But this loss is only short period phenomenon. In the long period, this loss will disappear, under that condition and situation, only profit will be earned. Determination of Price in the Long Period. During this period in order to gain excess profit, he will change efficiency and capacity of his resources according to his need.
But the determination of the quantity of production follows, the same line as under short period. This is clear from the following figure:. Thus OQ production is determined and OP is the price. But average cost is SQ. Under perfect competition price is determined by the interaction of total demand and supply.
This price is acceptable to all the firms in the industry. No firm can change this price. So, average revenue and marginal revenue, at every level of production, will be constant and equal.
Their curves are parallel to X-axis. Under Monopoly, to sell every additional unit of the commodity price will have to be lower. In this way, with the sale of every additional unit, average and marginal income goes on falling. But the decrease in average revenue is relatively less sharp than the decrease in marginal revenue, It is because marginal revenue is limited to one unit, whereas in case of average revenue, the decrease price is divided by the number of units.
Therefore, the fall in average revenue has relatively less slope. That is the reason why marginal revenue is less than average revenue. Skip to content. Monopoly A monopoly refers to when a company and its product offerings dominate one sector or industry.
If price falls below AVC, the firm will not be able to earn enough revenues even to cover its variable costs. In such a case, it will suffer a smaller loss if it shuts down and produces no output. If it shuts down, it only loses its fixed costs.
Imagine a monopolist could charge a different price to every customer based on how much he or she were willing to pay. How would this affect monopoly profits? However, there would be no consumer surplus since each buyer is paying exactly what they think the product is worth. Therefore, the monopolist would be earning the maximum possible profits. How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?
How does the demand curve perceived by a monopolist compare with the market demand curve? How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves? How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge? How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?
Imagine that you are managing a small firm and thinking about entering the market of a monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react? If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run? Draw the demand curve, marginal revenue, and marginal cost curves from Figure , and identify the quantity of output the monopoly wishes to supply and the price it will charge.
Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price.
Does the answer make sense to you? According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output?
If so, what does this mean? Aboukhadijeh, Feross. Accessed July 7, British Parliament. Dattel, E. Accessed July Grogan, David. Accessed March 12, Massachusetts Historical Society. Pelegrin, William. Skip to content Monopoly. Learning Objectives By the end of this section, you will be able to: Explain the perceived demand curve for a perfect competitor and a monopoly Analyze a demand curve for a monopoly and determine the output that maximizes profit and revenue Calculate marginal revenue and marginal cost Explain allocative efficiency as it pertains to the efficiency of a monopoly.
Demand Curves Perceived by a Perfectly Competitive Firm and by a Monopoly A perfectly competitive firm acts as a price taker, so we calculate total revenue taking the given market price and multiplying it by the quantity of output that the firm chooses.
The flat shape means that the firm can sell either a low quantity Ql or a high quantity Qh at exactly the same price P. Thus, if the monopolist chooses a high level of output Qh , it can charge only a relatively low price PI.
Conversely, if the monopolist chooses a low level of output Ql , it can then charge a higher price Ph. The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits. What is the difference between perceived demand and market demand? Total Cost and Total Revenue for a Monopolist We can illustrate profits for a monopolist with a graph of total revenues and total costs, with the example of the hypothetical HealthPill firm in Figure.
Total revenue for the monopoly firm called HealthPill first rises, then falls. Low levels of output bring in relatively little total revenue, because the quantity is low. High levels of output bring in relatively less revenue, because the high quantity pushes down the market price. The total cost curve is upward-sloping. Profits will be highest at the quantity of output where total revenue is most above total cost. The profit-maximizing level of output is not the same as the revenue-maximizing level of output, which should make sense, because profits take costs into account and revenues do not.
Marginal Revenue and Marginal Cost for a Monopolist In the real world, a monopolist often does not have enough information to analyze its entire total revenues or total costs curves. For a monopoly like HealthPill, marginal revenue decreases as it sells additional units of output.
The marginal cost curve is upward-sloping. Maximizing Profits. Illustrating Monopoly Profits It is straightforward to calculate profits of given numbers for total revenue and total cost.
Illustrating Profits at the HealthPill Monopoly. This figure begins with the same marginal revenue and marginal cost curves from the HealthPill monopoly from Figure. It then adds an average cost curve and the demand curve that the monopolist faces. In this example, the quantity is 5. The monopolist then decides what price to charge by looking at the demand curve it faces. The large box, with quantity on the horizontal axis and demand which shows the price on the vertical axis, shows total revenue for the firm.
The large total revenue box minus the smaller total cost box leaves the darkly shaded box that shows total profits. Since the price charged is above average cost, the firm is earning positive profits. In Step 2, the monopoly decides how much to charge for output level Q 1 by drawing a line straight up from Q 1 to point R on its perceived demand curve.
Thus, the monopoly will charge a price P 1. In Step 3, the monopoly identifies its profit. Total revenue will be Q 1 multiplied by P 1. Total cost will be Q 1 multiplied by the average cost of producing Q 1 , which point S shows on the average cost curve to be P 2. Profits will be the total revenue rectangle minus the total cost rectangle, which the shaded zone in the figure shows.
Because the market demand curve is conditional, the marginal revenue curve for a monopolist lies beneath the demand curve.
The Rest is History. Key Concepts and Summary A monopolist is not a price taker, because when it decides what quantity to produce, it also determines the market price. Review Questions How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist? Is a monopolist a price taker? Explain briefly. What is the usual shape of a total revenue curve for a monopolist? What is the usual shape of a marginal revenue curve for a monopolist?
Is a monopolist allocatively efficient? Why or why not? Critical Thinking Questions Imagine that you are managing a small firm and thinking about entering the market of a monopolist. Problems Draw the demand curve, marginal revenue, and marginal cost curves from Figure , and identify the quantity of output the monopoly wishes to supply and the price it will charge. References Aboukhadijeh, Feross. Glossary allocative efficiency producing the optimal quantity of some output; the quantity where the marginal benefit to society of one more unit just equals the marginal cost marginal profit profit of one more unit of output, computed as marginal revenue minus marginal cost.
The market is divided into sub-markets. The sub-market will be arranged in ascending order of their elasticities, the higher price being charged in the least elastic market and vice versa. Price Determination under Price Discrimination:. In the following diagrams, the monopolist has divided his total market into two sub-markets, i.
In the above diagram c it is shown that the equilibrium of the discriminating monopolist is established at output OM at which MC cuts CMR. The output OM is distributed between two markets in such a way that marginal revenue in each is equal to ME.
In the above diagram, it is also shown that in Market B in which elasticity of demand is greater, the price charged is lower than that in Market B where the elasticity of demand is less. Annual Budget Balance of Payment. Budget Policy. Circular Flow of Income. Coefficient of Correlation. Concepts of NIA. Consumption Function. Deficit Financing. Determination of National Income. Economic Development. Economic Planning. Economic Planning in Pakistan. Economic Schools of Thought.
Economic Survey Eight Five Year Plan. Equity in Taxation. Final Subjects. Fiscal Policy. Fiscal Policy in Pakistan. Flow of Funds Accounts of Pakistan. Foreign Aid. Foreign Trade. Game Theory. Graphical Presentation 1. Graphical Presentation 2. Harrod Dommar Growth Model. Important Links. Incidence of Taxation.
Index Numbers 1. Index Numbers 2. Industrial Development in Pakistan. Introduction to Statistics.
0コメント