Monopoly is a market structure in which there is a single seller, there are no close substitutes for the

commodity it produces and there are barriers to entry. In a monopoly market, the seller has an
absolute power to determine the price of its product: a monopoly is a price maker.

SHORT-RUN EQUILIBRIUM
Monopoly Equilibrium by Total Revenue–Total Cost Approach
The main objective of a monopoly firm is to maximize profit. So, according to traditional theory, a
monopolist is in equilibrium at the level of output and price at which it’s total Profit (difference
between total revenue and total cost i.e.  = TR – TC) is maximum. In Monopoly market, demand
curve of is negatively sloped or more can be sold only at lower price. Therefore, TR curve increases at
decreasing rate up to a certain output level then decreases beyond that output level.TC curve of a firm
is inverse "S" shaped, or TC initially increases at a decreasing rate then increases at an increasing rate.
TC curve start at a height equal to TFC on Y axis. Profit (π) is the vertical distance between TR and
TC. Total profit is maximum where the difference is maximum, given by OQ1 output level and attains
equilibrium. Since there is a single firm is an industry under monopoly, there is no need for a separate
analysis of the equilibrium of the firm and industry.
From the following table we observe monopolist maximizes its profit (120) by producing 6 units of
output and attains equilibrium.

Q TC P TR π MR MC
0 60 70 0 -60
1 84 66 66 -18 66 24
2 98 62 124 26 58 14
3 108 58 174 66 50 10
4 116 54 216 100 42 8
5 130 50 250 120 34 14
6 156 46 276 120 26 26
7 196 42 294 98 18 40
8 248 38 304 56 10 52
9 315 34 306 -9 2 67
10 400 30 300 -100 -6 85
11 503 26 286 -217 -14 103
 Equilibrium of a monopolist TR, TC approach

400

350

300

250

200

150

100

50

0
0 1 2 3 4 5 6 7 8 9 10

-50

TC TR π
-100

Monopoly Equilibrium by Marginal Revenue–Marginal Cost Approach

The monopolist maximises his short-run profits if the following two conditions are fulfilled: Firstly,
the MC is equal to the MR. Secondly, the slope of MC is greater than the slope of the MR at the point
of intersection. In the following figure (i) the equilibrium of the monopolist is defined by point E, at
which the MC intersects the MR curve from below. Thus, both conditions for equilibrium are
fulfilled. Price is OP and the quantity is OQ. The monopolist realises excess profits equal to the
shaded area PABC (in Figure (i) when AR>AC). Note that the price is higher than the MR. In pure
competition the firm is a price-taker, so that its only decision is output determination. The monopolist
is faced by two decisions: setting his price and his output. However, given the downward-sloping
demand curve, the two decisions are interdependent. The monopolist will either set his price and sell
the amount that the market will take at it, or he will produce the output defined by the intersection of
MC and MR, which will be sold at the corresponding price, P. The monopolist cannot decide
independently both the quantity and the price at which he wants to sell it.
P
AR
MR
AC
MC
MC

A
P AC
Profit

C B

E
AR

Q
O Q
MR
Figure (i) Firm is making excess Profit

P MC
AR
AC
MR
AC
MC

A
P

AR

O Q Q
MR
Figure (ii) Firm is making neither Profit nor loss
 P MC
AR
AC
MR
AC
MC C A

P B

E
AR

O Q Q
MR

Figure (iii) Firm is suffering loss

In the above figure (ii) the equilibrium of the monopolist is defined by point E, at which the MC
intersects the MR curve from below. Thus, both conditions for equilibrium are fulfilled. Price is OP
and the quantity is OQ. Here at equilibrium AR is equal to AC. The monopolist realises neither profit
nor loss or earns only normal profit which is included in TC.
In the above figure (i) the equilibrium of the monopolist is defined by point E, at which the MC
intersects the MR curve from below. Thus, both conditions for equilibrium are fulfilled. Price is OP
and the quantity is OQ. The monopolist suffers loss equal to the shaded area PBAC (in Figure (iii)
when AC>AR). The monopolist will continue its production only if loss is less than TFC and if Loss
exceeds TFC firm closes down.either set his price and sell the amount that the market will take at it,
or he will produce the output defined by the intersection of MC and MR, which will be sold at the
corresponding price, P. The monopolist cannot decide independently both the quantity and the price at
which he wants to sell it.
 Long-Run Equilibrium of Monopoly
In the long run Monopolist has the time to adjust its plant, or to use his existing plant any level which
will maximize his profit. To maximise profit a monopolist must fulfil the following conditions. i)
LMC = MR and ii) slope of LMC> MR at LMC= MR or LMC cuts MR from below. Since entry off
new firms are barred me a monopolist continue to earn excess profit in the long run. A monopolist
does not incur loss in long run. In long run, the monopolist can earn super normal profit because entry
of new firms is barred. If the monopolist is in loss, in short run, he has time to expend his plant or use
the capacity of the existing plant to maximize his profit.
In the long run the monopolist has the time to expand his plant, or to use his existing plant at any level
which will maximise his profit. With entry blocked, however, it is not necessary for the monopolist to
reach an optimal scale and produce at the minimum point of the LAC. To maximise profit a
monopolist must fulfil the following conditions. i) LMC = MR and
ii) slope of LMC> MR at LMC= MR or LMC cuts MR from below
What is certain is that the monopolist will not stay in business if he makes losses in the long run. He
will most probably continue to earn supernormal profits even in the long run, given that entry is
barred. However, the size of his plant and the degree of utilisation of any given plant size depend
entirely on the market demand. He may reach the optimal scale (minimum point of LAC) or remain at
suboptimal scale (falling part of his LAC) or surpass the optimal scale (expand beyond the minimum
LAC) depending on the market conditions.
In figure, the monopoly firm is in equilibrium at point E where LMC cuts MR form below. The
equilibrium point determines OQ level of output at OP price. At OQ level of output, average revenue
(AQ) is greater than average cost (BQ). Since AR > AC, the firm is earning super normal profit equal
to PABC (= AB × CB; where CB = OQ). Hence, in long run, the monopoly firm can enjoy super
normal profit.
P
AR
MR
AC
LMC
MC

A
P LAC
Profit

C B

E
AR

Q
O Q
MR

Figure Long run equilibrium of a monopolist.