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Monopoly profit is the profit earned by a company that is the sole supplier of a product or service in a given market. There is a common belief that monopolies can charge as much as they want for their products and services but there are in fact constraints and limitations on their pricing. As with all companies, care must be taken to find the right price point, allowing the company to make a profit without driving away potential customers.
When monopolies determine pricing, the first thing they identify is a optimum output, the amount of a product or service that can be produced in the most efficient and profitable way. They also develop a price curve and find the point where the price curve and the demand curve intersect. At low prices, the demand curve, reflecting the number of willing customers, is usually very high. As prices start to rise, demand falls, because people are less willing to pay the high prices. At a set price, the company will find the sweet spot, identifying the most optimum production level and finding the best price for the goods and services. The goal is to keep monopoly profit high, without pricing products beyond reach.
For accounting purposes, the costs of production are subtracted from the total funds earned to determine the profit made. Production costs include everything from renting facilities to paying staff. When a company that holds a monopoly in a particular market or industry makes a profit, it is considered a monopoly profit. As with other companies, a monopoly's goal is to increase profits while also meeting customer demands and building a good reputation with members of the public to establish a loyal customer base.
Prices for products and services produced by a monopoly tend to be higher than in a competitive market. Monopoly profit in turn is higher. Companies do not have to compete with rivals when establishing pricing and the avoidance of price wars can keep prices higher than they would be normally. Some economists argue that monopolies are inefficient, and recommend promoting competitive markets so that consumers are more able to access a range of services and products at different prices.
Monopoly profit is stated on financial filings, including documents that must be made available to the public for examination if the company is publicly traded. These documents can sometimes be complicated to read and it helps to have a guide to reading accounting statements when reviewing these materials. Companies that generate profits have the option of reinvesting it in their development or making dividends to shareholders. Newer companies tend to be more likely to invest their profits in themselves because they are still growing and may have identified areas of potential improvement.