Equilibrium Price and Output Determination in Monopoly

Short-Run Equilibrium

The monopolist won't have enough time to increase the size of its facility in the near future (or capacity). To put it another way, market supply cannot be altered in response to a shift in market demand. A monopolist has two responsibilities: a) to set the output level; and b) to set the price.

The level of output is set by a monopolist when both of the requirements for profit maximization are met: a) MC = MR and b) the slope of MC > the slope of MR. Being the only vendor, the monopolist bases the cost of his good on the law of demand. As a result, a firm's demand curve (AR) falls downward. In a situation of perfect competition, the firm is a price-taker and its only option is to choose its production. Setting the price and determining his output are two considerations the monopolist must make. The two choices are interdependent, nevertheless, because of the demand curve's downward slope. The ability to alter a product's price is the essence of monopolistic power.

Being the only seller, monopolists typically experience excess profit (AR > AC) at short run equilibrium. A monopoly corporation may not, however, necessarily generate an excess or supernormal profit. Monopolist profit will be at its highest and reach equilibrium at the output level where marginal revenue and marginal cost are equal. If the demand elasticity or average revenue curve is smaller than unity, the monopolist will never set his output level there. A monopoly firm's cost and revenue conditions determine whether it makes an excess profit, a typical profit, or a loss. ii) the danger of possible competition or the existence of distant replacements; and iii) government monopoly policy. In other words, the amount of profit is based on the firm's effectiveness and market demand. When a monopolist corporation creates any level of output at a point where two conditions are met, it must realize three options. As follows:

• The company makes an excess profit if AR > AC.
• Firm receives typical profit if AR = AC.
• Firm bears the loss if AR < AC.

Long Run Equilibrium

Long-term, the monopolist has enough time to increase the size of its plant or to utilize it at any level, maximizing profit. In other words, because there is enough time, the market supply can be altered in response to changes in the market demand. Due to the difficulty of bringing in new businesses, there is a chance that the company will eventually make an excessive profit. However, the size of his plant and the extent to which any particular plant size is utilized entirely depend on the market's size, demand, and cost structure. The alternative plants, including various plant sizes, that the company is to choose for operation in the long run are presented by the long-run average cost curve and its associated long-run marginal cost curves. The monopolist will make a rational surplus profit if there is sufficient demand for the product on the market to support the output generated at maximum capacity.

However, he only runs his facility at a sub-optimal scale and makes less excess profit if the market size or demand is modest. Similar to the last example, he operates his factory at higher than ideal capacity and generates greater surplus profit if market demand is higher or the market is larger. Additionally, the company will operate at a location where the short-run average cost is perpendicular to the long-run average cost curve. However, because of flaws in the market, the monopolist runs its facility at a size that is less than ideal.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan