As the output further rises beyond OQ 2, the firm starts earning super normal profits as TR exceeds TC.
At point R, its losses are completely wiped out and the firm reaches a breakeven point where TR = TC, a situation of normal profit. The TC exceeds the TR in the figure up to point R which means that monopoly firm is incurring losses up to output level OQ 2. The TC curve is same inverse-S-shaped.īased on it, following discussion can be carried out: In the Figure-11.4 the TR curve, is represented by a curve originating from the point of origin but tilting towards X-axis implying a diminishing increase in total revenue as quantity increases. It implies that a monopolist can operate under any kind of returns to scale, viz., increasing, diminishing or constant.Įquilibrium of a firm following the TR-TC method in short run is attempted in Figure 11.4. The point of difference is that at the point of equilibrium the MC may or may not he rising. MR = MC ((first order condition or necessary condition), and MC must cut MR from below (second order condition or sufficient condition). Nonetheless, analysis for short run and long run will be carried out separately. However, unlike perfect competition, there is no need to carry out analysis at two levels, firm and industry since there is a single producer. The profit maximizing output level and price of a monopolist can be determined through two approaches: the TR-TC method and the MR-MC method, same as in case perfect competition. Price and Output Determination under Monopoly: In the long run, he will make adjustment in the amount of the factors, fixed and variable, so that MR equals not only to short run MC but also long run MC.Īnswer 2. In the long run, the monopolist can change the size of plant in response to a change in demand. In the short run, the monopolist has to keep an eye on the variable cost, otherwise he will stop producing. Now the total profit is equal to P’L (profit per unit) multiply by OM (total output).
It can be seen from the diagram at output OM, while MP’ is the average revenue, ML is the average cost, therefore, P’L is the profit per unit.
The corresponding price in the diagram is MP or OP. Therefore, the monopolist will be in equilibrium at output OM where marginal revenue is equal to marginal cost and the profits are the greatest. It can be seen from the diagram that up till OM output, marginal revenue is greater than marginal cost, but beyond OM the marginal revenue is less than marginal cost. At the point where MR is equal to MC the profit will be maximum and beyond this point the producer will stop producing. The producer will continue producer as long as marginal revenue exceeds the marginal cost. The equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost. In other words, under monopoly the MR curve lies below the AR curve. Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue. Price-Output Determination under Monopoly:Ī firm under monopoly faces a downward sloping demand curve or average revenue cum. In this article we will discuss about price and output determination under monopoly.Īnswer 1.
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