PRICE AND QUANTITY DETERMINATION UNDER MONOPOLY
In an imperfect market, also called monopolistic competition, prices of goods and services can easily be influenced by the sellers or buyers.
This is due to the fact that only a single producer or supplier of a particular commodity exists even though there might be many buyers. In this case, they have full control over price or output and different prices rule the market.
Equilibrium is the most efficient operating level for monopolist. In a situation where this happens, the monopolist will not have the slightest intention to quit the business since he has full control of both the price and output.
Equilibrium of the monopolist normally occurs where P>MC and MC = MR. The monopolist does not attain equilibrium by equating price (P) of the goods with Marginal Cost (MC).
From the diagram, it is observed that the profit maximizing output is OQ1.
Cost of product and market price are OP 1 and OP2 respective The monopolist makes abnormal profit in I shaded area represented by P2RSP1. the super normal profit of a monopolist.
However, there are situations where i monopolist can suffer some losses. the AC curves are completely outside the revenue zone.
AC indicates that when I produced and sold output of OQ2, its cost i over and above revenue. Thus, the monopoly made total loss as shown in the shaded are£ the diagram.
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