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SS2: ECONOMICS - 2ND TERM

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Lesson 8, Topic 3
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Price and Quantity Determination under Monopoly

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As observed earlier, the monopoly has the power to influence either price or quantity but not both at the same time. If there is a low demand for his/her product he/she can reduce supply in order to maintain a high price and if there is high demand he/she will increase supply and make high profit.

The monopolist however can make abnormal profit both in the short-run and in the long run and he is at equilibrium where MC= MR while his/her demand curve is downwardly sloped. His/Her demand curve is his/her average revenue (AR) curve.

It should be noted that if demand for his product is elastic he/she will lower the price in order to increase sales but if inelastic he/she charges a higher price.

He/she does not produce at an output level where demand elasticity for his product is less than unity. MC must be rising with its slope greater than that of MR at this point. In the short-run, the monopolist makes an excess profit.

Short-run equilibrium position of the monopolist

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The Longrun Equilibrum of a Monopolist

In the long run, the Monopolist will earn a positive economic profit, he/she is likely to remain in business where he/she is able to gain profit. A monopoly will maximize profit when MC is equal to MR as long as the price is higher than or equal to LAC. A monopolist is incurring a loss in the short-run, there is time for him to bring in more into the business which can give him maximum profit overtime. 

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