1. LEVEL 3 ECONOMICS AS3.1 Understand marginal analysis and the behaviour of firms
Understanding Economics Chapter 10, P100
Long run equilibrium for a Monopoly
Learning The long run for a Monopolist
Objectives Causes of shift in D and S.
KNOW
Why a Monopoly can sustain
supernormal profits in the long run
How changes in supply and demand
UNDERSTAND impact on this market structures
THINKING – MANAGING SELF – PARTICIPATING AND CONTRIBUTING - RELATING TO OTHERS – USING LANGUAGE, SYMBOLS and TEXT

2. Many of the principles of what you have learnt about Perfect
Competitors apply when you are looking at Monopolies. For example a
Monopoly still maximises profit at the level of output where MR=MC,
and the shapes of the MC and AC curves are the same.
I want to highlight the differences that you need to be aware of;
1. The Monopoly can maintain supernormal profits in the long run
because it is the only firm.
2. The MR curve is downward sloping and cuts the horizontal axis half
way between zero and where the AR=P=D curve cuts it.
We will look at Monopoly long run positions including how they impact
on allocative efficiency and what happens when demand and
supply conditions change.

3. A Monopoly
PRICE
COST MC
REVENUE
Pe
Qmax
AR=P=D
QUANTITY
MR
The profit maximising level of output Qmax and
the price the Monopoly will receive Pe

4. A Monopoly
PRICE
COST MC
REVENUE
Pe
Qmax
AR=P=D
QUANTITY
MR
CORRECT METHOD
Run up though
CAUTION: A number of students get caught in the MC=MR right up to
trap of labelling Pe where MC cuts MR – THIS IS the demand curve to
illustrate the price
WRONG

5. PRICE A Monopoly
COST MC
REVENUE
Remember earlier in
this course we
learned that the MC
Pe curve represented
the supply curve for
a firm?
AR=P=D
Qmax
QUANTITY
MR
Recall that we showed 2 graphs for a perfectly competitive situation, The
firm and the market. With a monopoly the firm is the market so we only
need to look at a single graph.

6. PRICE A Monopoly
COST MC
REVENUE
Remember earlier in
this course we
learned that the MC
Pe curve represented
the supply curve for
a firm?
AR=P=D
Qmax
QUANTITY
MR
Recall also that the MC curve is the supply curve above breakeven. You can
hopefully see that in this market (if a Monopoly did not exist) our expected
equilibrium is where SUPPLY + DEMAND (the green lines, remember Level 1 eco?)

7. PRICE A Monopoly
COST MC
REVENUE
Pe
Deadweight Loss
AR=P=D
Qmax
QUANTITY
MR
You should then be able to identify that because there is a Monopoly that will
produce at Qmax, we have deadweight loss in this market. This is the loss of
efficiency caused by the existence of a Monopoly situation.

8. A Monopoly
PRICE
COST This is consumer surplus MC
REVENUE maximised
We call this price
and quantity
combination the
Social
Equilibrium
AR=P=D
QUANTITY
You know it as the normal market equilibrium where the
forces of demand and supply determine the market price. MR
It is sometimes referred to as Marginal cost pricing
because it is where MC equals P.

9. Now lets look at
different profit
situations for a
MONOPOLY

10. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE Remember that AC
must cut MC at its
minimum point and
AC for a supernormal
Pe profit AC will be
lower than AR
Ce
AR=P=D
Qmax QUANTITY
MR
Pe is the price the firm receives for each unit sold (AR) and Ce is the Average Cost of
making each unit. In this case AR < AC so the yellow area shows the supernormal
profit. This is a sustainable long run position for a Monopoly

11. A Monopoly making Supernormal Profit
PRICE The area of the red
COST triangle is called MC
REVENUE Consumer Surplus
AC
AR=P=D
QUANTITY
MR

12. A Monopoly making Normal Profit
PRICE
COST MC
REVENUE
AC
Remember that AC
Pe &Ce must cut MC at its
minimum point and
for a supernormal
profit AC will be
lower than AR
AR=P=D
Qmax QUANTITY
MR
Pe is the price the firm receives for each unit sold (AR) and Ce is the Average Cost of
making each unit. In this case AR = AC so this is a normal profit.

