Learning objectives

Students will be able to investigate how changes in market demand and cost structure affect the profitability and profit-maximizing quantity for a monopoly. Students will see the graphical illustration of shifts in underlying economic factors.

Real world application

When you buy a good or service from a monopoly (e.g., Internet service from a cable provider, a diamond from De Beers), you are typically paying more than you would if the industry were served by perfect competition. How much more are you paying? How much is society worse off because of this monopoly? Government policy-makers often make use of this model when determining the best policy to address these issues.
This slider changes the amount of demand for the good or service the monopolist produces, thus shifting the demand curve.
This slider alters the price elasticity of demand, which is the sensitivity of market demand to the price charged by the monopolist. The numerical value of demand elasticity varies along a linear demand curve, so this slider influences the overall market elasticity.
This slider changes the fixed cost of production, which are the costs that stay the same in the short run regardless of how much the monopolist produces.
This slider changes how much economies of scale can be captured by expanding production, also known as increasing returns to scale. With certain goods, the average cost per unit decreases as production increases, often due to significant fixed costs. An industry with large economies of scale is often served by a natural monopoly.
This slider changes how much economies of scale can be captured by expanding production. With certain goods, the average cost per unit decreases as production increases, often due to significant fixed costs. An industry with large economies of scale is often served by a natural monopoly.
Graphical curves can be described by mathematical equations, which allows for deeper analysis. These sliders allow a little more flexibility in manipulating the curves, particularly the cost curves. Don’t worry if these sliders don’t make any sense to you! These are provided mostly for instructors. You are welcome to play around with them, but note that it is possible to create cost curves that do not make sense.
Demand(Q) = α – βQ
Total Cost(Q) = ηQ3 – δQ2 + εQ + ω
Drag the sliders to change the values of the variables within the model and see how the changes affect the monopolist’s profit-maximizing decision and profits/losses. Click on an item in the legend to display or hide the item.