Analyze the short-run equilibrium of a firm under monopoly (Nov’04,’05, 07) and How output and price are determined by a monopoly firm (Dec'13)

Q. Analyze the short-run equilibrium of a firm under monopoly (Nov’04,’05, 07)? How output and price are determined by a monopoly firm (Dec'13)?

Short-run equilibrium: Producers in monopolistically competitive markets, as well as all market types, are profit maximizes. This means they will produce at the quantity for which their Marginal Benefit is maximized; a.k.a. where Marginal Cost equals their Marginal Revenue (MC=MR). If you draw a vertical line from the intersection point down to the x-axis, that is the market quantity. To find the price, you must extend the vertical line up to the Demand curve because Demand relates market price to quantity, not the Marginal Cost curve. Then draw a horizontal line to the y-axis and that is the market price. These two values represent the short-run equilibrium for a monopolistically competitive market.

Long Run Equilibrium: Since producers are profit maximizes, they will produce the quantity where MC=MR (same procedure as for the short-run equilibrium). In a monopolistically competitive market there are low barriers to entry so it is easy for other firms to come in and steal economic profit from the firms currently in the market. To counteract this, producers in the market will produce at a quantity that yields zero economic profit, because why would you join this market if there's no supernormal profit? This means the quantity the firm produces will be both where MC=MR and Price (the Demand curve) intersects the Average Total Cost curve. If you draw a vertical line up from the market quantity, it will go through both of these points. The price is again found by drawing a horizontal line to the y-axis.

Price and output determination under monopoly (dec'13): The object of the monopolist is to earn maximum profit. The monopolist will charge such a price which will give him the maximum profit. He always compares marginal revenue with cost at its output rate. The profit of firm is maximum when its MR = MC and Marginal cost curve cuts the marginal revenue curve from below. The MR curve in negatively sloped and it also lies below the AR curve at all levels of output, except the first unit. The monopolist controls the whole market and no new firm can enter into the market so the distinction between a long run and short run is not necessary. The price and output determination can be explained by the following diagram.

Explanation: In this diagram AR curve is higher than the MR curve. The MC curve cuts the MR curve at a point E. Equilibrium occurs at a point E, where MR = MC. So the best level of output for the monopolist firm is OF. As regards the determination of price monopolist fixes the price OP because the total revenue of the firm will be maximum at the equilibrium output OF. The cost of the firm will be = OSEF, the revenue of the firm will be = OPKF.