Question

What are the conditions of equilibrium in monopoly market?

Answer 1

Under monopoly, for the equilibrium and price determination there are two different conditions which are:

1. Marginal revenue must be equal to marginal cost.

2. MC must cut MR from below.

However, there are two approaches to determine equilibrium price under monopoly viz.;

1. Total Revenue and Total Cost Approach.

2. Marginal Revenue and Marginal Cost Approach.

Total Revenue and Total Cost Approach:

Monopolist can earn maximum profits when difference between TR and TC is maximum. By fixing different prices, a monopolist tries to find out the level of output where the difference between TR and TC is maximum. The level of output where monopolist earns maximum profits is called the equilibrium situation. This can be explained with the help of fig. 2.

Total Revenue and Total Cost Curve

In Fig. 2, TC is the total cost curve. TR is the total revenue curve. TR curve starts from the origin. It indicates that at zero level of output, TR will also be zero. TC curve starts from P. It reflects that even if the firm discontinues its production, it will have to suffer the loss of fixed costs.

Total profits of the firm are represented by TP curve. It starts from point R showing that initially firm is faced with negative profits. Now as the firm increases its production, TR also increases. But in the initial stage, the rate of increase in TR is less than TC.

Therefore, RC part of TP curve reflects that firm is incurring losses. At point M, total revenue is equal to total cost. It shows that firm is working under no profit, no loss basis. Point M is called the breakeven point. When firm produces more than point M, TR will be more than TC. TP curve also slopes upward. It shows that firm is earning profit. Now as the TP curve reaches point E then the firm will be earning maximum profits. This amount of output will be termed as equilibrium output.

Marginal Revenue and Marginal Cost Approach:

According to marginal revenue and marginal cost approach, a monopolist will be in equilibrium when two conditions are fulfilled i.e., (i) MC=MR and (ii) MC must cut MR from

below. The study of equilibrium price according to this analysis can be conducted in two time periods.

Answer 2

Explanation:

• Equilibrium in Monopoly occurs under the same circumstances as it does in perfect competition.
• The MC curve intersects the MR curve from below, meaning that the marginal cost (MC) and marginal revenue (MR) are equal.

There are two distinct conditions in a monopoly for the equilibrium and price determination, namely:

• Marginal cost and revenue must be equal.
• Marginal cost and revenue must be equal.MC must remove MR from the bottom.

However, there are two methods for figuring out the equilibrium price in a monopoly:

• However, there are two methods for figuring out the equilibrium price in a monopoly:The approach of total revenue and total costs.
• However, there are two methods for figuring out the equilibrium price in a monopoly:The approach of total revenue and total costs.The marginal cost and revenue approach.

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