Answer to Question #192709 in Microeconomics for Narendra

Question

Assume that a monopoly loses money in the short run but stays in business. in a graph show the monopolists output, price and the total loss. what will happen in the long run?

Explain please

Answer 1

Monopoly refers to the market situation where there is only single seller and more buyers. The seller enjoys the full market share and the monopoly has no close substitutes.  

The loss of monopoly in the short run can be illustrated as follows:

In the figure horizontal axis represents price and vertical axis represents quantity. The firm suffers losses when the average cost (AC) is higher than the average revenue (AR) at output level Q and price level P. So, the total loss is equal to the area P1ABP, which shows as the shaded area in the figure.

The monopoly firm suffers loss because in the short run, the factors of production cannot be vary and the firm will shut down only when the losses is higher than their fixed cost. In the long run, the factors of production can be vary and demand curve (AR) will be equal or lower than the average cost (AC) curve. So, long run monopoly earns normal profit or super normal profit.