What Monopoly Diagrams Can Be Used To Show

A monopoly diagram represents average revenue, marginal revenue, marginal cost and can also show average total cost, average variable cost and average fixed cost of a firm.

 

A monopoly diagram can be used to show:

1. Whether the firm is profit maximising (MC = MR), sales maximising (ATC = AR) or revenue maximising (MR = 0).  The diagrams show profit maximising firms.
2. Whether the firm is making normal profit, abnormal profit or a loss. The first diagram shows a firm making abnormal profit as average total cost is below average revenue. The vertical distance between these two curves is the abnormal (or supernormal) profit. If ATC is equal to AR then the firm is making normal profit (see diagram 2). If the ATC curve was above the AR curve, the firm would be making a loss. (see diagram 3)
3. The average total cost curve on the monopoly diagram shows whether the firm is experiencing falling long run average costs, or economies of scale. If the firm is producing on the downward sloping section of the curve, it is experiencing economies of scale. If it produces on the flat part of the curve is is experiencing constant returns to scale. If it is producing on the upward sloping section of the curve it is experiencing dis-economies of scale (rising long run average costs).
4. A monopoly diagram can show whether or not a firm should shut down. On this diagram you would have to show variable costs. If the firm is covering its variable costs and making a contribution to its fixed costs, it should stay in business even when making a loss.