11.3 Monopoly Equilibrium

(A) Monopoly Supply Curve: The behavior of the monopoly demand curve is distinct from the demand curve under competition. The supply curve of a monopolist is similar to that of a competitive firm. Supply is governed by the technical conditions of production. There is no reason why these should be different for a monopolist. Hence supply curve of a monopolist depends upon the behavior of the usual average and marginal cost of production. With such cost curves and a downward sloping demand curve let us attempt an equilibrium analysis of a monopolist.

(B) Monopoly Equilibrium: In order to study equilibrium under monopoly let us draw the demand and supply or cost curves of a monopolist.

In Figure 42 AR and MR are the demand and marginal revenue curves of a monopolist. AC and MC are the respective cost or supply curves. The usual equilibrium of MR=MC is equally applicable to the monopolist. In the figure MR and MC have intersected at point e which is the equilibrium point. At this point the monopolist produces and supplies output quantity Q. This is the only profit-maximizing condition for the monopolist. Under the given demand-cost structure no other level of output can help to enhance his profit.

In an equilibrium the monopolist charges price P which is determined by a corresponding point R on the average revenue curve. The total revenue of the monopolist is then,

TR = OQ ´ P = OQRP

Similarly the total cost of the monopolist is governed by a point on the average cost curve. S or C is the average cost of producing output Q in which the total cost will be

TC = OQ ´ AC = OQSC

The profits of the monopolist as the difference between TR and TC are,

Profits = TR - TC = OQRP - OQSC = CSRP

Hence CSRP are the monopoly profits. These profits look similar to Super Normal profits under competition. Monopoly profits differ in two respects:

i) Monopoly profits are permanent and enjoyed in the short as well as long run. There is no fear of monopoly profits being competed away.

ii) Monopoly profits arise out of control over conditions in the market. The monopolist follows restrictive policies and charges a higher price. This is the source of his profits. It is made clear by a downward sloping demand curve. Competitive Super Normal profits, on the other hand, are the result of more efficient and favorable conditions of production. Whether a monopolist will always earn extra profits or be satisfied with normal profits depends upon the technical cost conditions of a monopolist and the flexibility of the demand curve. By nature, a monopolist is not likely to allow his profits to fall. He will maintain some positive profits through restrictive practices.