Page 171 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes But in the short run he will continue working so long as price is above the average variable cost. If
the price falls below average variable cost the monopolist would shut down even in the short run.
In case of losses, monopoly equilibrium is shown in Figure 11.2. The monopolist is in equilibrium
at OS level of output with price OP. Since price (or AR) is smaller than average cost, he is making
losses which are equal to area of the rectangle PQGH.

Figure 11.2

11.4 Price and Output Determination in Long Run

In the long run, the monopolist has the time to expand his plant or to intensively use his existing

plant which will maximise his profits. Since there will be no new entry, it is not necessary for
the monopolist to reach an optimal scale. It means that monopolist will not stay in business if he
makes losses in the long run. The size of his plant and the degree of utilisation of any given plant
size depend entirely on market demand.

!
Caution He may reach the minimum point of LAC or remain at falling part of his LAC and
expand beyond the minimum LAC depending on the market conditions. In Figure 11.3 we
depict the case in which the market size does not permit the monopolist to expand to the
minimum point of LAC. This is because to the left of the minimum point of the LAC the
SAC is tangent to the LAC at its falling part and also because the short run MC must be
equal to the LMC. This occurs at E, while the minimum LAC is at b and the optimal use of
the existing plant is at a: since it is utilised at the level E, there is excess capacity.
Figure 11.3: Monopolist with Suboptimal Plant and Excess Capacity

166 LOVELY PROFESSIONAL UNIVERSITY