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440 CHAPTER 11 MONOPOLY AND MONOPSONY
production, the price of the product will probably rise. Of course, a firm, by itself (even Virgin Galactic), can
only raise the price so much. At some price no one will buy the product at all. Thus, the monopolist must
recognize that the properties of the demand curve—in particular, the price elasticity of market demand—will
affect the price it can set in the market.
When an individual agent can affect the price that prevails in the market, we say the agent has market
power. A monopsony market consists of a single buyer purchasing a product from many suppliers.
Monopsonies most frequently arise in markets for inputs, such as raw materials or industrial components.
They also arise in industries such as aerospace, where the buyer is often a government agency, such as the
U.S. Department of Defense or NASA.

CHAPTER PREVIEW After reading and studying this chapter, you will be able to:
• Explain how a monopolist chooses the level of its output (and thus, its price) to maximize profit.

• Calculate a monopolist’s profit-maximizing price and quantity given information about demand and cost.
• Compare the market equilibrium in a competitive market with the profit-maximizing choices of a
monopolist.
• Determine how a monopolist with more than one plant allocates its production among those plants.

• Explain how a monopsonist chooses its inputs to maximize profit.
• Calculate a monopsonist’s profit-maximizing price and quantity given information about demand
and cost.
• Compare the market equilibrium in a competitive market with the profit-maximizing choices of a
monopsonist.

• Explain how the choices of a monopolist or a monopsonist lead to economic inefficiency in a market.

11.1 A firm in a perfectly competitive market has an inconsequential impact on the market

PROFIT price and thus takes it as given. By contrast, a monopolist sets the market price for its
product. So what would stop the monopolist from setting an infinitely high price? The
MAXIMIZATION answer is that the monopolist must take account of the market demand curve: The
BY A higher the price it sets, the fewer units of its product it will sell; the lower the price it
MONOPOLIST sets, the more units it will sell. Thus, the monopolist’s market demand curve is down-
ward sloping, as shown in Figure 11.1. The profit-maximizing monopolist’s problem is
finding the optimal trade-off between volume (the number of units it sells) and margin
(the differential between price and marginal cost on the units it sells). The logic we de-
velop to analyze this volume–margin trade-off will apply in the nonmonopoly market
settings (oligopoly and monopolistic competition) that we study in later chapters.

THE PROFIT-MAXIMIZATION CONDITION
Suppose a monopolist faces the market demand curve D in Figure 11.1. The equation
of this demand curve is P(Q) 12 Q. (Q is expressed in millions of ounces per year,
and P is expressed in dollars per ounce.) To sell 2 million ounces, the monopolist