SHORT RUN EQUILIBRIUM UNDER MONOPOLY

A monopolist being the single seller can either control the supply of his good or can fix the price for his good based on the elasticity of demand.  In the short period if there is demand for his good, a monopolist  enjoys super normal profits.  On the other hand if there is less demand he may suffer loss.  But he would continue to produce as long as the price is above the average variable costs. 

In the short period a monopolist attains equilibrium when two conditions are met:  a)  MC= MR   and

          b)  MC should MR from below.  This is explained with the help of a diagram below.

In the above diagram, OX axis measures the output and OY axis measures the revenue and cost.  The AR curve slopes downwards from left to right.  The AR curve of the monopolist is the demand curve which shows that a monopolist can sell additional units of the commodity only when he reduces the price.  The MR curve slopes downwards from left to right because the AR curve slopes downwards.  E is the point of equilibrium at which the conditions of equilibrium are fulfilled namely, MC=MR and MC cuts MR from below.  To know whether the firm attains super normal profits or loss, the AC is important.  In the above diagram, the AC curve lies below the AR curve.  In other words, The AR is greater than AC.  The revenue per unit is OP and the total revenue is OP x OQ= OPAQ.

The cost per unit is OC and the the total cost is OC x OQ=OCBQ. So the total profit will be TR-TC, i.e, OPAQ – OCBQ =PABC (rectangle box)  which is the super normal profits earned by the monopolist during the short period.