A
pure monopolist is the sole supplier of a commodity; the demand curve is the
total or market demand curve. Monopolists are price makers, so
to sell more a firm will have to lower its price. Since the demand curve
slopes downwards total revenue (MR) will always be less than Average
Revenue (price). Therefore there will be downward sloping
total revenue (MR) below the demand curve (AR).
Maximum
profits are attained when output is at OQ where MR = MC, this is because at
lower outputs each unit produced adds more to revenue than costs. If it
is more than OQ output each additional unit adds more to cost than to
revenue. The price at which output OQ can be sold is determined by
the demand curve. Thus output OQ will be marketed at price OP. At output
level OQ, average cost equals QB and super normal profit per unit is AB. The
total super normal profit is
equal to AB x OQ and it is represented by the shaded area.
According
to the objective there are
different possible output positions for a monopolist.
If
the firm aims at profit maximization
the will produce at MC = MR, so they can earn a super normal
profits.
Back to Home Page Click here