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  Price and Output Determination

Price and Output Determination:

A monopolist similar to a perfectly competitive firm attempts to maximize his gains. A monopoly firm faces a down sloping demand curve, i.e., its average revenue curve. The downward sloping demand curve entails that larger output can be sold only by decreasing the price. Its marginal revenue curve will be beneath the average revenue curve.

The shape of average cost curve is ‘U’. The monopolist will be in balance whenever MC = MR and the MC curve cuts the MR curve from beneath.

In figure below, AR is the Average Revenue Curve and MR is the Marginal revenue curve. AR curve is declining and MR curve lies beneath AR. The monopolist is in symmetry at E where MR = MC. He generates OM units of output and fixes price at OP. At OM yield, the average revenue is MS and average cost is MT. Hence the profit per unit is MS-MT = TS. Total profit is the average profit (i.e., TS) multiplied by output (i.e., OM), that is equivalent to HTSP. The monopolist is in symmetry at point E and generates OM output at which he is earning maximum gain. The monopoly price is greater than the marginal revenue and marginal cost.

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