Business Economics Essay Example | Topics and Well Written Essays - 1500 words - 2

Business Economics - Essay Example In fact the choice problem of the monopolist is to choose the per-unit price and quantity of output to maximise profits. This is achieved by producing that level of output (Qm) for which the MC = MR (with the MR being intersected by the MC from below as a second order condition). The price charged will be Pm as it can be seen from the demand curve that it is what the consumers shall be willing to pay for each unit if Qm is the available output in the market. Here the profit level shall be supernormal (represented as the shaded area in the diagram) i.e, over and above the normal profits. The absence of close substitutes allows the monopolist to charge a price high enough that ensures supernormal profits. However one should note that the monopolist can actually be bearing losses as well in the short run. This occurs simply if the AC corresponding to the profit maximising output lies above the corresponding price. In this case however the short run problem for the monopolist becomes one of minimising the loss. However, a firm will go on operating in a monopoly market through the long run if only he earns positive profits. Such profits can be sustained in the long run since in spite of the supernormal profits that may act as incentives to new firms, the barriers to entry are assumed to be strong enough to prevent new entry in a monopoly market structure. In the long run, the equilibrium condition is LMC = MR with the MR curve being intersected from below by the LMC curve. However the monopolist is limited in hiking the pricing over a certain extent as the negative income effect it generates may cause consumers to move on to substitute goods and thus causing a loss in revenue. However as long as the monopolist produces the profit maximising output and charges the corresponding optimal price, he/she shall be earning supernormal profits in the long run as well. Oligopoly is a type of