Question

"Depending on the characteristics of the market structures, firms will experience different profit maximizing positions in the short-run and long-run." In terms of this statement, discuss the profit-maximizing position of a monopolistically competitive firm short run and monopolist in the long run

Answer 1

In short run a monopoly firm try to maximize profit or minimize losses by operating at MR=MC level. If average total cost is below the market price, then the firm will earn an economic profit.

Short Run profit = (P - ATC) * Quantity

If the competitive firms in an industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. More firms will continue to enter the industry until the firms are earning only a normal profit. Hence, the long-run equilibrium for monopolistic competition will equate the market price to the average total cost, where marginal revenue = marginal cost.

The middle dot on AR=D shows Market Price = Marginal Cost = Allocative Efficiency

The third dot which is on the right side shows Productive Efficiency = Minimum ATC

Pure competition works on productive efficiency point, but most of the firms in monopoly are not being to operate on this. They sell at a price higher than the minimum average total cost and would actually lose money selling at their minimum ATC. To use their excess capacity, they would have to produce a quantity equal to their minimum ATC, but they would not be able to sell that amount without lowering their prices, which would either reduce their profits or actually incur losses.