Monopoly Equilibrium and Laws of Costs

In the long run, a monopolist can adjust plant size and output. The cost behaviour (increasing, diminishing, or constant costs) affects both the equilibrium output and profit.

Cost laws in the long run:

• Increasing costs: Average and marginal costs rise as output increases.
• Diminishing costs (increasing returns): Average and marginal costs fall as output increases.
• Constant costs: Average and marginal costs remain the same at all outputs.

In all cases, monopoly equilibrium output is where MR = MC and MC cuts MR from below. The shape of the cost curves determines the pattern of costs and profit.

• Here, the monopolist produces under the law of diminishing returns or increasing costs.
• As output increases, marginal cost (MC) and average cost (AC) rise.

Equilibrium:

• MR and MC intersect at point E.
• At E, MC = MR, and MC is rising and cutting MR from below.
• Corresponding equilibrium output is OM, and the price charged is PM (taken from the demand/AR curve at OM).
• Monopoly profit is shown by the shaded area PQRS in the diagram (revenue rectangle minus cost rectangle).
• No other price–output combination yields a larger total profit, so this is the best position under increasing costs.

• Here, the monopolist produces under the law of increasing returns or diminishing costs.
• AC and MC curves are falling as output increases (economies of scale reduce cost per unit).

Equilibrium:

• MC and MR meet at point E.
• At this point, $MC=MR$, and MC cuts MR from below.
• The monopolist produces OM units and charges price PM from the demand curve.
• Net monopoly profit (monopoly revenue over cost) is again shown by the shaded area PQRS.
• Because costs fall with output, producing at a larger scale helps the monopolist reduce cost per unit and possibly charge a lower price while still earning high total profit.

• Under constant costs, AC is the same at all levels of output.
• The AC curve is horizontal and parallel to the X-axis, and AC = MC at every output.

Equilibrium:

• AR and MR are the usual downward-sloping demand and corresponding marginal revenue curves.
• MC (same as AC) intersects MR at point E.
• At E, MC=MR, and equilibrium output is OM.
• The monopolist produces OM units and sells each unit at price PM (taken from the demand/AR curve).
• Monopoly profit is equal to the shaded area PERS (difference between price and cost, multiplied by output).

In all three cases—rising, falling, or constant costs—the monopolist chooses output where MC=MR, but the level of output, cost per unit, and profit area differ according to the law of costs.

• Myth 1 - Highest Price: Monopolist wants maximum total profit (P×Q), not highest price—high price kills sales volume, reducing total earnings.
• Myth 2 - Per Unit vs Total: Per-unit profit peaks at very high prices, but total profit maximized at moderate price + higher quantity sold.
• Myth 3 - Economies of Scale: Bulk buying, by-product use, less advertising lets monopoly charge lower prices than fragmented competition sometimes.
• Myth 4 - Increasing Returns: Falling costs allow more output at lower prices, boosting total revenue for both firm and consumer benefit.

• Skills/Efficiency: Firm mergers bring better technology and management (Jio's 4G network revolution after acquisitions).
• Research & Development: Huge profits fund innovation—new products, better production methods (pharma monopolies develop life-saving drugs).
• Economies of Scale: Lower per-unit costs through bulk operations benefit consumers with potentially lower prices.

• Restricted Output: Produces less than perfect competition (Qm < Qpc) to push up price, even when MR=MC equilibrium reached.
• Higher Prices: Charges P > MC since AR curve always above MR curve (unlike perfect competition where P = MC = MR = AR).
• Economic Inequality: Profits concentrate wealth with owners, widening rich-poor gap—social evil in developing nations like India.

• Monopoly prioritizes total profit optimization over charging sky-high prices or maximizing per-unit margins.
• Balance of scale benefits vs output/price restrictions—government regulation needed (TRAI monitors telecom monopolies).