Talk:Monopoly profit

More Suggested Corrections

The correction suggested below for the first diagram is incorrect. Reference to a "square box" is confusing because as described, the result would not be a square box; it would be a non-square rectangle. Second, the value of marginal cost at the solution (where MR = MC) is not relevant to the determining the Monopoly Profit. Rather, it is the value of Average Total Cost at the solution. (See 3. below.)

1. The ATC Curve should be uniformly converging to the AVC Curve with increases in output. But in the diagram it diverges at higher levels of output.

2. The area intended to show Monopoly Profit is not showing showing it. Instead, it is showing Producer Surplus: (Price minus AVC) times Output.

3. The area showing Monopoly Profit must involve the height of the ATC Curve at the Monopoly Output. That height determines the lower border of the rectangle of interest: (Price minus ATC) times Output.

4. In terms of putting together a diagram to represent a monopoly firm's situation, it is only by coincidence that the minimum value of the ATC Curve falls on the Demand Curve. (These curves have independent origins.) This coincidence makes it easier to compare a hypothetical "competitive" outcome - where Price equals MC - with the monopoly outcome because the Economic Profit at the competitive outcome will be equal to zero. But that does not make it any less of a very special case. (I put "competitive" in quotes because the graph shows significant scale economies (large decreases in ATC), meaning that the market cannot be populated by a large number of price-taking firms. The Output where Price equals MC mimics the property of a competitive market equilibrium that Price will be equal to Marginal Cost for each producer.) While problematic, the indicated Output is nonetheless of interest because it maximizes the sum of profit and consumer surplus. If the ATC Curve in the graph were positioned a little lower, then the output where P=MC would exceed the output where ATC is at its minimum, and there would be positive profits at the "competitive" output, and vice versa.

MGMontini (talk) Please go to a Micro Economics 101 book for a reference, such as: Bradley R. chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., 1991. (See the footnotes in the article).

(1) The point is well taken. However, the ATC curve does converge to the AVC Curve with increases in output over almost the entire graph; and only exhibits a small problem at the very tip end because of practical limitations in the software used to create the Graph. I believe the graph properly depicts the Microeconomic theory that shows how "Diminishing Marginal product of labor" is reflected in both ATC and AVC. However, if you have better software than myself, I welcome your perfected graphical representation of this situation.

To further explain the graph, "Diminishing Marginal product of labor" means: a rising "Marginal cost" and rising "Average variable cost in the relevant range within which any competitive firm must operate. Even when the competitive firm is "taking losses", it must operate in this relevant range if it wants to continue operating in such a manner that further operations will not increase its losses. A firm with losses wants to at least "Minimize losses"; which is only possible when Sales Revenue at least covers the "Variable cost" (where Variable cost does not exist if there is no production and Sales). Accountants refer to these concepts within their far more simplified Variable costing concepts. In fact, "Chapter 11 bankruptcy" would be chosen by a firm "taking losses" if and only if Revenue is greater than Variable Cost; where continuing operations would "Minimize (future) Losses". If Sales Revenue is less than "Variable Cost", the firm would instead opt for Chapter 7 Bankruptcy and would stop all operations; showing the firm's possible operations is outside the relevant range.

However the situation is different for the Monopoly, the situation is different. Since the Monopoly controls the entire Market, it faces a downward sloping Marginal revenue curve and can control the price in the market be controlling the entire output sold within the Market. It maximizes profit by setting Marginal Revenue (the derivative of the Demand Curve with respect to quantity sold) equal to Marginal cost! This can be shown by taking the (Calculus) derivative of the profit equation and setting the result equal to 0 (basic method to obtain a maximum)! As explained in the first part of the article, the competitive firm does not have this advantage; in that it has no control of either price or the total output sold within the Market, and must therefore set Price equal to Marginal cost. As a result, the Monopoly can maximize profit by operating outsidethe relevant range the competitive firm must live within. This is properly depicted within the graph. The competitive solution is shown on the same graph in order to simply depict what the firm would do if it were acting like a competitive firm! This is an instructional tool. Please note the thumb graphical picture depicts a sample 2 firms within a competitive (non-monopolistic) market.

