Equilibrium Of Firm Under Monopoly

Equilibrium Of Firm Under Monopoly

MONOPOLY

The single supplier of a good, service or resource that has no close substitute. Monopoly arises existence of barriers preventing the entry of new firm.

EQUILIBRIUM OF FIRM UNDER MONOPOLY

A firm is in equilibrium position when it is earning maximum money profit.

The condition of equilibrium is:

MR        =      MC

Marginal revenue = Marginal cost

Short-Run Equilibrium Under Monopoly:

It is generally a wrong concept that monopoly firm in every situation of market earned Super normal profit. Practically a monopoly firm faces three types of situation:

• Super Normal Profit (TR > TC)
• Normal Profit            (TR = TC)
• Losses                        (TR < TC)

SUPER NORMAL PROFIT/ ABNORMAL PROFIT :

In short run the monopoly firm faces the situation of super normal profit which can easily explained by diagram.

In diagram on x-axis the quantity produced and on Y axis revenue and cost curves are measured. The AR & MR curve show average and marginal revenue respectively. AC and MC are average and marginal cost curves of a firm respectively.

At point E, MR = MC and condition of equilibrium is fulfilling.

From equilibrium point E, a perpendicular is drawn which cuts x-axis , and

• OP = Price per unit
• OT = Cost per unit
• OM = Output of the firm
• OPSM = Total revenue
• OTQM = Total cost

Total Revenue > Total Cost

Super normal profit = TR – TC

TPSQ = Profit area

NO PROFIT/ NO LOSS OR NORMAL PROFIT

In short run the monopoly firm also faces the normal profit situation which can easily explained by the diagram.

At a point where firm total revenue is equal to total cost firm is achieving normal profit. In other words in this situation firm just covering all it’s lost.

In diagram the distance OM show equilibrium production and MS show average revenue and average cost. Now:

• The area of rectangle OPSM = TR = Total Revenue
• The area of rectangle OPSM = TC = Total Cost

Because a single rectangle show the total cost and total revenue so,

TR = TC

CONDITION OF LOSSES:

In short run the monopoly firm faces the situation of losses which can easily explained by diagram.

In diagram on x-axis the quantity produced and on Y axis revenue and cost curves are measured. The AR & MR curve show average and marginal revenue respectively. AC and MC are average and marginal cost curves of a firm respectively.

At point E, MR = MC and condition of equilibrium is fulfilling.

From equilibrium point E, a perpendicular is drawn which cuts x-axis , and

• OP = Price per unit
• OT = Cost per unit
• OM = Output of the firm
• OPSM = Total revenue
• OTQM = Total cost

Total Revenue < Total Cost

PTSQ    =    Profit area

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