Question

• Describe and/or analyze graphically the firm’s profit-maximizing,Break-even, and shut-down conditions
• Describe the short and long run market conditions
• Explain what a “natural monopoly” is
• Describe limits on monopoly power

Answer 1

Profit Maximization, break even point and shut down point these are the situations occuring throughout a business cycle. To understand these situations first we need to understand the two major deciding factors of profit or loss that are Cost and Revenue.

In this figure Total Revenue (TR) starts from 0 and Total Cost(TC) starts above zero that means the cost of production is more than the Revenue at this point, that is a situation of loss then where both the lines intersect each other that point is the break even point afterwards in the light shade TC is below TR curve i.e. revenue is more than costs. At the dotted line the gap between TC and TR is maximum and hence that point is profit Maximization point. In the same manner when Cost is above Revenue and the Gap is maximum The point is called shut down point.

Short run - In the case of short run the Fixed Factors of production cannot be changed so at this situation generally shut down point and profit max. points are not considered.

Long run - In the case of long run when the firm continues to incur loses for a long time they consider shutting the form down, because in the long run Fixed Factors can be changed.

Natural Monopoly- It is the Monopoly in an industry in which their are high infrastructural costs and other barriers to start the firm. Example - railways, telecom etc. Railways has already spent a lot on track making which is not possible for a new firm.

Limitations in Monopoly -

There are many limitations in the Monopoly market.

Like entry of competitors, government policies, public preference, fear of substitution etc. A firm in a monopoly can control the prices but the limitations like what if a competitor will grow, what if government will declare that good to be public utility good or if people will boycott the product. Such limitations stops the monopolistic market to rule like a king but to hold the public welfare approach.