(2) The point on the graph is well taken. I've corrected the Graph accordingly. However, I think you may be correct about the "Producer Surplus" comment if the Marginal Cost curve is linear. If it's not linear, your statement on c

Producer Surplus is likely to be incorrect (except possibly another "special case").

(3) Again. this point on the graph is well taken. I've corrected the Graph accordingly.

$Profit\,=\,Revenue\,-\,Cost$=$(\,Price\,-\,ATC\,)\,x\,Quantity$

This is simply the (Grade School) equation for finding the "Area" of Either a square or a rectangle: "Length"×"Width". There is nothing in Microeconomic theory that says this area cannot be a square; and in fact a square is a special case of what is generally termed as a rectangle.

The current (Corrected) Chart (graph) is correct.

(4) This point is blatantly incorrect if the graphical picture is to depict what the firm would do if it were to act like a competitive firm and not a Monopoly. When thinking of Economic Theory in Graduate PhD level economics programs; all competitive firms act in the same way; where the Demand price is at the "Average Total Cost" (ATC) of the firm. Depicting anything else for a firm that is acting like a competitive firm would lead to significant error when trying to use it for analysis and predictive purposes in Economic Markets (and the study of these Markets). You may refer to in the Economics Book from the MIT Economics Department concerning some of these points: Tirole, Jean, "The Theory of Industrial Organization", Cambridge, Massachusetts: The MIT Press, 1988. In a Perfectly Competitive Market, which is typified by an absolute absence of any "Barriers to entry", any promise of Economic Profit (because some firms are operating within the market with a positive nonzero Economic Profit) will ensure new entrepreneurs will try to obtain some of the same Economic Profit other firms have by opening up their own new firm. I've clearly referred to this in the very first paragraph in this article. Another assertion, which tried to indicate that this is an unreasonable assumption (with the exception of only a very few Markets), was clearly and logically discredited through the discussion that pointed out that the availability of Substitutes in most Economic Markets will cause a situation that approximates the Perfectly Competitive paradigm. A good example of this are the markets for butter and no margarine; both of which are relatively close substitutes for one another. If the price of butter drops precipitously, the Demand for margarine will drop and margarine manufacturers must adjust accordingly. Hence, when Competitive Markets are in Economic equilibrium, firms typically operate at the bottom of the "Average Total Cost Curve" at the point where the "Marginal cost" curve intersects the "Average Total Cost Curve".

Two more points must be noted:

(a) The graphical picture of the Perfectly Competitive Market solution is instructional only; showing the price. quantity, and where on the Cost Curves the firm's operations would touch if it acted like a Competitive Firm.

(b) Using Calculus to "Maximize" the basic equation for economic profit shown above,

$profit\,=\,Revenue-\,Cost$

necessarily entails setting Marginal Revenue equal to Marginal Cost.

(c) You're assertion: $Q\,x\,(P\,-\,AVC)$ is "Producer Surplus" is only correct if and only if the Marginal Cost is linear (a straight line). This isn't usually the case since the Marginal product of labor usually diminishes at an increasing rate with increases in output. For those not versed in Economic Analysis, I would like to Explain this below. I do wish you would footnote references (like I always do) in order to show the source from which you obtained the information, as well as to allow readers to check the validity of the information you are presenting. This is especially so when you're making incorrect or irrelevant "corrections" that make the article misleading to those interested in economic theory!

As is normal in Microeconomics, the existence of "Diminishing Marginal product of labor" is reflected in an ascending Marginal cost depicted in all of the graphs. Any first year college class in "Microeconomics 101" would explain that the firm's Marginal cost is also the firm's Supply curve as well as within first year Masters/PhD courses in this subject. However, as mentioned, Marginal cost 'usually is nonlinear and rises at an increasing rate; as Marginal product of labor declines at an increasing rate in most cases!

