Output and price determinationThis is a featured page

Cost data:
  • Assumption - a pure monopolist hires resources competitively and has the same technology as a purely competitive firm.

MR=MC rule:
A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC.
  • Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve.
          • Draw a horizontal line. This is the price they set.
Output and price determination - Welker's Wikinomics Page

How to determine the profit-maximizing output, profit-maximizing price, & economic profit (or minimized loss) in PM industries:
    1. Find the profit-maximizing output at the point where MR = MC.
    2. Draw a vertical line upward from Qpm to the demand curve.
    3. Determine the economic profit using one of two methods:
      Method I: Find profit/unit by subtracting ATC of Qpm from Ppm. Then multiply the difference by Qpm to determined economic profit. (In other words, Economic Profit = (P - ATC) x Qpm )
      Method II: Find TC by multiplying ATC of Qpm by Qpm. Find TR by multiplying Qpm by Ppm. Then subtract TC from TR to determine economic profit. (In other words, Economic Profit = TR-TC )

    No monopoly supply curve:
    • No unique relationship between price and quantity supplied for a monopolist → no supply curve
      • Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output

    Misconceptions concerning monopoly pricing:
    • Not Highest Price:
      • Misconception: Monopolists will charge highest price possible because they can manipulate output & price
      • Monopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased.
      • Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost)
      • Monopolist seek maximum total profit, NOT the maximum price
    • Total, Not Unit, Profit:
      • Output level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.

      Output and price determination - Welker's Wikinomics Page


      Possibility of losses by monopolist:
      • Pure monopolist’s likelihood of earning economic profit greater than that of purely competitive firm’s
        • PC – long-run – destined to earn only normal profit
        • PM has high barriers of entry; therefore, the concept of “entry eliminates profits” does no apply to PM
      • Pure monopoly does not guarantee profit:
        • Monopoly is not immune from upward-shifting cost curves caused by escalating resource prices
        • Monopoly is not immune from changes in tastes that reduce the demand for its product
        • Both of these factors can lead to losses - initially it will persist in operating at a loss and to stop incurring loss, the firm's owners will reallocate their resources



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