Illustrating Profits at the HealthPill Monopoly

The marginal revenue and marginal cost curves from the previous figure fix the output at 5 units. The demand curve then says what the firm can charge for 5 units: $800. The whole rectangle, 5 units wide and $800 tall, is total revenue, $4,000. The lower, lighter rectangle is 5 units wide and $330 tall, the average cost of producing 5 units, so it is total cost, $1,650.

The band between the two is profit, $4,000 − $1,650 = $2,350. Because the price sits above average cost, the monopoly earns a profit, and barriers to entry mean no new firm arrives to compete it away. The slider raises or lowers the demand schedule; when the price drops below average cost the band changes colour, because the firm is then making a loss.