Rectangular (or square) area within the graph, Q×P, is a representation of the firm's Total revenue; which is the sum total of all of the firm's receipts. The Producer Surplus is that portion of these receipts that is above the firm's Marginal cost curve. Essentially, this Producer Surplus is the area between the firm's Total revenue (QxP) and the firm's Marginal cost curve (the firm's Supply curve). Since we're depicting a rising Marginal cost curve, we define

If and only if the Marginal cost curve is linear, we can represent it as =c×Q

In this (special case) the area under the Marginal cost curve is

$\int _{0}^{Q}c\,x\,Q\,dQ$ = c/2×Q²,

Then Producer Surplus is

$\int _{0}^{Q}P\,-\,c\,x\,Q\,dQ$=(P×Q)-(c/2×Q²)=(P-c/2×Q)×Q.

However, since "Total Variable Cost" in (this special case of) Economic analysis, when considering a linear "Diminishing Marginal product of labor", is

$\int c\,x\,Q\,dQ$=$c\,/\,2\,x\,Q^{2}$,

"Average Variable Cost" (in Economics) is: AVC=c/2xQ. This means: (P-AVC)xQ=(P-c/2xQ)xQ

MGMontini (talk) 13:10, 20 July 2021 (UTC)

(d) your statement:

(I put "competitive" in quotes because the graph shows significant scale economies (large decreases in ATC), meaning that the market cannot be populated by a large number of price-taking firms. The Output where Price equals MC mimics the property of a competitive market equilibrium that Price will be equal to Marginal Cost for each producer.)

in particular shows an absolute lack of knowledge of Microeconomic theory. The very first "Microeconomics 101" class clearly indicates that the existence of fixed costs (accountants call "sunk cost") will always exhibit itself as a diminishung ATC at lower levels of output. Put simply, average fixed cost diminishes as output rises; simply because the fixed cost numerator is a constant, and rises in the (quantity in the) denominator will make this "average" decline! This is simple grade-school math!. At higher outputs (in the relevant range), variable cost rises fast enough to offset this decline in a average fixed cost, making the ATC (average total cost) rise. Should one who knows nothing about a subject criticize (well footnoted) statements on the subject?! I think not!

 ::(e) If you look at the first part of the article no firm can continuously maintain economic profit (by operating where MC>ATC) in a competitive situation! This is because, upon viewing positive economic profits, new firms will enter into the market in order to obtain this economic profit. When this happens, market supply increases and the market price declines. Once again, this the very first under-graduate semester microeconomics 101 class. I've also clearly referred to this in the first part of the article as an introduction. This Please read Britannica's writing on this subject [1] and compare to this article. Though Britannica's writing on this subject [2] may be a little less complete, their statements show your criticism (I've referred to here) as absolutely incorrect; while showing my statements I've made are not incorrect! Please refrain from commenting on subject matter you (and your staff) obviously know nothing about! I will spread the truth on what is happening here if this continues and without proper footnoting! Please stop urges to "correct" cause it makes you feel superior even though you know nothing about the subject matter. You are destroying the credibility of this encyclopedia through your ignorant actions (which people will see for themselves in the long run). Why not read some Economics books before you write anything more. I find the "For Dummies.." books are good in other subject areas (though not comprehensive).

A few last comments. There are many links and references within this article because the other sections being linked should explain in greater detail the concepts brought out in this article! This stops the need for those who fully understand these terms and their implications from having to read through a lengthy detailed explanation of every term and why its use is both integral and important to the article. But it allows those with less understanding to go to the link in order to obtain a detailed explanation of every term; which will help them better understand this article!

I'm not sure if there is, and who is the new editor and commentator for this encyclopedia, but I hope they make better judgements than they have made here (especially concerning some items they may have only a passing knowledge of). If there are comments of "content", these comments should contain some sort of acceptable and professional reference that can explain and justify these comments. I have not found any of these recently!

