Explain in detail in 2 slides. Add speaker notes explaining each slide
Both monopolists and perfect competitors aim at maximizing their profits. However, differences in market conditions differentiate the results of their equilibrium. Let’s discuss this by analyzing the short-run and long-run equilibrium in a single-price monopoly. In a single-price monopoly, a monopolist sells goods or services at the same price to all buyers.
A monopolist maximizes its profit at the level of both price and output at which MR is equal to Marginal Cost (MC). Let’s graphically demonstrate the short-run equilibrium of a monopolist. MR equals MC at QO. Therefore, the equilibrium price and output is PO and QO. The profit is maximized at this level of output.
Like a perfect competitor, a monopolist can earn a supernatural profit, a normal profit, or incur loss in the short-run. As seen in the graph, the monopolist is earning a supernormal profit equal to area APOBC.
Let’s now discuss long-run equilibrium in a monopoly to help you understand how a monopoly works in the long-run.
Long-Run Equilibrium in a Single-Price Monopoly
For there to be a monopoly, there must be a barrier to entry. Because of this barrier, a monopolist can earn supernormal profit in the long-run due to the lack of competition. A monopolist can decide the plant size at which it can earn the maximum profit. However, if a monopolist continues to incur loss in the long-run and if there is no plant size at which it can earn profit, a monopolist might cease production in the long-run.
In Module 3, we discussed the equilibrium of a firm under perfect competition. We also analyzed equilibrium in a monopoly. Using this knowledge, let’s now compare perfect competition with monopoly. This comparison will enable you to understand the behavior of a firm in monopoly and perfect competition. This comparison will also facilitate the analysis regarding how other market forms operate.
