We saw that a monopolist earning profits could be in long run equilibrium since barriers to entry prevent new firms from entering and eroding those profits. However, we still must ask how a monopolist responds to other types of changes in its economic environment. First we will explore how it responds to a change in demand.
Remember that numerous factors can affect demand, but demand
can only change fundamentally in two ways. It can increase or
decrease. As we've already seen in the graph to the right, an increase
in demand also increases marginal revenue.
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