Finally, I should have to continuously come back here, to an article I've well footnoted with generally accepted collegiate (and professional) references to argue against and undo "corrections" that aren't footnoted and are incorrect most times. If this continues, I will have a bad review of this encyclopedia to all I know and will meet in the future. People who read this should be able to understand basic and generally accepted economic theory is presented; in much the same way one can depend on the information in the Encyclopedia Britannica! With changes that aren't footnoted (and are usually incorrect or irrelevant), this cannot be achieved here. Please refrain from further (unfootnoted) changes! Even criticism should be footnoted! As I said, this is the only way the correctness and relevance of this encyclopedia can be maintained. Please take note again; everything I've written in this article is properly footnoted!. With the exception of 1 (relatively minor) mistake in the first graph, all is a correct statement of basic accepted economic theory! At the very least editors can refer to the references in the footnotes before deciding on what is proper and what is not!

MGMontini (talk) 13:45, 20 July 2021 (UTC)

References

Suggested Correction

— Preceding unsigned comment added by Auxilstitute (talk • contribs) 17:07, 11 November 2014 (UTC)

The chart isn't correct IMO, the profit should be a square box from mc=mr to P@Q

MGMontini (talk) Please go to a Micro Economics 101 book for a reference, such as: "Essentials" by Bradley R. chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., 1991. (See the footnotes in the article). Simple math:

Profit = Total Revenue - Total Cost = Price x Quantity - Average Total Cost x Quantity = (Price - Average Total Cost) x Quantity

The current (Corrected) Chart (graph) is correct.

Corrections

MGMontini (talk) 17:51, 6 May 2010 (UTC)

Per the error indication above, corrected the jpg picture.

Added relevant Text Book (from College Classes) and other professional sources (published by reputable sources) to the existing text. Corrected the original text to more accurately reflect actual micro economic theory.

Added relevant discussions concerning the limited situations in which Monopolies, and therefore Monopoly Profit, can exist, as well as a discussion as to why there is only a limited number of situations in which a true (1 firm) monopoly can exist in the long run. Indicate the possibility of short-run Monopolies, that become Competitive Markets in the Long Run (see article).

Indicate various Government Laws and methodology used in handling the possibilities of Barriers to Entry and Monopolies. Gave Examples (from text Books - Associated with University/College courses) of each of the situations discussed.

Please send comments if there are any. Thank you.

MGMontini (talk) 17:51, 6 May 2010 (UTC)

Rating of the Content of the Article

I must admit, I feel rather insulted that the value of the content is listed as "Stub". I feel this is highly unjustified.
Of course the article involves Definition since it simply characterizes the term "Economic Profit". However, in this endeavor, I have covered some of the causes of "Economic Profit", an established explanation as to the (only) possible reasons "Economic Profit" can exist that is predominent throughout the community of Economists. Because Wiki articles must contain legitimate professional and verifiable references (rightly so), I have used a few "beginner's" text books as well as some established "Dictionaries" of Finance and Economics in order to allow any user/reader/verifier to easily verify the validity of the article's content, understand the sources for the content and how the sources' Economic discussions relate to the content, and to easily understand the (many) basic concepts embodied in this article if they go to these "Dictionaries" or any of the "Basic" texts out there. Only one of these Text Books is a more "complex" book; containing mostly the analysis embodied in a mathematical modeling methodology. Again the reason for this is simply to allow the average Wiki user to easily go to "Beginner's" Economic books (even in the "For Dummy" Series) and easily understand related discussions that form the basis for the content, and the additional related discussions that might be extended from this content. The "Complex" book was used here (as a reference/Footnote) because some of the other "Beginner's Texts" could not be used to fully verify some of the content footnoted by the MIT book as being established thought within the community of Economic/Finance Professionals; and the MIT analysis is extremely important in forming a (small but important) portion of the content. In order to ensure this content can be justified to the Editors, and in order to allow this content to explain some important concepts/facts to the less knowledgeable (in this subject) reader, the "Complex" reference was used even though it would be difficult for the average (less knowledgeable) reader of the article to read the source/reference if they so chose. The other sources, and any other similar sources they can find in any library/book store, does allow the average reader to refer to another "source" for this content and completely understand the material in the source and how it relates to the content of the article.

