Equilibrium of Firm in Short Period

A monopolist will fix price and output where MR =MC. In short period a monopolist may earn ‘profit’, normal profit or may suffer loss. It is wrong to believe that monopolist cannot face loss and monopolist simply because he is a monopolist does not always earn profit. The volume of profit of monopolist depends upon its demand and conditions of cost. In short period the demand of the product is weak then the price may be reduced to a point that he suffers loss. But there is no suspicion that the possibility of normal profit or loss is least in monopoly. There are three situations, which can be well illustrated by the diagrams as under-

  • Abnormal Profit. Monopolist will determine price and output

MR=MC at profit TIMR=MC.

TR = NOQP

TC = MOQL

Profit= TR-TC = NOQP = MOQL

= NLMP

Therefore at required profit NMLP, maximum and price will also be maximizing.

  • Normal Profit.

The demand of the goods of monopolist may weaken and may fall and earn only normal profit. In this condition TR =TC and Price =PQ and output will be OQ.

  • Because of hard weakening of demand a monopoly may earn loss too.

In this situation AR =MOQP

TC=NOQL

Loss=TC=TR=NOQL-MOQP

=NMPL

Price=PQ, output =OQ

Equilibrium of Firm in Long Period

Existence of monopoly in long period requires that there is no entry into the industry. A monopolist may for stall entry in many ways.  He may control the sources of raw material used for production of his output. Or he may hold certain patents that prevent other firms from duplicating its product etc. Suffice to say that the monopolist has no threat of entry in his field and is free to reap profits in long run.

So when the entry in the industry is blocked he can well adjust demand with supply. He may increase or decrease its production capacity in long run. In long period due to expansion or absorption of production capacity, there may be increase or decrease in the cost of factor of production and thus a monopolistic industry in long period will produce under, increasing, decreasing or constant costs. The price output determination under law of increasing, decreasing and constant cost are as under:

  • Law of Increasing cost

In the figure the law of increasing cost is working that is why the MC and AC all have a rising trend. At e MR = MC. This line joint at point P with AR and gives

Price = PQ

Output = OQ

Profit = TR – TC = NOPQ – MOQL

= NMLP

  • Law of decreasing Cost

In this case monopolist is working under law of decreasing cost that is why the AC and MC curve have falling trend. At point E, MR = MC. A line from this point illustrates price and output.

Price = PQ

Output = OQ

Profit = TR – TC = NOPQ = MOQL

  • Law of constant Cost

In this case monopolist is working under cost law of constant cost that is why AC = MC. At E Point MR = MC. At E point MR =MC. From that point line touches point P on AR this gives us. Price = PQ. Output = OQ profit = NMEP.

Price Determination Under Monopolistic Competition

            Each firm under imperfect competition or monopolistic competition produces different commodities, which are close substitutes. This makes the output and price policies of an individual firm or product partially dependent on the output and price policies of its rivals. In other words, the average revenue curve and the average cost curve of each firm will be partially affected by the price and output policies of its rivals. Since each firm can also increase or decrease the price of its commodity by its own action, the average revenue curve of each firm slopes downwards. It should be remembered that under perfect competition the average revenue curve of each firm is a horizontal straight line. It is so because no firm by its individual action increases or decreases the price of its commodity.

Further unlike in the case of perfect competition and monopoly, a firm under imperfect competition will come to equilibrium where its marginal revenue equals its marginal cost or where.

Marginal Revenue = Marginal Cost

Thus a firm will go on producing go on producing so long as its marginal revenue is higher than its marginal cost. it will stop increasing the scale at the point where marginal revenue and marginal costs are equal.

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