Can a monopoly charge any price it wants? Why or why not?
A monopolist cant charge any price he wants because he can only determine one of two things. It has to be either price or quantity, this is because there is a fixed price consumers are willing to pay for a given quantity. As a result a monopolist can only charge the price corresponding to the specific quantity he has set otherwise the goods he has produced wont be sold.
if the price is on the inelastic side of the demand curve, to an extent, yes.
but if it gets so high, eventually people will start looking for alternatives.
a monopolist always charges a price that is profit maximising. that means they dont always make a profit, they are after total profits and not per unit profit(so it might make sense to lower the price, depending on the elasticity of the demand curve).
A monopoly cannot charge ANY price - only the maximum price a consumer is willing to pay. If you charge $200 for something for which I am only willing to pay $20, I will not buy what you want to sell.
Where a monopoly can engage in price discrimination, it can reap additional profits by charging the maximum each individual consumer is willing to pay; if I am willing to pay $20 and you $30, then the monopoly will collect $50 and you and I will have our items; however, a perfectly competitive firm must price its good at $20 or below in order to gain the two sales.
No. A monopolist cannot decide to a charge a price other than the price at which the marginal cost equals the marginal revenue, unless of course the monoplolist is not interested in maximising profits. If the monopolist faces a completely elastic demand curve, then he cannot sell any good if he sells at a price higher than the price at which the horizontal deamnd curve cuts the price axis. He can sell at a lower price only at a loss of profit. If the demand curve slopes downwards from left to right (demand and price inversely related), he will chose the price at which marginal revenue equal marginal cost to maximise profit. If he coses a higher or lower price he will have to forgo profits. However, if the monopolist does not look for maximum profits, he can choose any price he wants and prepared to sell only that quantity that the market demand will accept.
It depends on who, or what, controls the monopoly.
There are various monopolies, that are state owned and these can always charge any price they wish to charge.
Some commercial companies are also controlled by a
government Watchdog. i.e. Water, Telephones,Power etc.
In strictly non-controlled commercial terms, a company can charge whatever the customer is prepared to pay.
Unfortunately, if it looks obviously, too profitable, they will soon have competition, which will drive the price and profitability down.
Hope this helps.
Depends on how you define monopoly. For instance Aluminium was a bona-fide monopoly in the states a few decades back (ALCOA) but they couldnt charge anything they wanted because if they did, people would substitute steel, or wood (wooden desks for example).
So *REAL* monopolies are rare. However hypothetically a real monopoly can charge whatever it wants.
I would like to clear up drbsen's response, because I think it is the most relevant and is correct, but might be confusing in its reliance on geometry.
In a monopoly, the market demand curve is the firm's demand curve, which usually is downward sloping.
In perfect competition, the firm's demand curve is a flat horizontal line, because he can sell as much or as little as he wants and he will have no effect on the market. He is a price taker at the market price. His decision is to decide what quantity to produce.
If his costs go up with quantity, he will want to pick a quantity where the extra amount of revenue is just equal to the cost. If revenue is greater, then he should produce more. If the extra revenue is less than the extra cost then he will lose money and should not produce that extra unit. Hence marginal cost should equal marginal revenue.
What is the marginal revenue of a horizontal flat demand curve? Total Revenue is PQ, so dPQ/dQ It is simply the market price P. That is the extra revenue you get from producing one more unit 1 * Price = Price. That is why we say price equals marginal cost.
For the monopolist, the demand is downward sloping. So is marginal revenue. He will produce a quantity where marginal revenue equals marginal cost. But price will not equal marginal cost. Price will be higher, depending on the demand curve.
What is marginal revenue for a downward sloping demand curve? If the demand curve is P = 50 - 2q, then total revenue is 50q - 2q^2, and dP/dQ is 50 - 4q, which is a line twice as steep as demand.
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