Describe the basic characteristics of the monopoly model and explain how these characteristics affect the ability of a monopolist to earn positive economic profits, both in the short run and over time
What will be an ideal response?
A monopoly consists of a single firm that serves an entire market. As such, there are no close substitutes for the firm's output. Also, because the firm serves the entire market, it faces a downward-sloping demand curve. Finally, there are usually substantial barriers to entry. The firm maximizes its profits by producing the level of output at which marginal revenue equals marginal cost. So long as the corresponding price the firm is able to charge (determined by the demand curve) is greater than ATC, the firm will earn a positive economic profit. Furthermore, because of barriers to entry, it is possible for the monopolist to continue to earn positive economic profits over time so long as there is no significant change in demand or cost conditions.
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