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3. Exclusive ownership of an essential resource. If one or a few firms have exclusive
ownership of an essential resource, this blocks the entry of new firms into the market. Such
exclusive ownership is very rare today.
Example 7: Early in the twentieth century, Alcoa (formerly Aluminum Company of America)
owned or controlled most of North America’s known supply of bauxite. Bauxite is the chief ore of
commercial grade aluminum. Such exclusive ownership is very rare today.
Demand and Marginal Revenue for a Monopoly
A monopoly is the lone seller of a product with no close substitutes. As the lone seller in a market,
a monopoly faces the market demand curve. The market demand curve will be downward
sloping. (Remember the law of demand from Chapter 3.) Thus a monopoly faces a downward
sloping demand curve.
A monopoly has maximum market power. Market power is the ability of a seller or a buyer to
affect market price. Remember from Chapter 21 that a perfect competitor is a “price taker”. A
perfect competitor cannot make the market price go up or down, nor can it stop the market price
from going up or down. A perfect competitor must simply “take” the market price as it is. A
monopoly is a “price maker”. A monopoly can cause the market price to increase or decrease by
changing its quantity of output. A monopoly can sell a greater quantity at a lower price, or a lesser
quantity at a higher price.
Since a monopoly must generally lower the price of all units sold in order to sell a greater
quantity, the marginal revenue of each additional unit sold will be less than the unit’s price. Thus,
the marginal revenue curve will not be the same as the demand curve.
Example 8A: Monop Company is a monopoly. The table below shows the demand schedule for
Monop. Note that Monop must lower its selling price to sell more units. The table also shows total
revenue (Price x Quantity) and marginal revenue (change in total revenue from selling one
additional unit of output).
Monop Company
Price Quantity Total Revenue Marginal Revenue
$22 0 $0 X
20 1 20 20
18 2 36 16
16 3 48 12
14 4 56 8
12 5 60 4
10 6 60 0
8 7 56 -4
6 8 48 -8
The demand curve for Monop Company is downward sloping and has a slope of –2 (for every $2
decrease in price, quantity demanded increases by 1 unit). The marginal revenue curve for
Monop is also downward sloping and has a slope of –4 (for every 1 unit increase in quantity,
marginal revenue decreases by $4). The demand curve and the marginal revenue curve for
Monop are illustrated on the graph on the next page:
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22 - 3 Monopoly