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Explain the short run equilibrium of the monopoly firm?
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Explain the short run equilibrium of the monopoly firm?
Short Run Equilibrium of a Monopoly Firm
A monopoly firm operates in an industry where it is the sole seller of a particular product or service. In the short run, the monopoly firm can earn supernormal profits due to its market power. The short-run equilibrium of a monopoly firm can be explained as follows:
1. Profit Maximization
The primary objective of a monopoly firm is to maximize its profit. To achieve this, the firm will produce where marginal revenue (MR) equals marginal cost (MC). The point where MR=MC is the profit-maximizing output level.
2. Setting the Price
Once the profit-maximizing output is determined, the firm can then set the price. The price will be set at the point where the demand curve intersects with the marginal revenue curve. Since the monopoly firm is the sole seller of the product, it has the power to charge a higher price than the competitive market price.
3. Supernormal Profits
In the short run, the monopoly firm can earn supernormal profits due to its market power. The difference between total revenue and total cost at the profit-maximizing output level is the supernormal profit.
4. Shut Down Point
If the price is below the average variable cost (AVC), the firm will not be able to cover its variable costs. In this case, the firm will shut down its operations in the short run. The shut down point is where price equals the minimum of the average variable cost curve.
5. Output Level
The monopoly firm will produce at the point where marginal revenue equals marginal cost. This output level is lower than the socially optimal output level, as the firm restricts output to maintain a higher price.
In conclusion, the short-run equilibrium of a monopoly firm is characterized by profit maximization, setting the price, earning supernormal profits, the shut down point, and the output level. While the monopoly firm can earn supernormal profits in the short run, it restricts output, leading to a loss of consumer surplus and deadweight loss.
A monopoly firm operates in an industry where it is the sole seller of a particular product or service. In the short run, the monopoly firm can earn supernormal profits due to its market power. The short-run equilibrium of a monopoly firm can be explained as follows:
1. Profit Maximization
The primary objective of a monopoly firm is to maximize its profit. To achieve this, the firm will produce where marginal revenue (MR) equals marginal cost (MC). The point where MR=MC is the profit-maximizing output level.
2. Setting the Price
Once the profit-maximizing output is determined, the firm can then set the price. The price will be set at the point where the demand curve intersects with the marginal revenue curve. Since the monopoly firm is the sole seller of the product, it has the power to charge a higher price than the competitive market price.
3. Supernormal Profits
In the short run, the monopoly firm can earn supernormal profits due to its market power. The difference between total revenue and total cost at the profit-maximizing output level is the supernormal profit.
4. Shut Down Point
If the price is below the average variable cost (AVC), the firm will not be able to cover its variable costs. In this case, the firm will shut down its operations in the short run. The shut down point is where price equals the minimum of the average variable cost curve.
5. Output Level
The monopoly firm will produce at the point where marginal revenue equals marginal cost. This output level is lower than the socially optimal output level, as the firm restricts output to maintain a higher price.
In conclusion, the short-run equilibrium of a monopoly firm is characterized by profit maximization, setting the price, earning supernormal profits, the shut down point, and the output level. While the monopoly firm can earn supernormal profits in the short run, it restricts output, leading to a loss of consumer surplus and deadweight loss.
Community Answer
Explain the short run equilibrium of the monopoly firm?
The monopolist maximizes his short-run profits if the following two conditions are fulfilled Firstly, the MC is equal to the MR.
Secondly, the slope of MC is greater than the slope of the MR at the point of intersection.
In figure 6.2 the equilibrium of the monopolist is defined by point ɛ, at which the MC intersects the MR curve from below. Thus both conditions for equilibrium are fulfilled. Price is PM and the quantity is XM. The monopolist realizes excess profits equal to the shaded area APM CB. Note that the price is higher than the MR.
Equilibrium of the monopolist
In pure competition the firm is a price-taker, so that its only decision is output determination. The monopolist is faced by two decisions: setting his price and his output. However, given the downward-sloping demand curve, the two decisions are interdependent.
The monopolist will either set his price and sell the amount that the market will take at it, or he will produce the output defined by the intersection of MC and MR, which will be sold at the corresponding price, P. The monopolist cannot decide independently both the quantity and the price at which he wants to sell it. The crucial condition for the maximization of the monopolist’s profit is the equality of his MC and the MR, provided that the MC cuts the MR from below.
We may now re-examine the statement that there is no unique supply curve for the monopolist derived from his MC. Given his MC, the same quantity may be offered at different prices depending on the price elasticity of demand. Graphically this is shown in figure 6.3. The quantity X will be sold at price P1 if demand is D1, while the same quantity X will be sold at price P2 if demand is D2.
Supply curve for the monopolist
Thus there is no unique relationship between price and quantity. Similarly, given the MC of the monopolist, various quantities may be supplied at any one price, depending on the market demand and the corresponding MR curve. In figure 6.4 we depict such a situation. The cost conditions are represented by the MC curve. Given the costs of the monopolist, he would supply 0X1, if the market demand is D1, while at the same price, P, he would supply only 0X2 if the market demand is D2.
Relationship between price and quantity
Secondly, the slope of MC is greater than the slope of the MR at the point of intersection.
In figure 6.2 the equilibrium of the monopolist is defined by point ɛ, at which the MC intersects the MR curve from below. Thus both conditions for equilibrium are fulfilled. Price is PM and the quantity is XM. The monopolist realizes excess profits equal to the shaded area APM CB. Note that the price is higher than the MR.
Equilibrium of the monopolist
In pure competition the firm is a price-taker, so that its only decision is output determination. The monopolist is faced by two decisions: setting his price and his output. However, given the downward-sloping demand curve, the two decisions are interdependent.
The monopolist will either set his price and sell the amount that the market will take at it, or he will produce the output defined by the intersection of MC and MR, which will be sold at the corresponding price, P. The monopolist cannot decide independently both the quantity and the price at which he wants to sell it. The crucial condition for the maximization of the monopolist’s profit is the equality of his MC and the MR, provided that the MC cuts the MR from below.
We may now re-examine the statement that there is no unique supply curve for the monopolist derived from his MC. Given his MC, the same quantity may be offered at different prices depending on the price elasticity of demand. Graphically this is shown in figure 6.3. The quantity X will be sold at price P1 if demand is D1, while the same quantity X will be sold at price P2 if demand is D2.
Supply curve for the monopolist
Thus there is no unique relationship between price and quantity. Similarly, given the MC of the monopolist, various quantities may be supplied at any one price, depending on the market demand and the corresponding MR curve. In figure 6.4 we depict such a situation. The cost conditions are represented by the MC curve. Given the costs of the monopolist, he would supply 0X1, if the market demand is D1, while at the same price, P, he would supply only 0X2 if the market demand is D2.
Relationship between price and quantity
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Explain the short run equilibrium of the monopoly firm?
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Explain the short run equilibrium of the monopoly firm? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about Explain the short run equilibrium of the monopoly firm? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Explain the short run equilibrium of the monopoly firm?.
Explain the short run equilibrium of the monopoly firm? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about Explain the short run equilibrium of the monopoly firm? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Explain the short run equilibrium of the monopoly firm?.
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