Why would a monopolist decide to stay in a market if its making a loss?

Watch
TheWrongTrick
Badges: 3
Rep:
?
#1
Report Thread starter 6 years ago
#1
From edexcel unit 3 economics
I can't quite get my head around this. I am told that "A monopolist may decide to remain operational whilst it makes a loss in the short-run as long as it is covering its variable costs and therefore making a contribution to its fixed costs. The monopolist may feel that in the long run super-normal profits might be achieved." But if its making a loss, how will it be covering its variable costs and how does that exactly make the fixed costs lighter?

Sorry if this question sounds stupid
0
reply
Liamnut
Badges: 13
Rep:
?
#2
Report 6 years ago
#2
If price is greater than AVC, the firm can cover it's variable costs and some of its fixed costs, reducing the loss it would see if it just kept q=0. In the long run, the no factors are fixed so at q=0 it won't make a loss as there are no fixed costs, so it should close.


(Original post by TheWrongTrick)
From edexcel unit 3 economics
I can't quite get my head around this. I am told that "A monopolist may decide to remain operational whilst it makes a loss in the short-run as long as it is covering its variable costs and therefore making a contribution to its fixed costs. The monopolist may feel that in the long run super-normal profits might be achieved." But if its making a loss, how will it be covering its variable costs and how does that exactly make the fixed costs lighter?

Sorry if this question sounds stupid
0
reply
mattt1
Badges: 0
Rep:
?
#3
Report 6 years ago
#3
if you apply the question to a real life example. You own a business and paid fixed costs (rent) of £10,000 a year,
you also have variable costs that calculate to around £5 per unit sold, but you only sell them for £6 per unit, chances are you won't make a profit, and you will make a loss, (unless if you sell loads and the £1 margin exceeds £10,000). Anyway the monopolist will stay in the market as for every unit sold they are covering their variable costs, and making £1 contribution to the £10,000 fixed costs, therefore by staying in the market they are reducing the loss they make.
0
reply
X

Quick Reply

Attached files
Write a reply...
Reply
new posts
Back
to top
Latest
My Feed

See more of what you like on
The Student Room

You can personalise what you see on TSR. Tell us a little about yourself to get started.

Personalise

How are you feeling about starting university this autumn?

Really excited (64)
22.61%
Excited but a bit nervous (127)
44.88%
Not bothered either way (36)
12.72%
I'm really nervous (56)
19.79%

Watched Threads

View All
Latest
My Feed