# 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?

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 the equilibrium is at Qm, Pm. (point M)
• This diagram shows how a monopoly is able to make supernormal profits because the price (AR) is greater than AC.
• Usually, supernormal profit attracts new firms to enter the market, but there are barriers to entry in monopoly, and this enables the monopoly to keep supernormal profits.

### Difference between monopoly and competitive markets in the long-run

In the short run, firms in competitive markets and monopolies could make supernormal profit.

However, there is one major difference.

• In monopolies, there are barriers to entry – which prevent new firms from entering the market
• In competitive markets barriers to entry and low – so new firms can enter the market causing lower profit.
• Therefore, in the long-run in competitive markets, prices will fall and profits will fall.
• However in the long-run in monopoly prices and profits can remain high.

### Efficiency and monopoly

• Monopolies set a price greater than MC which is allocatively inefficient.
• By producing at Qm, the monopoly is productively inefficient (not lowest point on AC curve)
• With less competition, a monopoly has fewer incentives to cut costs and therefore will be x-inefficient.

#### Welfare loss to society

• In a competitive market, the output will be at Pc and Qc. (point C)
• In a monopoly, the output will be QM and PM – causing a fall in consumer surplus.
• Monopoly also causes a fall in producer surplus (less is sold). But, some of the consumer surplus is captured by firms (from setting higher price).
• The blue triangle shows the net loss of consumer and producer surplus to society.

Long run average costs in monopoly

It is assumed monopolies have a degree of economies of scale, which enables them to benefit from lower long-run average costs.

In a competitive market, firms may produce quantity Q2 and have average costs of AC2. A monopoly can produce more and have lower average costs. This enables efficiency of scale.

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