Economic Profit of a Monopoly Firm

Introduction

• Examination of the economic profit for a monopoly firm.
• Introduction to the concepts of demand curve, marginal revenue, and marginal cost.

Demand Curve

• Traditional demand curve: higher prices lead to lower demand, while lower prices increase demand.
• Monopoly demand curve behaves similarly to other demand curves seen in competitive markets.
• Demand curve shows the relationship between price and quantity demanded.

Marginal Revenue Curve

• In a perfectly competitive market, marginal revenue equals the demand curve.
• In a monopoly, the marginal revenue curve is steeper than the demand curve.
• The monopoly reduces price for all units, not just the incremental one, causing the marginal revenue to decrease faster.
• Important distinction: marginal revenue curve is a downward slope, unlike the horizontal line in perfect competition.

Marginal Cost Curve

• Initially, economies of scale reduce costs, but coordination costs and diseconomies of scale eventually increase marginal costs.
• Rational quantity to produce is when marginal cost equals marginal revenue.

Rational Quantity and Price

• Rational quantity for a monopoly to produce is denoted as ( Q_m ).
• Price is determined by the demand curve at the production quantity ( Q_m ).
• Monopoly produces at a quantity where price is greater than marginal cost, unlike in perfect competition.

Markup and Deadweight Loss

• The difference between price and marginal cost represents a potential markup.
• Monopoly causes deadweight loss due to not capturing potential gains from higher quantities.
• Insurmountable barriers to entry prevent market adjustments that would capture these gains.

Economic Profit Calculation

• Average Total Cost (ATC) curve is used to determine economic profit.
• Economic profit occurs when price per unit exceeds average cost per unit.
• The economic profit is calculated as the difference between price and average total cost times the quantity.
• Represented by the shaded rectangle area in a graph.

Monopoly vs Perfect Competition

• In monopolies, marginal revenue curve differs from demand curve.
• Monopolies maintain economic profit even in the long run due to high barriers to entry.
• Unlike perfect competition, new entrants do not dissolve economic profit.

Conclusion

• Monopolies can continue to earn economic profits due to barriers to entry.
• Monopoly's marginal cost intersects marginal revenue at a point creating deadweight loss.
• Economic profit is sustained unless market conditions dramatically change.