Short Run Equilibrium

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Short Run Equilibrium

In the short run the monopolist maximises his short run profits or minimises his short run losses if the following two conditions are satisfied:
MC = MR and
The slope of MC is greater than the slope of MR at the point of their intersection (i.e., MC cuts the MR curve from below).
In the short run a monopolist has to work with a given existing plant. He can expand or contract output by varying the amount of variable factors but working with a given existing plant. Maximisation of profits in the short run requires the fixation of output at a level at which marginal cost with a given existing plant is equal to marginal revenue. In Figure 10.1, SAC and SMC are short run average and marginal cost curves. Monopolist is in equilibrium at E where marginal revenue is equal to marginal cost. Price set by him is SQ or OP. He is making profits equal to TRQP.
But in the short run he will continue working so long as price is above the average variable cost. If the price falls below average variable cost the monopolist would shut down even in the short run. In case of losses, monopoly equilibrium is shown in Figure 10.2. The monopolist is in equilibrium at OS level of output with price OP. Since price (or AR) is smaller than average cost, he is making losses which are equal to area of the rectangle PQGH.