What is the output of a monopoly?
Monopoly Price and Output A monopoly can maximize its profit by producing at an output level at which its marginal revenue is equal to its marginal cost. A monopolist faces a downward-sloping demand curve which means that he must reduce its price in order to sell more units.
How does a monopolist select the price from the demand curve?
As the price of the monopolist is given by the market demand curve, he will produce only if the demand curve lies above AVC over some range of output. In Fig. 10.9, this range of output is shown to be q l – q l. From this range of output, the monopolist will select the equilibrium level of output, and a corresponding price from the demand curve.
How will a multi-plant monopolist distribute the production over his many plants?
Thus, we come to the conclusion that the multi-plant monopolist will distribute the production of any particular quantity of output over his many (here two) plants in such a way that the MC in each plant may become the same; only then it would be able to produce the output at the minimum cost.
How can a monopoly maximize its profit?
A monopoly can maximize its profit by producing at an output level at which its marginal revenue is equal to its marginal cost. A monopolist faces a downward-sloping demand curve which means that he must reduce its price in order to sell more units.
How much output will the monopolist produce?
The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive profits.
What does a monopolist produce?
The monopolist produces that quantity of the commodity that reflects the equilibrium point of marginal revenue and marginal cost. The marginal cost is the change in the total cost of production when production is increased by one unit.
What output will the monopolist produce to maximize profit?
The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC.
What does a monopolist do with output and price?
If the firm produces at a greater quantity, then MC > MR, and the firm can make higher profits by reducing its quantity of output. A monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit.
Where does a monopolist produce?
In choosing the output to produce, the monopolist follows the marginal principle. a. This principle states the profit maximizing output is that output where marginal revenue equals marginal cost.
Where do monopolies produce?
Monopoly Production: Monopolies produce at the point where marginal revenue equals marginal costs, but charge the price expressed on the market demand curve for that quantity of production.
What is the profit-maximizing output?
Profit is maxmized at the level of output where the cost of producing an additional unit of output (MC) equals the revenue that would be received from that additional unit of output (MR).
What is the monopolist's profit-maximizing level of output quizlet?
A monopolist maximizes its profits by producing to the point at which marginal revenue equals marginal cost.
How much output will the monopolist produce in order to maximize profit quizlet?
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. $60. A monopoly firm maximizes its profit by producing Q = 500 units of output.
What is the main interest of monopolist?
Since monopolists control the supply of the entire industry, they also control the price of the entire industry and become price setters. A monopolistic firm can have two business decisions: sell less output at a higher price, or sell more output at a lower price.
What happens in a monopoly?
Under a monopoly there is only one firm that offers a product or service, experiences no competition, and sets the price, thus making it a price maker rather than a price taker. Barriers to entry are high in a monopolistic market.
Why is a monopolist a price maker?
A monopoly is a type of imperfect market where there are no competitors and products have no close substitutes. Therefore, the firm offering the products can charge any price without considering customers or rivals. Thus, such a monopolist firm is a price maker.
Does a monopolist always earn supernormal profit?
Explanation: A Monopoly firm does not always earn supernormal profits. The condition of earning supernormal profits or abnormal profits is if a firm's average cost of production is less than the average revenue from the production for the corresponding output.
When is normal profit enjoyed by the monopolist?
That is to say, normal profit is enjoyed by the monopolist when AC curve at a particular point coincides with the AR curve.
Where does a monopolist operate at the lowest point of his AC curve?
Secondly, a monopolist never operates at the lowest point of his AC curve where cost becomes the least. Actually, he operates somewhere to the left of the minimum point of his AC curve, be it in the short run or in the long run. In Figs. 5.2 and 5.3, the lowest point of AC curve has been represented by the point F.
What is the LAC and LMC curve?
In Fig. 5.3, LAC and LMC are the long run average cost and long run marginal cost curves. Corresponding to the equilibrium point E, the monopolist produces and sells OQ output at the price OP. Fig. 5.3 (a) shows a situation of supernormal profit to the extent of RSTP since costs are lower then revenue, i.e.,
What happens if a monopolist fails to cover up variable cost?
Loss then amounts to only fixed cost. But, if the monopolist fails to cover up variable cost, i.e., if P < AVC, only then will he suspend production. He will ‘drop out’. Of course, there cannot be loss in the long run.
Why is demand curve downward sloping?
This happens due to the nature of the demand curve. As the demand curve is downward sloping it must be tangential to the falling portion of AC curve. Operation at this point implies that the monopoly firm cannot utilize its plant optimally. Or it implies under-utilization of resource.
Which point of the AC curve is the monopoly?
However, some economists have suggested that, in the long run, a monopoly firm may not only operate to the left of the minimum point of AC curve (i.e., sub- optimal scale), but may also operate at the lowest point of AC curve (i.e., optimal scale) and may also operate to the right of the minimum point of AC curve (i.e., over- optimal scale) depending on the extent of market or demand for the monopoly product.
What is the first order condition for equilibrium?
