MONOPOLY, TOTAL ANALYSIS: A monopoly produces the profit-maximizing quantity of output that generates the greatest difference between total revenue and total cost. This total approach is one of three methods that used to determine the profit-maximizing quantity of output. The other two methods involve the direct analysis of economic profit or a comparison of marginal revenue and marginal cost.Monopoly is a market in which a single firm is the only supplier of the good. Anyone seeking to buy the good must buy from the monopoly seller. This single-seller status gives monopoly extensive market control--a price maker that faces a negatively-sloped demand curve. With this negatively-sloped demand curve, marginal revenue is less than average revenue and price. Comparable to any profit-maximizing firm, a monopoly produces the quantity of output in the short run that maximizes the difference between total revenue with total cost, which is economic profit. At this production level, the monopoly cannot increase profit by changing the level of production. The analysis of total revenue and total cost can be achieved through a table of numbers or with total revenue and total cost curves. Working the NumbersA monopoly is presumed to produce the quantity of output that maximizes economic profit--the difference between total revenue and total cost. This decision can be analyzed using the exhibit below. This table presents revenue and cost information for Feet-First Pharmaceutical, a hypothetical example of a monopoly, for the production and sale of Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis.Because Feet-First Pharmaceutical produces a unique product it has extensive market control and sells its Amblathan-Plus according to the market demand. To sell a larger quantity, it must lower the price. Feet-First Pharmaceutical's status as a monopoly firm is reflected in this table.
A click of the [Incurring Losses] button indicates that producing and selling 1 ounce of Amblathan-Plus generates an economic loss of $7. Total revenue is $10 and total cost is $17. A $3 loss results from 2 ounces of Amblathan-Plus. Feet-First Pharmaceutical incurs an economic loss for the first 2 ounces of Amblathan-Plus. Feet-First Pharmaceutical also incurs an economic loss if production is 9 ounces or more. But loss is not what Feet-First Pharmaceutical seeks. Click the [Earning Profits] button to highlight the range of production levels that generate positive economic profit. Feet-First Pharmaceutical initially turns its profit picture around with 3 ounces of Amblathan-Plus. At 3 ounces of Amblathan-Plus Feet-First Pharmaceutical's total revenue is greater than his total cost by $1. Profit remains positive through the production of 8 ounces of Amblathan-Plus, Feet-First Pharmaceutical's total revenue exceeds total cost and it receives an economic profit. For 5 ounces of Amblathan-Plus, this profit is $7, for 6 ounces profit is $8, and for 7 ounces profit drops back to $7 again. So what is the profit-maximizing level of Amblathan-Plus production Feet-First Pharmaceutical should undertake? The desired production level is clearly not 2 ounces or less, nor is it 9 ounces or more, all of which lead to economic loss. It must be within the highlighted range between 3 and 8. The quantity that generates the greatest of economic profit is 6 ounces of Amblathan-Plus. This alternative can be highlighted by clicking the [Profit Max] button. The production of 6 ounces of Amblathan-Plus results in $45 of total revenue and $37 of total cost, a difference of $8. No other production level generates a greater economic profit. Producing 1 more ounce of Amblathan-Plus or 1 less ounce of Amblathan-Plus reduces profit to $7. Working the Curves
Before leaving this graph, two other quantities can be highlighted. The total revenue and total cost curves intersect at two quantities--at just under 3 ounces of Amblathan-Plus and about 8.5 ounces of Amblathan-Plus. Click the [Breakeven] button to highlight these two output levels. Both quantities are termed breakeven output. Breakeven output is a quantity of output in which the total revenue is equal to total cost such that a firm earns exactly a normal profit, and thus receives no economic profit nor incurs an economic loss. The reason for the term "breakeven" output is that the firm is just "breaking even." It is neither making a profit nor incurring a loss. Economic profit is zero. Breakeven output is usually most noteworthy as a reference point. The profit-maximizing production level invariably occurs between the two breakeven output levels. Check Out These Related Terms... | monopoly, short-run production analysis | monopoly, marginal analysis | breakeven output, monopoly | profit curve, monopoly | short-run production alternatives | profit maximization, monopoly | loss minimization, monopoly | Or For A Little Background... | monopoly | monopoly characteristics | total revenue, monopoly | total revenue | total cost | profit | profit maximization | And For Further Study... | monopoly and demand | long run industry supply curve | monopoly, long-run production analysis | monopoly and efficiency | short-run supply curve, monopoly | perfect competition, total analysis | Recommended Citation: MONOPOLY, TOTAL ANALYSIS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: December 16, 2025]. |
