. The only thing that changes is how much of it is yours.
A price taker (Unit 8)
Its extra crate does move the price, by 1¢. But 99.9% of that loss lands on other sellers’ crates. To that seller it rounds to zero: MR ≈ P (Unit 8 rounds it to MR = P), and its demand looks flat.
A monopoly
Every crate is its own, so the whole $20.00 hits it: MR < P. It counts a loss that small sellers ignore, so it sells fewer crates than a competitive coast.
Made-up numbers, as on the previous page. The “gain one, lose one” way of splitting MR follows Marginal Revolution University, Maximizing Profit Under Monopoly.
why MR < P
One more checkup: a gain and a loss
From 3 checkups at $140 to 4 at $120
1
Quantity effect: +$120The 4th customer pays $120.
2
Price effect: −$60To get that customer, the price falls $20—for the first 3 customers too: 3 × $20.
3
MR = $120 − $60 = $60Marginal revenue (MR): the change in total revenue from one more checkup. Less than the $120 price.
A price taker has no price effect, so MR = P (8b). A price maker always has one, so MR < P: the MR curve lies below the demand curve.
The two effects follow Krugman & Wells, Microeconomics 5e, Ch. 13; OpenStax 2e, Ch. 9 (“Why is a monopolist’s marginal revenue always less than the price?”).
back to Unit 6
Stop where MR = MC, not where MR = 0
1
Revenue is highest where MR = 0Unit 6: at the midpoint, 5 checkups at $100, demand is unit elastic. Total revenue peaks at $500.
2
But checkups cost money: stop where MR = MCAt 4 checkups, MR = MC. The 5th would add $20 of revenue but cost $60. Profit: $160 at 4, $120 at 5. The goal is profit, not revenue.
3
MR = MC comes before MR = 0Past the midpoint, MR < 0: one more checkup lowers revenue and adds cost. So the clinic stops on the elastic part.
Unit 6 said a patent drug’s demand is very inelastic, so its price can be far above cost. Both hold: inelastic demand is why the seller can raise the price, and it keeps raising it until demand at its price is elastic.
hands up · vote first
The clinic makes 4 checkups a day. What price?
Town Animal Clinic
A$40No That is where MR meets MC. It picks the quantity, not the price.
B$80No That is ATC at 4 checkups: the cost per checkup, not the price.
C$100No That is where revenue peaks (5 checkups). Not the profit-maximizing point.
D$120✓ Answer Go up from Q = 4 to the demand curve: the town will pay $120 for 4 checkups.
Trap: MR = MC picks the quantity. The demand curve picks the price.
quantity, price, profit
Three steps on a monopoly graph
Town Animal Clinic
1
Quantity: where MR = MCQ* = 4 checkups a day (MR = MC = $40).
2
Price: go up to the demand curveP* = $120: what the town will pay for 4 checkups.
P > MCBuyers pay $120 for a checkup that costs about $40 to add.
In a table, if two quantities tie for the most profit, pick the larger one (the 8b rule).
the long run
Why the clinic’s profit does not disappear
Unit 8b: perfect competition
Economic profit
↓
New firms enter; supply shifts right
↓
Price falls to minimum ATC: profit = 0
Monopoly
Economic profit ($160 a day)
↓
A barrier keeps rivals out
↓
Profit can last for years
One telltale sign of a possible monopoly is when a firm earns profits year after year, while doing more or less the same thing, without ever seeing those profits eroded by increased competition.
OpenStax, Principles of Economics 2e, Sec. 9.2
The best of all monopoly profits is a quiet life.John Hicks (1935), quoted in OpenStax Sec. 9.2: a protected firm may stop trying to please its customers.
true or false?
You be the judge
PriceA monopoly can charge any price it wants and still sell as much as it wants.
FalseDemand limits it: at a higher price, fewer buyers.
RuleMR = MC is the rule for competitive firms; a monopoly uses a different rule.
FalseEvery profit-maximizing firm uses MR = MC. What changes is MR: below P for a monopoly.
RevenueA monopoly earns the most profit where its total revenue is highest.
FalseRevenue ignores cost. The clinic: revenue peaks at 5 checkups, profit at 4.
MR > MCA monopoly producing where MR > MC can raise its profit by producing more.
TrueEach extra unit adds more revenue than cost.
Long runBecause of barriers to entry, a monopoly can keep earning economic profit in the long run.
TrueNo entry, so nothing competes the profit away.
Your turn · read the graph
The county’s only crop duster
One pilot sprays fields from a small plane; the next one is 100 miles away. Price is per field sprayed.
County crop duster (made-up numbers)
(a) How many fields a day maximize profit?
4 fields: MR crosses MC there, both at $1,200.
(b) What price does the pilot charge?
$2,000 a field: go up from 4 to the demand curve. Not $1,200: that is MR and MC.
(d) Total revenue is highest at how many fields? Why not spray that many?
7 fields, where MR = 0. Fields 5 to 7 each cost more than they bring in (MC > MR). At 4, demand is elastic.
(e) At 4 fields, compare P and MC. What does the gap mean?
P $2,000 > MC $1,200: one more field is worth about $2,000 to a farmer but costs only $1,200 to spray. Is that efficient? Next page.
Is that efficient?
Efficient means producing until P = MC
Allocative efficiency: keep producing while buyers value one more unit (P) above what it costs to make (MC). Stop where P = MC.
County crop duster (same numbers)
Efficient: 5 fields. D meets MC at $1,800. Every field a farmer values above its cost gets sprayed.
The pilot sprays 4. There P = $2,000 > MC = $1,200: the next field is worth more than it costs. But to sell it, the pilot must cut the price for every farmer.
At 4 fields: CS $1,600 + PS $4,480 = $6,080. At 5 it would be $6,500. The missing $420 a day is deadweight loss: fields worth more than they cost that nobody sprays.PS = profit $4,000 + the $480 fixed cost.
Perfect competition produces where P = MC: no deadweight loss. A monopoly stops where P > MC.
same demand, same MC
A patented weed killer, before and after
Areas in $ thousand a month (made-up numbers)
Many makers
Patent holder
Price
$20
$60
Quantity (thousand jugs)
40
20
Consumer surplus
$1,600k
$400k
Producer surplus
$0
$800k
Deadweight loss
$0
$400k
Total surplus
$1,600k
$1,200k
Unit 5’s two labels: $800k of consumer surplus is a transfer to the firm; $400k is deadweight loss—trades nobody makes.
Why allow patents, then? The $800k a month of producer surplus pays back the research. Without it, the weed killer might never be invented. The patent trades 20 years of deadweight loss for the invention.
what government does
A natural monopoly: break it up or regulate it?
Town water company (made-up numbers)
The pipes are a huge fixed cost, so ATC keeps falling as more homes are served. Click through the three cases.
Breaking it up raises cost. Two companies with two sets of pipes, 30k homes each: $60 a home. One company serving all 60k: $40.
Left alone: MR = MC at 40k homes; it charges $60 a month. ATC is $50, so profit = $10 × 40k = $400k a month.
Producer surplus is ($60 − $20) × 40k = $1,600k; the $1,200k for the pipes leaves $400k of profit. Homes 40k–80k go unserved: DWL $800k.
Price cap at ATC: $40 a month. 60k homes are served, bills fall, and economic profit is zero—enough to keep the company running. DWL shrinks from $800k to $200k.
One more home needs no price cut, so MR = $40 > MC = $20: each home adds $20. 60k × $20 = $1,200k, just the fixed cost.
Two common answers
Regulate the price (most U.S. power and water companies) or public ownership (many city water systems).
Why not set P = MC = $20? That removes the last $200k of DWL, but the company would lose its $1,200k fixed cost every month unless the city pays it.
Natural-monopoly regulation follows Krugman & Wells, Microeconomics 5e, Ch. 13 (Fig. 13-9); OpenStax 2e, Sec. 9.1. Graph redrawn with new numbers.
Part 1 · wrap-up
Three things to take away
1
Monopoly: one seller, no close substitutes, barriers to entryThree reasons: the government grants it (legal monopoly); a key resource or economies of scale (natural monopoly).
2
MR < P, so: Q where MR = MC, then P from demandProfit = (P − ATC) × Q, and barriers let it last into the long run.
3
P > MC: less output, a higher price, deadweight lossPatents accept that cost for a while to reward invention; natural monopolies get their prices regulated.
Wednesday: the markets in between—craft breweries (many firms, different products) and meatpacking (a few big firms). Why do cartels fall apart?
