In determining his price policy, the monopolist has two possibilities before him. He may fix a particular price for his product, and then the quantity he will put in the market will be determined by the conditions of demand. Or, he may fix the supply of the commodity and place this quantity in the market for what it will bring. Whichever of these two courses may be adopted by the monopolist, his aim is get maximum total profit from his monopoly position.
With a view to maximizing his profits, the monopolist will go on producing so long as the marginal revenue is greater than the marginal cost. Marginal cost is additional cost and marginal revenue is additional revenue when one more unit is produced and sold. So long as what the monopolist adds to his receipts by selling an additional units, is more than what he adds to his costs by producing it, he will increase profits by increasing production, the last unit produced has the same cost as the revenue it brings and thus adds nothing to total profits. He will certainly not produce a unit which adds more to cost than to the revenue and thus reduces his total profits. The monopoly firm will thus produce up to a point where marginal revenue is equal to marginal cost. This is the point where the total profit to the monopolist will be maximum.
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