Monopoly Price Theory

Monopoly Price Theory explains how a single firm with no competition sets prices. Since it controls the entire supply of a product, it can choose a price that maximizes its profit. To do this, the monopolist considers how higher prices might reduce sales and lower prices might increase sales, balancing these factors to find the optimal point. Unlike competitive markets, where prices are driven down to equilibrium, a monopoly can set higher prices because consumers have fewer alternatives. This results in prices that are generally above what would occur in a competitive market, potentially leading to reduced overall economic efficiency.