Let’s begin by recalling the features of a monopoly industry. Then we will be better placed to understand the subtle differences between a monopoly and a natural monopoly.
In microeconomic theory a monopoly firm is assumed to be the only firm in an industry, with the ability to set the market price. As it is the only firm in the industry, the demand curve it faces is also the industry demand curve. We assume that the firm wishes to maximise profits, producing monopoly, market structure, natural monopoly, privatisation a profit-maximising output level where marginal costs of production are equal to marginal revenue. Industry output is lower than under perfect competition and reflecting this the equilibrium price will be higher, and higher than costs of production. This ensures that the monopoly firm makes excess profits.
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