Equilibrium/Profit-Maximization : Monopoly

Profit equals total revenue minus total costs.
Profit = TR – TC - (1)
Multiplying and dividing (1) by Q
Profit = (TR/Q - TC/Q) x Q
Profit = (P - AC) x Q

The monopolist will receive economic profits as long as price is greater than average total cost

A monopolist firm firm will choose to produce an output where
• MC = MR
• MC curve cuts MR from below.

Here, E is the point of equilibrium. At E ,
1. MC=MR
2. MC cuts MR from below.
  • From E, Draw a line perpendicular to X axis till AR curve. This will tell us the price, (price is OA over here.)
  • the point of intersection of this perpendicular line and AC curve , ie point D, tells us the average cost.So, the cost is OB over here.
  • we know that Profit = (P - AC) x Q
  • Profit is rectangle ABCD.

A monopolist firm will earn super normal profits in the short run as well as the long run.

1 comment:

Anonymous said...

Very informative and easy to understand. The best literature i have found so far on economics, thank you so much.