Calculating a Monopolist’s Profit or Loss
Calculating a Monopolist¡¯s Profit or Loss
A monopolist calculates its profit or loss by using its average cost (AC) curve to
determine its production costs and then subtracting that number from total revenue (TR).
Recall from previous lectures that firms use
their average cost (AC) to determine
profitability. Average cost in this example is
average total cost (ATC).
Profit for a firm is total revenue minus total
cost (TC), and profit per unit is simply price
minus average cost.
To calculate total revenue for a monopolist,
find the quantity it produces, Q*m, go up to
the demand curve, and then follow it out to its
price, P*m. That rectangle is total revenue.
Next find the output level on the average cost
curve and go to the vertical axis from the AC
curve. The portion of the total revenue
rectangle that represents production costs is
the striped section on the left. The firm¡¯s profit
is the small rectangle on the top of the total
revenue rectangle. It is TR-TC.
If the monopolist¡¯s average cost is greater
than the price of its product, the firm would
suffer a loss.
In the right-hand graph, the firm¡¯s average
cost curve is greater than price, and it is losing
money. Total cost is AC* x Q*m, but total
revenue is only P*m x Q*m, so TC>TR.
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