A monopoly is a market with a single supplier of a product that has no close or perfect substitute. Monopolists determine the prices since they control the demand for the product. Being the only supplier dealing with the product, monopolists have full power to control the supply of the product. This shows that monopolists are the price maker since it is the only firm in the industry.
The demand curve of a monopolist is sloped downward from right to left. This is because a monopolist has the capability of selling greater output by only decreasing price units of output. Marginal revenue is usually less than price.
MR = ΔTR where: ΔTR is changing in Total Revenue
ΔQ ΔQ is a change in output.
The relationship between the monopoly price and price elasticity is explained by the total revenue test. This test depicts that in cases of the demand being elastic, then a fall in price will lead to rising in total revenue, but when demand is inelastic, a fall in price leads to a decrease in total revenue. Total revenue is maximized when the demand is unit elastic i.e. demand elasticity is equivalent to 1. When demand is unit elastic, marginal revenue is zero.
A further decrease in price and total revenue below the unit elastic of demand leads to marginal revenue that is less than zero. This is not a safe point for monopolists since total revenue is decreasing and there is negative marginal revenue. Monopolists choose the combination of prices where demand is elastic to keep marginal revenue positive.
In brief, a monopolistic competition market has many producers, low barriers to entry, and slightly different products. Indeed, a firm that increases prices is likely to lose its customers to rivals. In addition, some of the firms control prices and are the price makers. Indeed, this makes them have a demand curve that slopes down.