Basic Definition
In
economics a
monopoly is a firm that lacks any viable
competition, and is the sole producer of the
industry's product. In a normal
competitive situation, no firm can charge a
price that is significantly higher than the
Marginal (Economic) cost of producing (the last unit of) the product. If any firm doing business within a
competitive situation tries to raise prices significantly higher than the
Marginal cost of producing the product, it will lose all of its
customers to either other existing firms that charge lower prices, or to a new firm that will find it profitable to use a lower price (closer to its
marginal cost) to take customers away from the firm charging the higher price. But since the monopoly firm does not have to worry about losing customers to competitors, it can set a
Monopoly price that is significantly higher than its
marginal cost, allowing it to have an
economic profit that is significantly higher than the
normal profit that is typically found in a
perfectly competitive industry. The high
economic profit obtained by a monopoly firm is referred to as
monopoly profit.