Figure 61.3 involved specific numbers and assumed that marginal cost was constant, there was no fixed cost, and therefore, that the average total cost curve was a horizontal line. Figure 61.4 shows a more general picture of monopoly in action: D is the market demand curve; MR, the marginal revenue curve; MC, the marginal cost curve; and ATC, the average total cost curve. Here we return to the usual assumption that the marginal cost curve has a “swoosh” shape and the average total cost curve is U-shaped.

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Applying the optimal output rule, we see that the profit-maximizing level of output, identified as the quantity at which marginal revenue and marginal cost intersect (see point A), is Q_M. The monopolist charges the highest price possible for this quantity, P_M, found at the height of the demand curve at Q_M (see point B). At the profit-maximizing level of output, the monopolist’s average total cost is ATC_M (see point C).

Recalling how we calculated profit in Equation 59-1, profit is equal to the difference between total revenue and total cost. So we have

(61-4) Profit = TR − TC

= (P_M × Q_M) − (ATC_M × Q_M)

= (P_M − ATC_M) × Q_M

Profit is equal to the area of the shaded rectangle in Figure 61.4, with a height of P_M − ATC_M and a width of Q_M.

We learned that a perfectly competitive industry can have profit in the short run but not in the long run. In the short run, price can exceed average total cost, allowing a perfectly competitive firm to make a profit. But we also know that this cannot persist. In the long run, any profit in a perfectly competitive industry will be competed away as new firms enter the market. In contrast, while a monopoly can earn a profit or a loss in the short run, barriers to entry make it possible for a monopolist to make positive profit in the long run.