Short run equilibrium of a firm under monopoly, Managerial Economics

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The short run equilibrium of monopolist is displayed below in figure.

2209_Short run equilibrium of a firm under monopoly.png

Figure: Abnormal Profit under Monopoly

AR is the average revenue curve, MR is marginal revenue curve, AC is average cost curve and MC is marginal cost curve. Up to OQ, level of output marginal revenue is greater than marginal cost though beyond OQ the marginal revenue is less than marginal cost.

So the monopolist would be in equilibrium where MC=MR. So a monopolist is in equilibrium at OQ level of output and at OP price. He earns abnormal profit equal to PRST. Though, it isn't always possible for a monopolist to earn super normal profits. If cost and demand situations aren't favourable, monopolist may incur short run losses.

536_Short run equilibrium of a firm under monopoly1.png

Figure: Loss under Monopoly

Though monopolist is a price maker, because of high costs andweak demand, he suffers a loss equal to PABC as displayed above in figure.


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