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Managerial Economics - Market Structure

Profit maximization under Monopoly Competition - Market Structure

   Posted On :  29.05.2018 09:21 pm

For monopolist there are two options for maximizing the profit i.e. maximize the output and the limit the price or limit the production of the goods and services and fix a higher price (market driven price).

Profit maximization under Monopoly Competition
 
 
For monopolist there are two options for maximizing the profit i.e. maximize the output and the limit the price or limit the production of the goods and services and fix a higher price (market driven price). In monopoly competition, the demand curve of the firm is identical to the market demand curve of that product. In monopoly the MR is always less than the price of the commodity.
 

Profit Maximization Rule:

 
Produce at that rate of output where MR = MC. From the graph we can understand the profit maximization under monopoly. ‘X’ axis indicates the output and ‘Y’ the price/cost and revenue. The marginal revenue curve is denoted as MR. The average revenue curve is AR which is also the demand curve. MC is the marginal cost curve, It looks like a tick mark and average cost curve AC is boat shape.



From the above graph it is seen that the demand curve D and average revenue curve AR are depicted as a single curve. The marginal revenue curve MR also slopes the same but the MR curve is below the AR curve. The short run marginal cost curve SMC looks like a tick mark and the boat shaped average cost curve SAC is also seen in the graph. The profit maximization criteria of MR=MC is followed in the monopoly market and the equilibrium point ‘E’ is derived from the intersection of MR and SMC curves in the short run. i.e. MC curve or SMC here intersects the MR curve from below. Based on the equilibrium point, the output is the optimum level of production i.e., at OM quantity. The price of the commodity is determined as OP. On an average the firm receives MQ amount as revenue. The total revenue of selling OM quantity gives OMQP amount of total revenue (OM quantity x OP price). The firm has spent MR as an average cost to produce OM quantity and the total cost of production is OMRS (OM quantity x MR cost per unit)

Profit  =  TR - TC
           =    OMQP - OMRS
           =     PQRS (the shaded portion in the graph)
 
In the short run the monopoly firm will earn profit continuously even with various returns.



From the above graph it can be understood that the cost of production (MC, AC) is increasing along with the output but even with the increasing scale the firm earns PQRS as profit which is the shaded portion in the graph.
 
The graph given below explains clearly that the firms cost curves of Marginal cost (MC) and Average cost (AC) are declining with this slope. The organization earns PQRS profit but the profit is comparatively lesser than the previous situation.


The third situation explains that the organizations’ marginal cost and average cost curves are horizontal and parallel to the X axis. Even with the constant scale, the firms earns profit as PQRS.



Therefore we can conclude by saying that under monopoly market structure the firm will earn profit even under different cost conditions and profit maximization takes place. They follow the price determination condition as MC=MR and never incur loss.

 

Tags : Managerial Economics - Market Structure
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