A monopoly is the extreme of market power: one seller and nobody else.
What makes a monopoly
One firm
It is the whole industry: its demand is the market's demand.
No close substitutes
Buyers cannot switch to something similar.
High barriers to entry
Patents, economies of scale, control of a resource.
The points to remember
- A natural monopoly: AC still falls where it meets demand, so one firm supplies everyone most cheaply: rail networks, water pipes.
- Its fixed costs are huge; its marginal cost, one more passenger, is tiny.
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Like every firm, a monopoly produces where MR = MC. Unlike a competitive firm, it keeps its profit.
Our example (made-up numbers)
| Output (MR = MC) | Price (on AR) | Average cost | Abnormal profit |
|---|---|---|---|
| 40 thousand | €8 | €4 | €160 thousand |
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Remember it as: MR = MC for output, AR for price, AC for cost: the box is the profit, the triangle the welfare loss.
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Abnormal profit lasts because barriers stop rivals entering. But a monopoly is not sure to make a profit at all.
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The points to remember
- If AC is above AR at every output, even a monopoly makes a loss.
- It still picks MR = MC: that is where the loss is smallest.
Quick reminder
- Axes: Costs, revenue up the side, Q along the bottom
- Curves: D = AR, MR, MC and AC
- Marks: Pm and Qm where MC = MR, the profit (or loss) box and the welfare loss
- Dots with dashed lines to the axes
- No numbers, no title
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If AC lies above AR, the same diagram shows a loss instead of a profit.
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Paper 1 asked this in November 2024, November 2025 and May 2026, as part (a) for 10 marks.
Explain why a monopoly firm is able to make abnormal profits in the short run and in the long run.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |