Short Run and Long Run Equilibrium under Monopoly

Short Run Equilibrium under Monopoly

The monopolist is known for his/her always profit and for never lost. But in short run monopolist maximize its profit only when the following two conditions are satisfied.

1st Condition: When the marginal revenue and marginal cost becomes equal in the equilibrium point.

2nd Condition: At the point of equilibrium, the slope of the MC will be greater then the slope of the MR.

From the graph, it is cleared that at the point of equilibrium E MC=MR and the slope of marginal cost is greater than the slope of the marginal revenue because marginal revenue is negatively sloped downward from left to right side.

The OP is the equilibrium price and OX the equilibrium output level. The area of OABX represents the cost of OX while OPCX represents the total revenue of the given output. The area of ABCP represent the super normal profit for the given monopoly in short run equilibrium.

Long Run Equilibrium under Monopoly

In the long run equilibrium, all the factors of production including the size of the plant are variable. A monopoly will maximize its profit when the long run marginal cost is equal to the marginal revenue and the marginal cost curve intersect the marginal revenue from below.

The area of OABX represents the cost of OX while OPCX represents the total revenue of the given output. The area of ABCP represent the super normal profit for the given monopoly in long run equilibrium. But when there are some new firm trying to enter into the market then the monopoly will shift its price from OP to FD and making it difficult for the new firm to earn profit but monopoly itself earning normal profit instead of super normal profit.

When the new firm take back up due to the lose then the monopoly will start again super normal profit.