The feeling prevails that a monopolist will always sell his goods at the highest price. On the contrary, he sells them at that price which brings him the largest net return, whether that price be high or low. He is concerned not only in price, but also in the number of units sold. In pursuing his economic advantage, therefore, he would set the price with due regard for demand; for, as we have already learned, an increase in price lowers demand while a decrease causes demand to rise.

The operation of the law of monopoly price is best observed in connection with goods which have an elastic demand; and which are produced under conditions of decreasing costs - that is, under conditions in which the unit cost of production decreases as the number of units produced is increased. Assuming, for illustrative purposes, that the manufacturer of a certain brand of toilet soap is a monopolist, we can work out concretely his problem of fixing the price.

No. of Cakes Sold

Cost per Cake

Gross Cost

Selling

Price per

Cake

Gross Receipts

Net Profits

20,000

2033 The Law Of Monopoly Price Getting The Largest N 22

$ 4,000

8033 The Law Of Monopoly Price Getting The Largest N 23

$ 16,000

$12,000

50,000

1833 The Law Of Monopoly Price Getting The Largest N 24

9,000

5033 The Law Of Monopoly Price Getting The Largest N 25

25,000

16,000

100,000

1533 The Law Of Monopoly Price Getting The Largest N 26

15,000

4033 The Law Of Monopoly Price Getting The Largest N 27

40,000

25,000

300,000

1433 The Law Of Monopoly Price Getting The Largest N 28

42,000

25 33 The Law Of Monopoly Price Getting The Largest N 29

75,000

33,000

1,000,000

1033 The Law Of Monopoly Price Getting The Largest N 30

100,000

1533 The Law Of Monopoly Price Getting The Largest N 31

150,000

50,000

3,000,000

833 The Law Of Monopoly Price Getting The Largest N 32

240,000

1033 The Law Of Monopoly Price Getting The Largest N 33

300,000

60,000

5,000,000

733 The Law Of Monopoly Price Getting The Largest N 34

350,000

833 The Law Of Monopoly Price Getting The Largest N 35

400,000

50,000

8,000,000

6 1/233 The Law Of Monopoly Price Getting The Largest N 36

520,000

633 The Law Of Monopoly Price Getting The Largest N 37

480,000

40,000 (loss)

An examination of these figures shows that our soap monopolist would fix the selling price at 10 cents, not because that was the highest price he could get nor because he could sell the largest number of cakes at that price, but rather because at that price he can reap the greatest reward.

A second consideration which the monopolist must keep clearly in mind is that his monopoly consists in controlling the supply and not the demand - that is, that he has no control over demand except through price. Consequently, a monopolist must take care in fixing the price of his good, for if he places it too high his entire output will not be demanded; if too low, he loses profit. Occasionally, a monopoly, like the South African Diamond Company,, is so secure in its dominating position as to be able to withhold, if prices are too low, portions of its products from the market. Such a practice, however, would be impossible among most monopolists, for the simple reason that competition might arise or the goods withheld might decay. We may conclude, then, that the mere fact that a certain good is in the hands of a monopolist is not conclusive proof, as most people think, that the good will command a higher price than if in the hands of numerous competitors.