/ / Short Run Equilibrium of a Firm Under Monopoly

Short Run Equilibrium of a Firm Under Monopoly

Monopoly Definition:

in order to understand the short-run equilibrium of a firm under monopoly. we must know what monopoly is. A market situation in which there is only a single seller of the product is “monopoly.” In this situation, there is no close substitute for the product and the supply of the product is in control of the seller. Whereas, pure monopoly is a little impractical in real life.

Short-run Equilibrium of firm under monopoly:

Under this situation, the monopolist adjusts the supply of the product and determines the price in order to maximize his profit. There is no close substitute for the product in the market. Therefore, a monopolist easily commands the market.

We shall discuss this situation through the graph in more detail. You can see the figures in this table.

equilibrium of firm under monopoly

Explanation of Equilibrium of a Firm Under Monopoly:

In monopolistic competition, the sellers cut down their prices in order to sell more of the output. since they want to maximize their profit. The total revenue in the third column is the product of the price and quantity. Marginal revenue is the result of the change in total revenue divided by the change in quantity. Similarly, the average cost is the result of dividing the total cost by the quantity. However, marginal cost is the result of the change in total cost divided by the change in the quantity. With the help of these figures, we will now explain which is the equilibrium quantity of the product. we will also explain the equilibrium price of the product in the short run.

 In a perfectly competitive market, the firms are the price takers. Whereas, in case of monopoly, the monopolists determine both the price and supply of the output. So, monopolists’ decisions are for the profit maximization. The conditions for AC and MC are same as cost condition in competitive markets. However, the revenue differs because there is a download slope of the demand curve in monopoly. If monopolist increases the price, the sales will go down and vice versa.

You can simply see that marginal revenue becomes equal to marginal cost at the 4th unit of output. So this is the equilibrium point of the monopolist. The quantity at this point is  38 and this is the equilibrium quantity. Whereas, the price is the equilibrium price i.e. 14. After the equilibrium point, marginal revenue and average revenue starts falling. Whereas, marginal cost is greater than marginal revenue and similarly, the average cost is greater than the average revenue.

short Run Equilibrium of a Firm under Monopoly, Graphical Representation:Short Run Equllibrium of a Firm under Monopoly

In this diagram, the average and marginal revenue curve of a monopolist is downward sloping. Because a monopolist cuts down the prices in order to maximize his profit. Whereas AC and MC are U in shape. At point E  the marginal cost curve intersects the marginal revenue curve at point E which is the equilibrium point of a firm under monopoly. If you draw a perpendicular line, you can observe that KF and OH is the price/average revenue and EF and OC is the average cost of a monopolist firm at OF Level of output. Since average revenue OC is greater than Average cost OC that is CH is the supernormal profit per unit of output and HCKE is the total supernormal profit of a firm.

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