Firstly, MC must be equal to MR. This condition is known as necessary condition or first-order condition (FOC) for equilibrium.
What is it called when a monopolist produces his product in more than one plant?
If the monopolist produces his product in more than one plant, then his organisation is called a multi-plant monopoly . We shall now discuss how the multi-plant monopolist would determine the quantity of output to be produced with a view to earning the maximum amount of profit.
What is the MC of a monopolist?
Now at any q = q 1 + q 2, the MC of the monopolist is MC 1 = MC 2. This is because here the qth unit of output is either the q 1 th unit of output in plant 1 or the q 2 th unit of output in plant 2 and the additional cost of producing that unit is either MC 1 or MC 2, and MC 1 = MC 2.
What is the second order condition for profit maximisation in a multi-plant monopoly?
In other words, the second order condition for profit maximisation in a multi-plant monopoly states that at the point of intersection between the MC curve and the MR curve, i.e., at the point where the FOC has been satisfied, the slope of the MC curve, viz., the MC 1 + 2 curve in Fig. 11.16, should be greater than that of the MR curve.
What is the equilibrium point of a two plant monopoly?
In Fig. 11.16, the equilibrium point of the two-plant monopoly is the point E, which is the point of intersection of the MC 1+2 curve and the MR curve of the firm. For, at this point, i.e., at q = q*, we have
What is the MC of both plants?
Now if the production of q* of output is so distributed between the two plants that q* is produced in plant 1 and q 2 is produced in plant 2 (q* + q 2 = q *, by construction), then the MC in both the plants would be OT, i.e., here we would have: MC = MC 1 = MC 2 = OT.
What happens if MC 1 is equal to MC 2?
Instead of MC 1 being equal to MC 2, if we have MC 1 > MC 2 (in the two-plant case), then the firm would reduce the quantity of production in plant 1 and increase the quantity in plant 2, total output remaining the same, i.e., the firm would transfer production from the plant with a higher MC (here plant 1) to the plant with a lower MC (here plant 2). For, by doing this, it would be able to produce the same output (q) at a lower cost.
Is a monopoly negatively sloped?
It may be noted that since the firm operates in the stage of efficient production, it would operate along the upward sloping portions of its MC 1 and MC 2 curves , and so the SOC would be automatically satisfied, for the MR curve of a monopoly is negatively sloped, by definition.
What happens when a monopolist operates at the optimum scale?
Even when the monopolist operates at the optimum scale, the price he charges will be higher than the price prevailing in perfect competition. In perfect competition, the price (p c ), equals the average cost at optimal scale. However, under monopoly, the marginal revenue equals average cost at the optimum scale, as Fig. 10.15 shows. Since AR > MR, the average revenue or price can only be higher than the average cost. Hence, even if it operates at optimum scale, monopoly price will be higher than the competitive price.
Where does a monopolist confine his choice?
A monopolist will confine his choice to a range where loss can be avoided, if such an output range exists. It exists where the demand curve li es above the short run average cost curve.
How to compare monopoly equilibrium and competitive equilibrium?
Monopoly equilibrium can be compared to competitive equilibrium. In competition, output is pressed to the point where marginal cost equals the market price. If we treat the marginal cost of the monopolist as the counterpart of the aggregate marginal cost of the competitive industry, its intersection with the market demand curve gives us the competitive market price and sales. These are shown by p c, q c in Figs. 10.12 (a) and 10.12 (b). It can be seen that the competitive sales (q c) are larger than the monopolists’ and the monopoly price is higher than the competitive price (p c ).
How is market equilibrium determined?
Market equilibrium under monopoly is determined by the choice of the monopolist, and not by supply-demand curves, as under perfect competition. In fact, we cannot speak of a ‘supply curve’ of the monopolist as if it were independent of the market demand curve. This is because, the market demand curve is the basis of the monopolist’s supply decisions. Hence, his supply is always equal to the demand at his chosen price.
What is the long run equilibrium of a monopoly?
One aspect of long run equilibrium which derives from the properties of the cost curve is that the firm is simultaneously in long as well as short run equilibrium. Thus, in long run equilibrium of the monopoly: MR = LMC = SMC at the equilibrium output q 0 , where LAC = SAC. This is shown in Fig. 10.13.
What is the inverse of elasticity of demand?
Lerner defines the inverse of the elasticity of demand as the ‘degree of monopoly’ . Since 1/|ε d | affects the monopolist’s ‘markup’, we may say that the degree of monopoly reflects in the ‘markup’ of the monopoly . The relation between the elasticity of demand and the ‘markup’ suggests a further possibility. If the monopolist locates for his product two separate markets with different elasticities of demand, he can charge a different price in the two markets. His price in the market with a higher elasticity of demand will be less than his price in the other market. This possibility will be explored further in the section on third degree price discrimination.
Why is monopoly price higher than competitive price?
This is because the average cost at a non-optimum scale of production is always higher than the average cost at optimum scale . Hence, the monopoly price must also be higher.