Price and output at MC = MR, the profit box, why a monopoly is inefficient, and the case for natural monopoly.
Semaglutide is the drug in Ozempic and Wegovy. In India, Novo Nordisk held the patent, a legal barrier to entry: no other firm was allowed to make the drug, so Novo Nordisk was the only seller, at roughly 11,000 to 16,400 rupees a month. The patent expired on 20 March 2026. Within weeks nearly 40 Indian firms were selling their own versions at around 2,000 to 3,500 rupees a month, and monthly sales rose from about 25,000 packs in February to about 170,000 in April.
What was the patent doing to the price and the number sold? And why would a government grant a patent at all?
Source: review in Diabetes Care led by the Madras Diabetes Research Foundation, reported by South First (September 2026).
A firm becomes the only seller in its market.
Compared with a market of many competing firms with the same costs, what is it likely to do?
With no rivals, the monopolist can restrict output and raise the price. It produces where MC = MR, which is less than competing firms would produce, so the price on the demand curve is higher.
Start with the assumptions. A pure monopoly is the only firm in its industry, which is rare. More often a firm has monopoly power: a large enough share, often taken as 25% or more, to act in a similar way. High barriers to entry and imperfect information keep rivals out, and the firm is a price-making profit maximiser. Its demand curve is the market demand curve. It slopes downwards: to sell more, it must lower its price. Demand is its average revenue.
MR starts at the same point as AR and falls twice as steeply. Why? Because to sell one more unit, the monopolist must cut its price on every unit, not just the extra one.
Teacher tip: Start MR at the same point on the price axis as AR, and make it cut the output axis halfway to where AR would. Examiners check both.
Put numbers on it. At £10 the firm sells 1 unit: TR £10. At £9 it sells 2: TR £18, so MR is £8. At £8 it sells 3: TR £24, so MR is £6. Each £1 cut in price lowers MR by £2. That is why, with a straight-line demand curve, MR falls twice as steeply as AR. Compare perfect competition: a price taker sells every unit at the same price, so its AR and MR are the same horizontal line.
Check: A monopolist sells 2 units at £9 each. To sell a third, it must cut its price to £8. What is the marginal revenue of the third unit?
Total revenue goes from 2 × £9 = £18 to 3 × £8 = £24, so MR is £6. The third unit brings in £8, but the first two now sell for £1 less each, losing £2.
Next the costs. Draw MC first: falling, then rising.
Check: ATC goes on next. Where must MC cut ATC?
While MC is below ATC it pulls the average down, and once it is above ATC it pulls the average up. So MC crosses ATC where ATC stops falling and starts rising.
Then ATC, a flatter U. MC must cut ATC at its lowest point. If ATC is above MC, the next unit pulls the average down; once MC is above ATC, it pulls the average up.
Like any firm, the monopolist maximises profit where MC = MR. Mark that point first.
Go straight up from MC = MR to the demand curve for the price, Pm, and down to the axis for the output, Qm. Up to demand, not across from MC = MR.
Check: Where is the monopolist’s price read from?
The price is the most consumers will pay for Qm, so it comes from demand. Reading across from MC = MR gives marginal cost, not price.
For cost per unit, read ATC at Qm, the output the firm actually produces. Not the lowest point of ATC.
Price minus ATC, times Qm, is abnormal profit: the shaded box. Barriers to entry stop new firms coming in, so unlike perfect competition this profit can last into the long run.
Check: Why can this abnormal profit last into the long run?
In perfect competition the profit would attract entry and be competed away. Barriers to entry, like the semaglutide patent, stop that. When the barrier falls, firms enter and the price falls.
Allocative efficiency needs price equal to marginal cost, where MC meets demand, at Q*. The monopolist stops at Qm, where price is well above MC. The triangle between demand and MC, from Qm to Q*, is the deadweight welfare loss : units consumers value at more than they cost, which are never made.
Teacher tip: Welfare is consumer surplus plus producer surplus. The rectangle consumers lose between the competitive price and Pm is not lost: it goes to the firm as profit, a transfer. Only the triangle is lost to everyone, which is why it is called deadweight.
Check: At Qm, price is above MC. What does that mean?
Price is the value buyers put on the last unit; MC is the cost of the resources to make it. P > MC means society would gain from more output, but the monopoly does not produce it because selling more means cutting the price on every unit.
Now the other kind of efficiency. Productive efficiency is about cost per unit.
Check: Is the monopolist productively efficient at Qm?
Productive efficiency means producing at the lowest point of ATC. At Qm the firm is to the left of that point, so ATC is higher than it could be.
It is also productively inefficient. At Qm, ATC is above its lowest point. The firm could make each unit more cheaply by producing more, but that would mean a lower price. With no rivals pushing it, waste may also push costs above the ATC curve itself: X-inefficiency, which the diagram cannot show.
One special case. In a natural monopoly, such as water pipes or a rail network, fixed costs are so high that long-run average cost is still falling where it meets market demand. One firm can supply the whole market more cheaply than two could, so competition would waste resources. That is why these firms are usually regulated rather than broken up.
Check: Why is a natural monopoly usually regulated rather than broken up?
Long-run average cost is still falling where it meets demand, so splitting the market between firms would raise cost per unit. Regulation keeps the cost advantage while limiting the price.
They set output where MC meets demand. That is where a competitive market would be. The monopolist maximises profit at MC = MR, a lower output, and charges a higher price.
Explain why a monopoly is likely to be allocatively and productively inefficient.
The monopolist maximises profit where MC = MR, producing Qm and charging Pm, the price consumers will pay for that output. Because MR is below demand, Pm is well above the marginal cost of the last unit. Allocative efficiency needs P = MC, so the monopoly is allocatively inefficient: consumers value the next units at more than they would cost to make, but they are not produced.
This creates a deadweight welfare loss, the triangle between demand and MC from Qm to the output where P = MC. At Qm the firm is also not at the lowest point of its ATC curve, so it is productively inefficient: it could produce each unit more cheaply at a higher output, but choosing that output would lower its price and its profit. Barriers to entry stop rivals competing this away, so the inefficiency can last into the long run.
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