13. A Monopoly making Subnormal Profit
PRICE
COST AC
MC
REVENUE
Ce
Remember that AC
must cut MC at its
Pe minimum point and
for a supernormal
profit AC will be
lower than AR
AR=P=D
Qmax QUANTITY
MR
Pe is the price the firm receives for each unit sold (AR) and Ce is the Average Cost of
making each unit. In this case AC < AR so the red area shows the subnormal profit.
This firm would have no interest in staying in the market so would want to leave.

14. Now lets look at
different scenarios
for a MONOPOLY

15. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 1: What would happen if there was an
increase in demand in this market?

16. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR1=P1=D1
AR=P=D
Qmax QUANTITY
MR
MR1
SCENARIO 1: An increase in Demand
Shift the demand curve (AR=P=D) right – the MR curve
must move too. Remember it cuts half way.

17. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR1=P1=D1
AR=P=D
Qmax QUANTITY
MR
MR1
SCENARIO 1: An increase in Demand
DO YOU KNOW what effect the level of dmenad has on
the Monopoly?? Lets take a look!

18. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR1=P1=D1
AR=P=D
Qmax
Qmax1 QUANTITY
MR
MR1
SCENARIO 1: An increase in Demand
Qmax is now not the profit maximising level of output, So
we need to move to where MR = MC (Qmax1)

19. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR1=P1=D1
AR=P=D
Qmax
Qmax1 QUANTITY
MR
MR1
SCENARIO 1: An increase in Demand
This firm will enjoy an increased price, no change in costs, and
increase in revenue and a much larger supernormal profit

20. Remember you will be asked to explain what
the Monopoly will do based on marginal
analysis
Like this;
After demand increased in this market the Monopoly was no
longer producing at the profit maximising level of
output (I hope you have memorised this term by now?). The firm
should increase its output as currently its MR is greater than its MC
so there are additional marginal profits to be made. They should
continue to increase output to the point where MC = MR which will
be its new profit maximising level of output.

21. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 2: What would happen if variable costs
increased in this market?

22. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 2: variable costs increased
As you know variable costs affect marginal costs and will affect AC.
Do you think you know what will happen? Lets take a look.

23. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 2: variable costs increased
When variable costs increase we lift the MC curve directly upwards.

24. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC1
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 2: variable costs increased
The AC curve will havre to move as well to reflect the change in
costs. Remember it must cut the MC curve at the minimum point.

25. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC1
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 2: variable costs increased
What should the Monopolist do now?

26. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC1
Pe1 AC
Pe
Ce
AR=P=D
Qmax
Qmax1 QUANTITY
MR
SCENARIO 2: variable costs increased
Qmax is now no longer the profit maximising level of output, so
identify and label the new Qmax.

27. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC1 Try and ignore all
the fact that the
Pe1 AC diagram looks
Pe
Ce1 complicated. Just
look for the key
points and label
Ce correctly.
AR=P=D
Qmax
Qmax1 QUANTITY
MR
SCENARIO 2: variable costs increased
Now as a result of this change in output what is the profit situation
of the Monopolist? Label the new profit, it’s the green shaded area.

28. A Monopoly making Supernormal Profit
PRICE MC1
COST MC
REVENUE
AC1
Pe1 AC
Pe
Ce1
Ce
AR=P=D
Qmax
Qmax1 QUANTITY
MR
SCENARIO 2: variable costs increased
The Monopolist in this situation will find themselves making a much
lower level of supernormal profit

29. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 3: What would happen if fixed costs
increased in this market?

30. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC1
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 3: fixed costs increase
This has no effect on MC so only the AC curve will move. Recall that
it slides up the MC curve.

31. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC1
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 3: fixed costs increase
You will identify quite quickly that Qmax does not change.

32. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC1
AC
Pe
Ce
AR=P=D
Qmax QUANTITY
MR
SCENARIO 3: fixed costs increase
You should also see in this case that AC now cuts the Demand curve
or AR so AC=AR after fixed costs increase. This has eliminated the
supernormal profit

33. A Monopoly making Supernormal Profit
PRICE
COST MC
REVENUE
AC1
The monopolist in
this case will look
Ce Pe for opportunities to
raise the price and
return to
supernormal profit.
AR=P=D
Qmax QUANTITY
MR
SCENARIO 3: fixed costs increase
You should also see in this case that AC now cuts the Demand curve
or AR so AC=AR after fixed costs increase. This has eliminated the
supernormal profit