Monopoly Profit Scenarios

Overview

This lecture covers the economic profit, normal profit, and economic loss scenarios for a monopoly, including how to illustrate and calculate these on graphs.

Economic Profit in Monopoly

• Economic profit occurs when a firm’s average revenue (AR) exceeds its average cost (AC) at the profit-maximizing output.
• The profit-maximizing quantity is found where marginal cost (MC) equals marginal revenue (MR).
• The price is determined by the demand curve above this output level.
• Economic profit is calculated as (AR - AC) × Quantity; e.g., if AR = 8, AC = 6, Q = 10; profit = (8 - 6) × 10 = 20.
• On the graph, economic profit is the area between the AR and AC curves at the chosen output.

Normal Profit in Monopoly

• Normal profit occurs when AR equals AC at the profit-maximizing output.
• At this point, the firm covers all costs including opportunity costs, resulting in zero economic profit.
• On the graph, the AR and AC curves meet at the profit-maximizing quantity.
• Formula: AR - AC = 0, so profit is zero.

Economic Loss in Monopoly

• Economic loss happens when AC is greater than AR at the profit-maximizing quantity.
• The firm’s costs per unit exceed its revenue per unit, resulting in negative economic profit.
• Calculation example: If AR = 20, AC = 30, Q = X; loss = (20 - 30) × Q = negative value.
• On the graph, AC lies above AR at the chosen output.

Graphing Tips & Common Mistakes

• Always label all axes and curves: price (vertical), quantity (horizontal), demand (D=AR), MC, MR, and AC.
• Profit-maximizing output is where MC intersects MR; price is found on the demand curve above this quantity.
• Do not confuse where to place the price—always follow up from the output to the demand curve, not MR.

Key Terms & Definitions

• Average Revenue (AR) — Revenue per unit sold; typically the firm’s price.
• Average Cost (AC) — Total cost divided by quantity produced.
• Marginal Cost (MC) — Additional cost of producing one more unit.
• Marginal Revenue (MR) — Additional revenue from selling one more unit.
• Economic Profit — When AR > AC at profit-maximizing output.
• Normal Profit — When AR = AC; zero economic profit.
• Economic Loss — When AR < AC; negative economic profit.

Action Items / Next Steps

• Complete Activity 64 as practice, using the methods explained.
• Review previous lessons on cost and revenue curves for further understanding.
• Prepare to check Activity 64 answers in the next lesson.