9/28/2023 0 Comments Monopoly economics graphIf D 2 is the demand curve, then the equilibrium position of the monopolist is at the intersection of the MC curve and the MR 2 curve at point A 2. Further, if this demand curve is tangent to the ATC curve (demand curve D 2), then the monopolist can also recover his complete cost of production. If the demand curve lies to the right of D 1, then the monopolist can recover a part of his fixed costs. In such cases, a monopolist would close down the plan and restrict his losses to the fixed costs. It is important to note that if the demand curve lies left to the position of D 1, then there is no production since the monopolist would simply add to his losses by operating the plant. This ensures that he suffers a loss which is equal to his fixed costs. Therefore, he decides to produce – OM 1 quantity of output and sells it at a price E 1M 1. However, even if he closes the plant down, he cannot reduce the losses since they are fixed costs. Therefore, while the monopolist satisfies the first condition of equilibrium, he is unable to recover his complete cost of production. Its corresponding MC curve intersects the MR 1 curve from below at point A 1. Further, there are three demand curves to explain the possible positions of the equilibrium: Demand Curve D 1 is tangent to the AVC curve at point E 1 There are three curves – the average variable cost (AVC) curve, the average total cost (ATC) curve, and the marginal cost (MC) curve. The quantity is along the X-axis and price and cost of production along the Y-axis. The figure shown above depicts a firm’s short-run Equilibrium in Monopoly. Further, if the demand for his product is high, then the monopolist can also make super-normal profits. Also, in the short-run, a monopolist might incur losses but will shut down only if the losses exceed its fixed costs. In the short-run, a monopolist firm cannot vary all its factors of production as its cost curves are similar to a firm operating in perfect competition. Summary of Short-run Equilibrium in Monopoly In the short-run, a monopolist sometimes sets a lower price and incurs losses to keep new firms away. Therefore, the firm is incurring an average loss of PP’ and the total loss is PP’BA. The average revenue = OP and the average cost = OP’. In the figure above, you can see that the average cost curve lies above the average revenue curve for the same quantity. LossesĪ firm earns losses when the average cost of production is higher than the average revenue for the corresponding output. In this case, the per unit profit isĪlso, the total profit earned by the monopolist is PP’BA. Therefore, the firm is earning more and incurring a lesser cost. In the figure above, you can see that the price per unit = OP = QA. Super-normal ProfitsĪ firm earns super-normal profits when the average cost of production is less than the average revenue for the corresponding output. Therefore, the firm earns normal profits. Also, the AC curve touches the AR curve at a point corresponding to the same point. In the figure above, you can see that the MC curve cuts the MR curve at the equilibrium point E.
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