<p>If the AC curve is assumed convex and demand is assumed linear, as in the figure, then an AC curve tangent to the demand line means that AC &gt; P at all quantities but one (where AC = P). Thus the monopolist makes zero profits in his optimum. However, for cost and demand parameters drawn from a continuous distribution this is a probability-zero event. You'd rather expect that either AC &gt; P everywhere (and the monopolist would have left the market) or AC &lt; P somewhere (the standard example). Analogous considerations hold for a Cournot duopoly.</p>

CC BY-SA 4.0
2021-12-09T11:50:06.050Z
Yes, when the number of firms is an integer, $AC=P$ is unlikely to hold, and the long-run equilibrium is characterized by $AC(y_N)<p_N$ for all active firms (of the economy with $N$ firms), and $AC(y_{N+1})>p_{N+1}$ if $N+1$ firms were active,
Bertrand
CC BY-SA 4.0
2021-12-10T15:58:24.323Z
Thanks for your answer! I'm just a bit confused by what you mean by "cost and demand parameters drawn from a continuous distribution".
Evan
CC BY-SA 4.0
2021-12-10T18:40:32.827Z
@Evan, I just meant that for "randomly chosen" parameter values this case will "never" happen, sort of.
VARulle
CC BY-SA 4.0
2021-12-07T23:44:33.347Z
2021-12-07T23:44:33.347Z
VARulle
<p>So I'm studying market structures for the end of term, and I'm a bit confused about excess profits.</p>
<p>From what I can see, excess profits occur when the demand curve intersects the AC curve - the MR=MC quantity leads to a price which is above AC, and thus the firm earns excess/economic profits (as in monopoly). If the demand curve were tangent to the AC curve (as in long-run monopolistic competition), there are no excess profits, because the firm produces at AC.</p>
<p>My question is: is there any reason why the demand curve faced by a monopolist isn't just tangent to the AC curve? Or is it that this is the only situation where the monopolist doesn't earn economic profits? See the diagrams below.</p>
<p><a href="https://i.sstatic.net/X0AK3.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/X0AK3.png" alt="Only normal profits in long-run monopolistic competition" /></a> <a href="https://i.sstatic.net/H6pLu.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/H6pLu.png" alt="Excess profits in monopoly" /></a></p>
<p>Finally, what does this mean for a firm in a Cournot duopoly equilibrium, with no collusion? Does the competition from its rival leave it with a similar result as the firm in monopolistic competition with the demand curve tangent to the AC curve, or does it enjoy excess profits?</p>

CC BY-SA 4.0
2021-12-07T15:02:42.937Z
Hi Evan! Can you please define more precisely what you mean by "*excess profits*"? Positive profits?
Giskard
CC BY-SA 4.0
2021-12-07T15:04:30.687Z
"*is there any reason why the demand curve faced by a monopolist isn't just tangent to the AC curve?*" ... is there any reason why it should **generally** be tangential to the AC curve?
Giskard
CC BY-SA 4.0
2021-12-07T15:07:24.150Z
@Giskard Thanks, I mean supernoral or economic profits - as in, any profit earned by the firm above the minimum level of profit it would require to stay in business. Also, I don't see any reason why the demand curve should generally be tangential to the AC curve - my question is essentially whether this means it's possible to have a monopolist who doesn't earn excess profits
Evan
CC BY-SA 4.0
2021-12-07T15:07:57.037Z
Is this different from positive economic profit?
Giskard
CC BY-SA 4.0
2021-12-07T15:10:13.603Z
No, that's not different - I mean positive economic profit
Evan
<microeconomics><markets><monopoly><oligopoly><monopolistic-competition>
Will there always be excess profit in the Cournot model equilibrium/monopoly
Evan
# Will there always be excess profit in the Cournot model equilibrium/monopoly

(Asked by: username_0 on 2021-12-07)

So I'm studying market structures for the end of term, and I'm a bit confused about excess profits.

From what I can see, excess profits occur when the demand curve intersects the AC curve - the MR=MC quantity leads to a price which is above AC, and thus the firm earns excess/economic profits (as in monopoly). If the demand curve were tangent to the AC curve (as in long-run monopolistic competition), there are no excess profits, because the firm produces at AC.

My question is: is there any reason why the demand curve faced by a monopolist isn't just tangent to the AC curve? Or is it that this is the only situation where the monopolist doesn't earn economic profits? See the diagrams below.

[![Only normal profits in long-run monopolistic competition](https://i.sstatic.net/X0AK3.png)](https://i.sstatic.net/X0AK3.png) [![Excess profits in monopoly](https://i.sstatic.net/H6pLu.png)](https://i.sstatic.net/H6pLu.png)

Finally, what does this mean for a firm in a Cournot duopoly equilibrium, with no collusion? Does the competition from its rival leave it with a similar result as the firm in monopolistic competition with the demand curve tangent to the AC curve, or does it enjoy excess profits?

**Tags:** microeconomics, markets, monopoly, oligopoly, monopolistic-competition

> **Comments:**
> **username_1**: Hi username_0! Can you please define more precisely what you mean by "*excess profits*"? Positive profits?  
> **username_1**: "*is there any reason why the demand curve faced by a monopolist isn't just tangent to the AC curve?*" ... is there any reason why it should **generally** be tangential to the AC curve?  
> **username_0**: @username_1 Thanks, I mean supernoral or economic profits - as in, any profit earned by the firm above the minimum level of profit it would require to stay in business. Also, I don't see any reason why the demand curve should generally be tangential to the AC curve - my question is essentially whether this means it's possible to have a monopolist who doesn't earn excess profits  
> **username_1**: Is this different from positive economic profit?  
> **username_0**: No, that's not different - I mean positive economic profit  

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## 1 answers

### Answer by username_2 on 2021-12-07. Score: 1 | Accepted answer

If the AC curve is assumed convex and demand is assumed linear, as in the figure, then an AC curve tangent to the demand line means that AC > P at all quantities but one (where AC = P). Thus the monopolist makes zero profits in his optimum. However, for cost and demand parameters drawn from a continuous distribution this is a probability-zero event. You'd rather expect that either AC > P everywhere (and the monopolist would have left the market) or AC < P somewhere (the standard example). Analogous considerations hold for a Cournot duopoly.

> **Comments:**
> **username_3**: Yes, when the number of firms is an integer, $AC=P$ is unlikely to hold, and the long-run equilibrium is characterized by $AC(y_N)<p_N$ for all active firms (of the economy with $N$ firms), and $AC(y_{N+1})>p_{N+1}$ if $N+1$ firms were active,  
> **username_0**: Thanks for your answer! I'm just a bit confused by what you mean by "cost and demand parameters drawn from a continuous distribution".  
> **username_2**: @username_0, I just meant that for "randomly chosen" parameter values this case will "never" happen, sort of.  

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