Readers Question Explain with the help of diagrams the equilibrium of a firm having monopoly power in the market in the short-run and long-run?
The diagram for a monopoly is generally considered to be the same in the short run as well as the long run.
Profit Maximisation occurs where MR=MC. Therefore equilibrium is at Qm, Pm.
Features of this diagram
- There are barriers to entry in Monopoly. Firms are price makers. The industry demand curve is the same as the firms demand curve.
- Profits are maximised at output where MR=MC. This means they set a price greater than MC which is allocatively inefficient.
- In this diagram the firms makes supernormal profits because AR is greater than AC.
Monopoly Diagram and Welfare Loss to Society.
- In a competitive market, output will be at P1 and Q2.
- In a monopoly, output will be QM and PM.
- A monopoly causes a fall in consumer surplus and a fall in producer surplus. Some of the consumer surplus is captured by firms.
- The red triangle shows the net loss of consumer and producer surplus to society.
Long Run Average Costs
It is assumed monopolies have a degree of economies of scale, which enables them to benefit from lower long run average costs.
Note: In monopolistic competition the short run equilibrium is different to the long run equilibrium
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