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Price and Output Determination under Monopoly

Price and Output Determination under Monopoly


Price and Output Determination under Monopoly

  The term ‘monopoly’ has been derived from two Greek words ‘mono’ and ‘poly’. ‘Mono’ means single and ‘poly’ means the seller. Thus, monopoly refers to a market structure where there is a single seller of the product having no close substitutes. In other words, a Monopoly is a market where a single seller or product is having no close substitute.

Read More: Types of Market Equilibrium with Diagram

Determination process under monopoly; 

Short-run equilibrium

In Short-run equilibrium, all the firms make abnormal profits, normal profits, or losses depending upon the AC and MC, which are shown below;

a. If AR > AC, then it is said to be super normal or abnormal profit
b. If AR = AC, then it is said to be normal profit
c. If AR < AC, then it is said to be lost or bears the loss
Condition for Equilibrium
a. MR = MC
b. Then, MC must intersect MR below


   In the given figure, X-axis and Y-axis represent the (X)Output and (Y)Cost, Revenue, and Price. The downwards-sloping curve represents Average Revenue (AR), and Marginal (MR) respectively, and AC, and MC are always U-shaped representing the Average Cost and Marginal Cost. Point E represents equilibrium because at this point MC and MR are equal, and MC is intersecting with MR from below both conditions are fulfilled to become equilibrium. There are three possibilities in the short run under monopoly.

a. Abnormal Profit: In the given figure, the equilibrium point is E, OP is the equilibrium price and quantity is OQ. The average cost of production is OC. With the price, output, and average cost of production, the monopoly firms are earning the abnormal profit because AR is greater than AC.
Total revenue (TR) = OQBP
Total Cost (TC) = OQAC
Total Profit (TP) = TR-TC = OQBP – OQAC = ABPC (shaded rectangle area)


b.Normal Profit: When AR is equal to AC, the firm is earning just normal profit. In the given figure, the equilibrium point is E. Thus, the equilibrium amount of output is OQ and the equilibrium price is OP.


c. Loss:  In the given figure, the equilibrium point is E. Thus the equilibrium amount of output is 8OQ and the equilibrium price is OP. The Average cost of production is OC. Since AR is less than AC, the firm is bearing loss in the shaded rectangle area CBAP. 
Total Revenue (TR)= OQAP
Total Cost (TC)= OQBC
Total profit (TP)= TR-TC= OQAP- OQBC= ABPC (shaded rectangle area)
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Long-run equilibrium

Long-run is a period in which a firm can change both fixed and variable factors. In the long run, the monopolist has enough time to adjust the size of the plant at a certain level of output to maximize its profit.
Conditions for equilibrium
1. MR = LMC)
2. LMC must interest MR from below  (:: LMC = Long-run marginal cost)
    In the given figure, AR is the average revenue curve of a monopoly firm. LAC is the long-run average cost curve and LMC is the long-run marginal cost curve. The monopolist is in the equilibrium at point E with OP price, OQ quantity, and OC is the long-run average cost of production. As AR > AC, the monopolist is operating under abnormal profit equal to the shaded area ABPC  in the long run.



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