Under short-run monopoly firm tries to obtain maximum profit. In short run equilibrium under monopoly the equilibrium of the firm can be discussed through following two approaches:
Short run Supernormal Profit:
As we know monopoly firm has no competition in the whole market so it is very usual for it to earn supernormal profit. When the average revenue (AR) is greater than the short run average cost (SAC), firm will earn supernormal profit.
All such conditions are described in the following diagram.
Equilibrium point of firm is when
- MC = MR
- MC cuts MR from below
In diagram firms total revenue is OPAQ and total cost OCBQ
Short run Loss:
A monopoly firm may suffer from loss in short run period because in short run period at least one input is fixed. If short run average cost (SAC) of monopoly firm passes above the average revenue (AR), firm will go through loss.
All such conditions are described in the diagram shown as follows:
In diagram firms total revenue is OPGQ and total cost OCFQ.