how a monopoly firm makes output decision
In these notes we will see how a monopolist decides how much quantity to produce. Monopoly firm is a firm which is a sole seller of the commodity it is dealing in, there is no other firm selling the identical product. There is no substitute to what a monopolist is selling in the market. This gives the monopolist the power to control prices and quantity of his product, but the monopolist cannot decide both price and quantity together . If a monopolist want to sell more he have to reduce price of the product.
so, what amount should monopolist sell?
obviously like any other producer monopolist will also maximize his profit and will sell the quantity with maximum profit. Lets see what quantity is profit maximizing for a monopoly firm and how a monopolists takes output decision.
a monopolist's Profit Is Maximized When Marginal Revenue Equals Marginal Cost.
Q* is the output level at which MR = MC.
If the firm produces a smaller output—say, Q1—it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q1 and Q* exceeds the cost of producing them.
Similarly, expanding output from Q* to Q2 would reduce profit because the additional cost would exceed the additional revenue.
We can also see algebraically that Q* maximizes profit. Profit π is the
difference between revenue and cost, both of which depend on Q:
As Q is increased from zero, profit will increase until it reaches a
maximum and then begin to decrease. Thus the profit-maximizing
Q is such that the incremental profit resulting from a small increase
in Q is just zero (i.e., Δπ /ΔQ = 0). Then
But ΔR/ΔQ is marginal revenue and ΔC/ΔQ is marginal cost. Thus
the profit-maximizing condition is that
lets take an example that show how monopoly profits are maximized.
Part (a) shows total revenue R, total cost C, and profit, the difference between the two.
Part (b) shows average and marginal revenue and average and marginal cost.
Marginal revenue is the slope of the total revenue curve, and marginal cost is the slope of the total cost curve.
The profit-maximizing output is Q* = 10, the point where marginal revenue equals marginal cost.
At this output level, the slope of the profit curve is zero, and the slopes of the total revenue and total cost curves are equal.
The profit per unit is $15, the difference between average revenue and average cost.
Because 10 units are produced, total profit is $150.
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so, what amount should monopolist sell?
obviously like any other producer monopolist will also maximize his profit and will sell the quantity with maximum profit. Lets see what quantity is profit maximizing for a monopoly firm and how a monopolists takes output decision.
a monopolist's Profit Is Maximized When Marginal Revenue Equals Marginal Cost.
Q* is the output level at which MR = MC.
If the firm produces a smaller output—say, Q1—it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q1 and Q* exceeds the cost of producing them.
Similarly, expanding output from Q* to Q2 would reduce profit because the additional cost would exceed the additional revenue.
We can also see algebraically that Q* maximizes profit. Profit π is the
difference between revenue and cost, both of which depend on Q:
As Q is increased from zero, profit will increase until it reaches a
maximum and then begin to decrease. Thus the profit-maximizing
Q is such that the incremental profit resulting from a small increase
in Q is just zero (i.e., Δπ /ΔQ = 0). Then
But ΔR/ΔQ is marginal revenue and ΔC/ΔQ is marginal cost. Thus
the profit-maximizing condition is that
Part (a) shows total revenue R, total cost C, and profit, the difference between the two.
Part (b) shows average and marginal revenue and average and marginal cost.
Marginal revenue is the slope of the total revenue curve, and marginal cost is the slope of the total cost curve.
The profit-maximizing output is Q* = 10, the point where marginal revenue equals marginal cost.
At this output level, the slope of the profit curve is zero, and the slopes of the total revenue and total cost curves are equal.
The profit per unit is $15, the difference between average revenue and average cost.
Because 10 units are produced, total profit is $150.
hope your doubts are clear. do subscribe to stay updated with new notes. you can also request your topics in comment box below.
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