MANAGERIAL ECONOMICS

Monopoly Profit Maximization

Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS

Monopoly Profit Maximization

Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Monopoly

✓ A monopoly is the only supplier of a good that has no

close substitute.

✓ Example: De Beers, controlled the global diamond market.

Monsanto has a monopoly in many genetically modified
(GM) seeds.
MANAGERIAL ECONOMICS
Characteristics of a Monopoly Market

One producer or seller of a particular product

Monopoly Market

Full control on the supply of a product

No close substitute of a monopolist’s product

Restrictions on the entry of other firms

Monopolist can influence the price of a product

MANAGERIAL ECONOMICS
Monopoly Pricing under Short-Run

PRICE AND OUTPUT DETERMINATION UNDER SHORT PERIOD

Under monopoly market structure a monopolist can make a change in the level of production with making a change in
scale of production or with intensive use of the productive technique keeping in view the time factor which enables the
monopolist to do this, is called short period.

Under short period a monopolist may have

• super normal profit

• normal profits

• losses
MANAGERIAL ECONOMICS
Monopoly Pricing under Short-Run
1. SUPER-NORMAL PROFIT UNDER SHORT PERIOD:

Diagram shows the short period equilibrium of the firm where the monopolist has maximum of the profits. In diagram AR and
MR are the Average Revenue and Marginal Revenue curves of the firm and AC and MC are in Average cost and Marginal cost
curves of the firm. The firm's MC curve cuts MR curves at point E and establishes equilibrium at point E.

At this point the firm's output is OQ and the price is equal to OP and OR or QM is the average cost of the firm. The difference
of OP and OR shows profit equal to PR (per unit profit). Thus, PR MT the shaded area represents the supernormal profit of a
monopolist under short period.
MANAGERIAL ECONOMICS
Monopoly Pricing under Short-Run

2. NORMAL PROFIT UNDER SHORT PERIOD:

Under monopoly market a firm may have normal profit situation which is well illustrated in the diagram.
In this diagram, AR and MR are the Average Revenue and Marginal Revenue curves of the firm and AC and
MC are the Average cost and Marginal cost curve in the short period. Marginal cost curve cuts marginal revenue
curve at point E and also establishes equilibrium at E point and the output level is OQ with OP level of price and
QM is the average cost of the firm which is equal to its price (OP). At this position the firm is neither having
profits nor incurring losses.
 MANAGERIAL ECONOMICS
Monopoly Pricing under Short-Run

3. LOSSES UNDER SHORT PERIOD:

Under monopoly market structure a firm may incur losses which can be depicted in diagram.

The diagram illustrates a position of losses in short period by a monopolist. Here, price is less than its cost. In diagram SMC and SAC
are the short run marginal cost curve and short run average cost curve of the firm respectively. AR and MR are the average revenue and
marginal revenue curves of the firm.

SMC cuts the MR at point E and establishes the equilibrium. Here OQ is the level of output to be produced. OP is the price and QM is
the average cost of the produce in short period which results in loss equal to OM-OP = PM per unit of output making a total loss equal to
the shaded area PMST.
MANAGERIAL ECONOMICS
Monopoly Pricing under LONG-Run

PRICE AND OUTPUT DETERMINATION UNDER LONG PERIOD –

Under long period a monopolist has enough time to adjust the supply according to the demand
of the product. In the long period a monopolist will remain in business only if he can make a profit
by producing the optimum level of output with the most appropriate scale of plant. The optimum
level of output in the long period is given by the point where the LMC curve intersects the MR
curve from below and the most appropriate scale of plant is that whose SAC curve is tangent to the
LAC curve at the best level of output and the firm or the industry will be in equilibrium. As new
entry into the industry in restricted and the firm is the industry as well, the monopolist will adjust
the long run output by means of size of plant adjustment depending upon the level and slope of the
AR and MR curves.
 MANAGERIAL ECONOMICS
Monopoly Pricing under LONG-Run

In the long run the firm will be in equilibrium where firm's LMC curve cuts the long run MR curve and at this point
of intersection the firm will enjoy profits. Generally, the firm in the long period is earning super-normal profit as shown
by diagram.

In the diagram the firm at point E is in equilibrium where LMC cuts MR from below. Thus, E is the equilibrium point
where OQ is the output and OP is the price and OM is the average cost of the firm (OM = PQ), hence, the firm is
having profit equal to shaded area MPSR. This is a case of profit in long run situation.
MANAGERIAL ECONOMICS
Problem Solving

Determine the best level of output for a perfectly

competitive firm that sells its product at P = $4 and

TC = 0.04 Q3 – 0.9 Q2 + 10 Q + 5.
MANAGERIAL ECONOMICS
Problem Solving

Suppose demand function for monopoly is P= 1000-

10Q, and cost function is TC= 100 + 40Q + Q2

Find out the price, output, and maximum profit

under monopoly.
THANK YOU

Biplab Sarkar
Department of Management Studies
biplabsarkar@pes.edu
+91 80 6666 3333 Extn 337