Price and Output Determination under monopoly

Price and Output Determination under monopoly

            The condition of price and output determination is similar to those of perfect competition i.e. MR = MC and MC must intersect MR form below. The demand curve of a monopolist or AR curve is downward sloping and MR is less than AR. Downward sloping AR indicates that a monopolist is able to sale more commodities at less price. Monopolist has full control over the supply of his product. For him in short period there are both fixed and variable costs and in long period there is only variable cost.

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-

(A)   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.

(B)   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.

(C)  Loss. 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