My professor drew a graph with P as the vertical axis and Q as the
horizontal axis.  He drew a long run average cost curve that is
in the shape of an indifference curve. (bowed inwards towards the origin)

He then drew a parallel line under the LRAC curve which he called
the LRMC (long run marginal cost curve).  The difference between
the two curves represents the monopoly is operating at a loss.  He
says this condition only applies with increasing returns to scale.  
I know what Inncreasing returns to scale is, but I can't apply it
to this graph.  My question is if the LRMC curve lies below
the LRAC curve, isn't the firm's marginal costs curve showing
that each good is being produced at a point less than the LRAC
therefore, the firm should be operating with lesser costs?
What does the P stand for: the price of the good or the cost
to the firm?  What does the Q stand for?

Also, I'm lost on the Cobweb model.  I can't draw it
AND explain what 
I am doing on a test.  Can somebody draw the Cobweb
model and describe each step for me?

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Request for Question Clarification by elmarto-ga on 09 Oct 2003 13:06 PDT

Hi swifty!
In what context was your professor talking about the monopoly going at
loss? This graph is sometimes used to explain the existence of natural
or government-owned monopolies (such as utilities).

Recall that under perfect competition, in equilibrium, the price at
which the good is sold is set to be equal to the marginal cost of
producing that good. In the firm you describe, setting the price equal
to the MC would make the company loose money, because at any quantity,
the price at which each unit of good is sold is less than the cost
(average) of producing that good.

In any case, in order to state that the company is at loss, one would
need to know how is the equilibrium price being set; do you recall
from your class if anything was said about this? I might be able to
answer your qeustion if you clarify this.

Regarding your other question, the vertical axis is used BOTH for
price and cost, depending on which curve you're examining.

Best regards,
elmarto

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Clarification of Question by swifty123-ga on 09 Oct 2003 16:31 PDT

Hi, Yes you guessed it.  It's an energy economics class.
We are talking about utilities and monopolies.  There was no mention
of equilibruim, he just said that when a monopoly is operating
with increasing returns to scale, marginal pricing will result in a loss.
     ^^^^^^^^^^^^^^^^^^^^^^^^^^     
I don't see a loss if the marginal cost is below the average cost.  That
implies each axtra unit costs less to produce than at the average cost.