Monopoly Diagram Short Run and Long Run

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?

monopoly

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.

monopoly-deadweight-profit

  • 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
economiesofscale

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

More on Monopoly

32 thoughts on “Monopoly Diagram Short Run and Long Run

Comments are closed.