A monopoly can be viewed as the opposite of perfect competition. Instead of many firms, there is only one: the monopolist. This has important consequences for both price setting and the quantity produced.
Barriers to Entry
Why do monopolies arise? There are many different reasons, but all of them have to do with barriers to entry in the market. The reasons for these barriers could be structural. There are properties of the market that automatically shut competitors out:
Economics is often defined as something along the lines of “the study of how society manages its scarce resources.” The starting point of most such studies is that individuals allocate their resources such that they themselves will get the highest possible level of utility.
An individual has an idea of what the consequences of different actions will be, and she chooses that action she believes will produce the best result for her. She is, in other words, selfish and rational.
Where does the demand curve come from? In order to explain why individuals choose different quantities at different prices, we will use a model with three components:
A producer uses raw materials, capital, and labor to produce goods and services. Here, we will present a simple model for how they decide how much to produce and which technology to use for production. A large part of producer theory is very similar to consumer theory.
When we have studied equilibria so far, it has always been so-called partial equilibria. (A partial equilibrium is one where we assume that “everything else is unchanged.”) However, we have also seen that a change in one variable can lead to changes in many other variables, so the restriction that everything else is unchanged may not be very realistic.