Economics Most of My Career Essay

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A monopolist cannot solve such losses by raising its prices. It is conceivable that a monopolist may have no point on the demand curve at which it will turn a profit. Under such circumstances, the monopolist has to simply accept the loss or exit the industry, as raising the price to cover costs will result in a reduction of revenue.

b) a monopolist cannot charge any price it wants. For any product -- even in a monopoly -- there is a point of maximum profit for any point on the demand curve. Above that point, demand falls as consumers switch to a substitute, ration their consumer or simply refuse to consume the product. At this point, a marginal increase in revenue will result in a marginal reduction in profit. For the monopolist, increasing prices simply will not result in increased profits; neither will lowering them. If at this point the monopolist is not covering its costs, then the industry is unprofitable.

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The monopolist can choose to reduce its costs or exit the business.

The nature of the demand curve in this situation is dependent on the price elasticity of demand for the good. This is determined by a number of factors, including the availability of substitutes and the degree to which the good is necessary. Only a good essential for survival -- fresh water, fresh air or sunlight -- would be such that a monopolist could increase prices infinitely in order to cover costs. For all other goods, this is not the case, and the monopolist must find the point of maximum profit on the demand curve and set the price there.

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