A monopolist will produce an output that maximises his total profits or net monopoly revenue (difference between total revenue and total cost). A monopolist gets maximum net monopoly revenue at the point of equality of MC and MR, former cutting the latter from below.
He will go on producing additional units of output, so long as marginal revenue (MR) exceeds marginal cost (MC). The reason is that it is profitable to produce an additional unit, if it adds more to revenue than to cost. He would not like to forego profits by producing less (or more).
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Fig. 14.2, Fig. 14.3 and Fig. 14.4 show the short-run equilibrium of the monopolist at point ‘E’, where MC curve cuts MR curve from below. The equilibrium price is OP and the equilibrium quantity is OQ.
In the short-run a monopolist earns super normal profits (Fig. 14.2), when the equilibrium price (AR) exceeds the corresponding average cost. The difference between the two is profit per unit (BQ – CQ = BC in Fig. 14.2). Total profits are given by the shaded area DPBC, which are equal to the difference between total revenue (area OPBQ) and total cost (area ODCQ).
Though monopolist generally earns profits even in the short-run, but the possibility of losses in this period cannot be ruled out. In Fig. 14.3, the monopolist incurs losses, since his equilibrium price (BQ) is lower than the corresponding average cost (CQ).
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The loss per unit to the monopolist is BC and the total losses to the monopolist are shown by the shaded area DPBC in Fig. 14.3, which is same as the difference between total cost (area ODCQ) and total revenue (area OPBQ).
The monopolist continues production with losses in the short period, so long as he is able to cover at least the variable cost, i.e., the firm is incurring losses which are not greater than fixed cost.
In the short-run, the monopolist may earn just normal profits. In this case, the average cost curve will pass through the average revenue curve corresponding to equilibrium level of output making price equal to average cost and hence zero economic profit (Fig. 14.4).