A monopoly is usually the result of natural conditions (Natural Monopoly) or the result of a privilege granted by the state. A monoploy has the status of being a price-maker, as opposed to the conditions of Perfect Competition which assume that the firm is a price-taker. Graphically these assumptions translate into a downward sloping demand curve for the monopoly and a horizonal demand curve for perfect competition. For a monopoly this means that the firm can set price at a point where profit is maximized. This point is where elasticity of demand is equal to (-)1. At this price the economic profit is maximized and the marginal revenue is equal to zero.

Monopolistic Competition[]

Examples of Bertrand and Cournout Monopolies do suggest caution in the assertion that monopolies are certain to have positive economic profit. This assertion is more likely in the case where barriers to entry are high or legally enforced.

Limits to Monopoly power[]

Often a firm will have a monopoly of a certain product which has close substitutes (i.e. Coke and Pepsi). This can even hold for items more subtlely related (i.e. aluminum siding and brick). The key being that if one firm takes advantage of monopoly power in the short run, demand can sufficently change as to take the substitutability into account.