How a Profit-Maximizing Monopoly Decides Price

Step 1 is the quantity Q₁ where marginal revenue meets marginal cost. Producing less would mean giving up units whose revenue exceeds their cost; producing more would mean adding units that cost more than they bring in.

Step 2 is the price. Drawing a line straight up from Q₁ to the perceived demand curve reaches point R, and the height of R is the price P₁ the market will pay for that quantity. Step 3 is profit. Total revenue is Q₁ times P₁; total cost is Q₁ times the average cost of producing Q₁, which is the height of point S on the average cost curve, P₂. The shaded rectangle between them is profit. The axes carry no numbers, as in the book; the slider shifts demand and all three steps follow.