Equilibrium of Firm in Long Period

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:

(a)   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

(b)   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

(C)  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.