Show on a Diagram How a Monopoly Firm Will Make Supernormal Profits by Restricting Ouput

Show on a diagram how a monopoly firm give make supranormal boodle by curtail siding. Discuss how the surmise of disputable trades could impact on the outlay and make of a monopoly. Neo-classical theory defines monopoly as a market structure where whiz dominant firm supplies most or all output in the effort without facing ambition because of high barriers to entry to the industry. The monopolist is a short run get ahead maximiser and ascribable to the demand under a monopoly being moderately inelastic at any given price, the monopolist is said to be a price maker, unlike hone competition where the firms be price concordrs.The diagram below shows the monopoly making paranormal gelt by restricting output. The equilibrium lettuce maximising level of output is 0A where MC = MR, and price will be 0p. Supernormal acquire be made, shown by the area on the diagram shaded red. If profit maximisation was not an objective for a monopoly, it might produce at the bottom o f its reasonable cost curve (AC). so, price being lower than P and beat produced would be greater. However, because a monopoly is partly defined by wanting to profit maximise in the short run, this is not the case. C AC determine Quantity mR p A Demand 0 Under perfect competition, supernormal profits can only be made in the short run, due to low barriers to entry. The monopolist can earn supernormal profit in the short and longsighted run due to not having to produce at the bottom of the AC curve and having high barriers to entry. These barriers to entry, preventing some other potential new entrance from coming in and competing with the monopoly can take various forms. Perhaps the monopoly has control over the source of an essential lovesome material.Perhaps the monopoly has extremely strong brand loyalty and takes great trade to protect its brand image and the loyalty of its consumers through extensive marketing. It has been shown that neo-classical theory suggests that hig h barriers to entry will earn supernormal profits for a monopoly. Contestable market theory, in which states that there is freedom of entry to the industry and where costs of exit are low, suggests that a monopoly will earn supernormal profits dependent to a large extent on the costs of exit from the industry.If the costs of exit from the industry are low, then the monopoly arguably wont make supernormal profits in the long run. If a monopoly in the short run is charging high prices and earning supernormal profit, a contention will enter the industry and take some market share from the monopolist by charging a lower price. The monopolist will react by reducing prices, forcing the new contender out of the industry. This happens because the competitor cannot compete with the new lower prices set by the monopolist due to its costs being too high.Thus, if the costs of exit from the industry are low, it is worth the competitor entering the market and having earned supernormal profits i n the short run. Though, once the competitor has left the industry and the monopolist raises its price again wanting to earn supernormal profits, another competitor will enter the industry reducing the monopolists overall profits and pickings market share away from it. Clearly the only way to subjugate potential competitors from adopting hit and run play would be for the monopolist to price at a level where it only earned normal profits.In the long run the monopolist will increase output and slack price, operating at the optimal level of output where MC = AC. Thus in conclusion it has been shown that a monopoly will make supernormal profits by restricting output. The monopoly chooses the output level to produce at, and wanting to profit maximise, it produces at the point where marginal costs equals marginal revenue. In contestable market theory, the established firm, the monopoly, must behave as if it operates in a perfectly competitive market to prevent hit and run tactics by po tential competitors, producing where MC = AC.