174
Part III: Market Structures and the Decision-Making Environment
Minimizing losses to make the best of a bad situation In the short run, monopolies can incur economic losses. In the case of economic losses, the price associated with the marginal revenue equals marginal cost output level is less than average total cost. Figure 10-4 indicates a situation where the monopoly earns negative economic profit.
Figure 10-4: Producing with economic losses.
In Figure 10-4, note the monopolist’s demand and marginal revenue curves have the same shape as in situations I describe earlier in this chapter. The demand curve is downward-sloping, indicating that the monopolist must lower price to sell a greater quantity of output, and marginal revenue lies below the demand curve. Average total cost, average variable cost, and marginal cost all have the usual shapes. Marginal cost is upward-sloping, reflecting diminishing returns. Average variable cost and average total cost are both U-shaped, and marginal cost passes through the minimum point on both curves. Given its demand curve and cost curves, this monopolist maximizes profits — minimizes losses — by producing the quantity of output q0 that corresponds to the intersection of marginal revenue and marginal cost. Price is determined by going from q0 up to the demand curve and across to P0.
Economists use the term maximize profits even when they’re minimizing losses. Maximizing profits means the highest possible profit. In the case of a firm that loses money, the highest possible profit is the smallest loss.
