Monopoly Profit on the Graph - Video Tutorials & Practice Problems
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First, find the quantity where MR=MC. At that quantity, find Price and ATC. Profit = (P - ATC) * Q
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Monopoly Profit on the Graph
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Alright, now let's consider how to find the profit maximizing quantity for a monopoly as well as how to calculate profit or loss from the graph. Alright, so quick note, before we get started again, if you studied monopolistic competition already, this is the same exact page from that chapter. Okay, so everything we learn there is exactly the same for monopoly as well. Alright, so profit maximizing quantity will always occur and this is for every, every market structure, monopoly monopolistic competition, right? Everything we've got where marginal revenue equals marginal cost, that's going to be our profit maximizing quantity. Okay, And remember, just like we discussed before, profit maximizing could also mean loss minimizing. Right, Same thing. Okay, so now, if if we think about perfect competition, we only had a few, a few curves there, but now we've added this extra curve for marginal revenue. Okay, so what I do now, since our marginal revenue is going to be different from our demand curve for our sake to make it simpler, I try and keep the marginal revenue curve and the marginal cost curve red. Right? So that we can always pick out that profit maximizing quantity, but this is something to help us now, right on the test, when the teacher gives you the exam, you're probably not going to have all all these things color coded for you and you're gonna have to be able to figure it out for yourself, but for now while we're learning it, I think this will make it a little easier. So remember marginal revenue equals marginal cost. That is always going to be our profit maximizing quantity. So where is that on our graph? Well, easy enough, especially with our color coding marginal revenue curve, marginal cost curve they cross right here. Okay, so this is the point where they cross. So we have to go down and find what that quantity is, Right? So whatever this quantity is right here, that is our profit maximizing quantity, right? Wherever that is. So somewhere in between two and three units, that would be where we would maximize. Okay, so once we found the profit maximizing quantity, how do we calculate what the profit or loss is gonna be? Well, here's our handy dandy formula that we've used before. The price minus the average total cost times quantity. Right, So we're doing the same thing first that we're gonna look for the marginal revenue. Um Equalling the marginal cost, and that's gonna tell us what quantity to produce. And then we have to calculate our profit from price and average total cost. So it's gonna be a little different here than we did in perfect competition. The steps are a little trickier. So let's go ahead and check that out here on the graph now. Okay, so we're still gonna start the same way by finding our profit maximizing quantity. Okay, um so let's start here on the left graph, notice how much stuff is going on now, right, there's curves all over the place that could get pretty confusing, right? So you just have to know what you're looking for and then you can simplify this a lot. Right? So we're looking for the profit maximizing quantity first and foremost, marginal revenue equals marginal cost. And that's gonna be this point right here. Right? Our red curves where I have are marginal revenue and marginal cost curves right here, they're crossing right there, right? So this is the quantity that we want to produce is where those cross So we go down into our quantity axis and there we go. That's the quantity we want to produce. Now, are we going to make a profit or a loss in this case? Well now we have to take it to price an average total cost. Right? So remember that our demand curve, that is our price, that is our average revenue. Okay, so the demand curve is our price and our average total cost comes from the average total cost curve. Right? So before our marginal revenue in perfect competition was equal to the price, Right? So we didn't have to move again. But here, the marginal revenue and the price are different things. So we use the marginal revenue to find this point. But then we're not gonna calculate using that marginal revenue point. What we're gonna do is we're gonna go up to the price at that quantity up to the price up here, right? And and then also to the average total cost at that quantity as well. So we gotta find our average total cost curve. And that's this yellow one down here, right? So these are the points that matter. Once we want to calculate profit, we gotta look on the demand curve for the price. We want to look at average total cost for the average total cost. Right? So now notice that that black point, we're not using that to calculate profit. Our profit is calculated up here and down here, right? So our hoops. So this would be our profit right here, right, This whole area would be profit. Okay, So we can calculate that. If we knew the quantity, we would have to have a number for average total cost and price. We could go ahead and calculate that using our formula. So this graph on the left shows a profit, right? This is a profit in there in the green area. Let me go ahead and write profit in there. Okay, let's go on to the right graph. And I'm gonna get out of the way here. So we can see the whole graph and notice it. Pretty much everything's the same here. Except that average total cost curve, look where it went, it went way up there. So you can imagine what's gonna happen here. But are we start with the same thing, right? We wanna find our profit maximizing point, which in this case is gonna be our loss minimizing point. Okay, so let's go ahead and find that. And remember that's always gonna be where marginal revenue equals marginal cost. So let's find that on our graph right here where the red curves intersect marginal revenue and marginal cost. So that's gonna tell us the quantity we want to produce and there is our profit maximizing loss minimizing quantity. Right? So now that we know the quantity, we need to find the price and the average total cost, same thing, right? The price comes from the demand curve. Average total cost comes from the average total cost curve. So let's find those two points. So right here is our price at that quantity, right? And up here is our cost, our average total cost at that quantity. So what do we see this area right here is gonna be a loss, right? Because our average total cost is greater than our price. We have a loss. Okay, so this area right here represents our loss, write that in here loss. Okay. And we'll label the graph loss as well. Alright, So there we go. This, you can see the similarities from what we did in perfect competition, right? Although perfect competition had that flat demand curve but our our steps remain the same. Right? First we found that profit maximizing quantity using marginal revenue, marginal cost. And then we calculated our profit from the price and the average total cost. Cool. Alright, let's go ahead and move on to the next video
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Problem
Problem
The MR curve lies below the demand curve in this figure because the:
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Demand curve is linear
B
Demand curve is highly inelastic throughout its full length
C
Demand curve is highly elastic throughout its full length
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Gain in revenue from an extra unit of output is less than the price charged for that unit
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Problem
Problem
The economic profit can be found by multiplying the difference between P and ATC by quantity. It can also be found by:
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Dividing profit per unit by quantity
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Subtracting total cost from total revenue
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Multiplying the coefficient of demand elasticity by quantity
D
Multiplying the difference between P and MC by quantity
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Problem
Problem
This pure monopolist:
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Charges the highest price it could achieve
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Earns only a normal (accounting) profit in the long run
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Restricts output to create an insurmountable entry barrier
D
Restricts output to increase its price and total economic profit
