Why Monopolies Lack a Well-Defined Supply Curve in the Long Run
A monopoly market is characterized by a single seller who dictates the market's supply. Unlike perfectly competitive markets, a monopolist is not a price taker but a price maker and thus, we do not typically observe a well-defined supply curve for a monopoly firm.
The Monopolist's Indecisive Supply Curve
(Keyword: monopoly, supply curve, market structure)
Under a monopoly, there is no well-defined supply curve. This is because the output of the monopolist is determined not only by the marginal cost but also by the shape of the demand curve. The purpose of supply curves is to illustrate the relationship between price and quantity supplied, but under monopoly, this relationship is ambiguous.
For a perfect competition scenario, under the short run, the portion of the marginal cost (MC) curve above the shut-down point is the supply curve, showing a one-to-one correspondence between price and quantity. However, in a monopoly, the output decision is not linear, leading to a lack of such a clear and definable supply curve.
The Unique Supply Decision of a Monopolist
(Keyword: demand curve, marginal cost, price elasticity)
Monopolistic supply behavior differs because the monopolist considers both marginal cost and the demand curve. This makes the supply curve conceptually challenging as the price is often influenced more by the demand curve than by the supply.
Monopolists can supply different amounts at various prices depending on the demand elasticity. If the demand curve is elastic, a small change in price will significantly change the quantity demanded, but if inelastic, the opposite is true.
The following figure illustrates how a monopolist might behave under different demand scenarios. The monopolist might produce output OQ at price OP1 if the demand curve is AR1, or at a different price OP2 if the demand curve is AR2. This indifference between price and output is a key reason why there is no well-defined supply curve for monopolies.
Constructing a Supply Curve in a Monopolistic Setting
(Keyword: marginal revenue, price elasticity of demand)
Monopolists must construct a supply curve that reflects the interplay between marginal cost and marginal revenue. The relationship between price and quantity in a monopoly is more complex than in a perfectly competitive market. The supply curve does not trace out a series of prices and quantities in the same way it would for a competitive market.
Consider a monopolist with an initial average revenue (AR1) and marginal revenue (MR1) curve at a specific output level. If the demand curve shifts to a steeper demand curve (AR2), the marginal revenue curve also shifts to MR2. The monopolist will produce at the point where the marginal cost curve intersects the shifted marginal revenue curve, regardless of the price. The output level remains the same but the price will be different.
Even with a well-understood marginal cost, the supply curve for a monopolist is not straightforward because the decision on how much to supply is based on the current demand conditions, not just the marginal cost.
Conclusion
The lack of a well-defined supply curve in a monopolistic market stems from the monopolist's decision-making process, which is influenced by both marginal cost and demand elasticity. This complexity challenges the traditional economic models that rely on supply curves to predict output and pricing in different market structures.
(Keyword: monopolies, supply curves, demand elasticity)