Explain how a monopolist makes output decisions

A monopoly makes output decisions in ways that are similar to firms in a competitive market but there are some key differences.

In the short run, a monopoly produces an output level at which marginal cost is equal to marginal revenue. This is similar to competitive market firms.

The difference however is that for a monopoly, marginal revenue is not the same as market price of the product. When a firm in a competitive market sells an additional unit, it is guaranteed a price equal to the market price. No firm in such a market has the size or the power to influence pricing. For a monopoly though, this does not apply. For a monopoly to sell the additional unit, it has to reduce the price of the product. This is because of law of demand which says that consumers will demand more if the price is lower. Hence, for a monopoly to sell more, it has to reduce the price which affects the revenue it is collecting on all of its existing production. The net revenue from additional unit sold is therefore lower than the product price.

The marginal revenue curve for a monopoly is downward sloping with a slope twice as steep. This is why a monopoly charges a higher price and produces less than in perfect competition and its marginal cost is lower than the price it charges. A monopoly therefore can earn an economic profit over the long run.

In the short run, a monopoly make incur a loss under certain conditions where cost structure is too high and prices don't cover the costs. In the long run however, such a monopoly will cease to operate.