Explain how a monopolist attains equilibrium in the short run period.

In the short run period, a monopolist attains equilibrium by maximizing its profits. This is achieved by producing the quantity of output where marginal revenue (MR) equals marginal cost (MC).

First, the monopolist determines the level of output that will maximize its profits by comparing the marginal revenue (MR) it earns from selling an additional unit of output with the marginal cost (MC) of producing that unit. The monopolist will continue to increase production as long as the marginal revenue from selling an additional unit is greater than the marginal cost of producing that unit.

Once the monopolist has determined the optimal level of output, it will set the price at which it will sell that output. The price is determined by the demand curve for the monopolist's product, which shows the quantity of the product that consumers are willing to buy at different prices. The monopolist will set the price at the point on the demand curve that corresponds to the quantity of output it has chosen to produce.

At this point, the monopolist has achieved equilibrium in the short run period. It is producing the optimal level of output and selling it at the optimal price, maximizing its profits. This equilibrium will persist in the short run as long as market conditions remain constant.

Monopoly Equilibrium in the Short Run

A monopolist is a firm that is the sole supplier of a good or service in a market. Unlike perfect competitors, monopolists have market power and can influence the price of their products.

To attain equilibrium in the short run, a monopolist follows a two-step process:

1. Output Determination:

- The monopolist sets output to maximize its profit.
- It chooses the output level where marginal revenue (MR) equals marginal cost (MC).
- MR is the additional revenue gained from selling one more unit. MC is the additional cost incurred from producing one more unit.

2. Price Determination:

- Given the chosen output level, the monopolist sets the price to maximize its profit at that output.
- The monopolist charges a price higher than its marginal cost to extract its monopoly profit.

Graphical Representation:

The monopolist's equilibrium is illustrated in the following graph:

[Image: Monopoly equilibrium graph]

- The demand curve shows the relationship between price and quantity demanded.
- The marginal revenue curve lies below the demand curve, showing that MR decreases as output increases.
- The marginal cost curve represents the additional cost of producing each unit.
- At output level Q-, MR = MC, which is the equilibrium output.
- The corresponding price, P-, is set by the demand curve at Q-.

Implications of Monopoly Equilibrium:

- Price Above Marginal Cost: Monopolists charge a price above their marginal cost because they have no competition.
- Profit Maximization: The monopolist maximizes its profit by setting price and output where MR = MC.
- Excess Capacity: Monopolists may produce less output than a perfectly competitive market, leading to excess capacity.
- Consumer Harm: Consumers pay higher prices than they would in a perfectly competitive market, resulting in consumer harm.
- Inefficiency: Monopolies can lead to inefficiencies as resources are not allocated optimally, resulting in lower overall welfare.

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