Please understand, any Encyclopedia is not meant to be an "end all" reference and explanation. It is only a relatively brief, comprehensive, understanding of the basic underpinnings of the subject matter, so as to allow the reader enough understanding of the subject matter to either know how to continue a more "in depth" research that should be far more comprehensive in all details, and relevant theoretical and historical matters that relate to the topic, or to provide enough basic understanding of the subject matter so as to allow the reader to converse somewhat intelligently about it and more easily understand any further reading done in the subject matter. An encyclopedia has never been meant to surplant a "Text Book", only to supplement it as a preliminary understanding of many of the "Text book" Extensive and Detailed analysis. Neither does it serve the average reader to have a "text book" detail in an encyclopedia article; for the average user does not want to read an entire (lengthy) text book (chapter) on the subject if they are coming to an encyclopedia. The average user wants a brief and 'comprehensive' description of the relevant ideas concerning the subject matter, so that they have enough to have a 'basic' understanding of the relevant issues, and will only delve into further detail if they truly are interested in doing so, and only into those particular portions of the subject matter they feel they need to research further.

This is why I feel the "Stub" indicator is unwarranted. I feel the content of the article does exactly this. It is not that I feel nothing can possibly be added to improve/expand the article in a good and relevant fashion, but I do feel what has been done already is substantial enough to stand on its own merits if no-one adds to the article. TO indicate the quality is in any way inferior, I believe, is a mistake. I challenge anyone to go to any beginning 'Economics College "Text Book"' to find much more material on this subject matter than is already bwritten in this encyclopedia article. —Preceding unsigned comment added by Mgmwki (talk • contribs) 17:30, 6 December 2010 (UTC)

I believe I'm the one who gave the article a "stub" rating, but I did so in June 2008 [3]. At the time, the state of the article was very different [4], and I certainly felt "stub" was appropriate. I'm not spending much time thinking about Wikipedia right now, including not seriously re-reading the article or your comments above. That's not to disparage you in any way, just to say may brain's really full right now. You should feel free to either change the rating yourself or ask for a new rating from someone over at WikiProject Economics. In a quick glance it looks like you've done good work. CRETOG8(t/c) 21:52, 6 December 2010 (UTC)

Reinstitute separate "Monopoly Profit" Section

As discussed in the Economic Profit section, I believe it was inappropriate to wipe out a separate section on Monopoly Profit since it is a very "different animal" from either "Monopolistic Competition" and "Oligopoly". A separate treatment should be maintained for each type of Market. A Monopoly Market involves Only 1 Seller; and is unique, with very unique characteristics because of this. This forces a separate treatment for Monopolies, as is done in most college text books. I propose we follow the lecture, and written material presentation, accepted in most Accredited Universities.

Please be Courteous: Do Not Remove valid Cited Sections, Only Add valid Cited Sentences - Reputable sources

Please have some knowledge of Economics (this is an Economics Concept) before making changes to this article. Please do not make an attempt to "correct" a cited section; especially if you are not using an accredited source: textbooks from an accredited University[5], or at least a "For Dummies" or "Teach Yourself..." books from reputable sources. I, other viable contributors, and the readers (looking for accredited and reliable information) will all appreciate if this courtesy is extended.
Please note that everthing in this article has been properly footnoted and has proper citations from the accredited academic and professional literature.MGMontini (talk) 17:02, 25 June 2014 (UTC)

Dr. Pappa's comment on this article

Dr. Pappa has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

well drafted

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Pappa has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Fabio Canova & Luca Gambetti & Evi Pappa, 2006. "The structural dynamics of output growth and inflation: some international evidence," Economics Working Papers 971, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2006.

ExpertIdeasBot (talk) 16:09, 11 July 2016 (UTC)