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    Monopoly 01.04.22

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    Shovan Karmakar
    The document discusses the concept of monopoly, including its definition as a market with a single seller and no close substitutes. It outlines some key features of monopolies like being a price maker and having a downward sloping demand curve. The document also discusses different types of monopolies and barriers to entry that allow monopolies to exist. It compares monopolies to perfect competition in terms of demand curves and pricing behavior.

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    © All Rights Reserved
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    Monopoly 01.04.22

    Uploaded by

    Shovan Karmakar
    16 views18 pages
    The document discusses the concept of monopoly, including its definition as a market with a single seller and no close substitutes. It outlines some key features of monopolies like being a price maker and having a downward sloping demand curve. The document also discusses different types of monopolies and barriers to entry that allow monopolies to exist. It compares monopolies to perfect competition in terms of demand curves and pricing behavior.

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    Monopoly_01.04.22

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    The document discusses the concept of monopoly, including its definition as a market with a single seller and no close substitutes. It outlines some key features of monopolies like being a price maker and having a downward sloping demand curve. The document also discusses different types of monopolies and barriers to entry that allow monopolies to exist. It compares monopolies to perfect competition in terms of demand curves and pricing behavior.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    16 views18 pages

    Monopoly 01.04.22

    Uploaded by

    Shovan Karmakar
    The document discusses the concept of monopoly, including its definition as a market with a single seller and no close substitutes. It outlines some key features of monopolies like being a price maker and having a downward sloping demand curve. The document also discusses different types of monopolies and barriers to entry that allow monopolies to exist. It compares monopolies to perfect competition in terms of demand curves and pricing behavior.

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    You are on page 1of 18

    MONOPOLY

    References: Koutsoyannis and Ferguson & Gould


    MONOPOLY
    ❖ The Word Monopoly is a Latin Term. 'Mono’means
    Single and ‘Poly’means Seller.

    ❖ Monopoly is a form of Market Organization in which


    there is only One Seller of the Commodity.

    ❖ There are No Close Substitutes for the


    Commodity sold by the Seller.

    ❖ Example : Indian Railways


    2
     Monopolies exist because of barriers to
    entry into a market that prevent
    competition.
     The monopoly firm (monopolist):
    May be small or large.
    Must be the only supplier of the product.
    Sells a product for which there are only
    close substitutes.
    ➢ To some extent true monopolies generally exist
    in government controlled markets.
    ✓ Ex. : Indian railway

    ➢ Monopoly in private business is rare.


    ❖ Private firms who have considerable market
    share.
    Like : Google
    Microsoft
    Apple
    4
    Features
    ✓ One seller and large number of Buyers.

    ✓ Monopoly is also an Industry.

    ✓ Restrictions on the Entry of the New Firms.

    ✓ No close Substitutes.

    ✓ Price Maker.

    ✓ Price Discrimination.

    ✓ Downward Sloping Demand Curve.


    5
    CAUSES AND SOURCES OF MONOPOLY POWER
    ✓ Control over Raw Materials or Ownership of Natural Resources.

    ✓ Patents.

    ✓ Technical Barriers.

    ✓ Government Policy.

    ✓ Historical and Entry Lag.

    ✓ Limit-Pricing Policy or Unfair Competition.

    ✓ Capital Size.
    6

    ✓ Business Mergers.
    Types of Monopoly
     Natural monopoly: A monopoly that arises from
    economies of scale. The economies of scale arise from
    natural supply and demand conditions, and not from
    government actions.
     Local monopoly: a monopoly that exists in a limited
    geographic area.
     Regulated monopoly: a monopoly firm whose behavior
    is overseen by a government entity.
    Barriers to Entry
     Institutional barriers to entry.
    Exclusive franchising
    Licences
    Patent protection

     Technical barriers to entry.


    Unique resources
    Economies of scale and scope
    Economy of experiences

    8
    Barriers to Entry

     Strategic barriers to entry.


    Limit pricing
    Excess capacity
    Product differentiation (brand
    proliferation)

    9
    Monopoly
    V/S
    Perfect Competition
    Perfect competitive Firm Monopoly
    ◆ Is one of many producers ◆ Is the sole producer

    ◆Has a horizontal demand ◆ Hasa downward-sloping


    curve demand curve

    ◆ Is a price taker ◆ Is a price maker

    ◆Sellsas much or as little ◆ Reduces price to 10


    at same price increase sales
    (A)Perfect competitive (b) AMonopolist’s
    Firm Demand Curve
    Price Price

    Demand
    (AR Curve)

    Demand
    (AR Curve)
    0 Quantity of 0 Quantity of
    Output Output 11
    Demand & Revenue Under Monopoly

    ▪ In a monopoly situation, there is no difference between firm &


    industry.
    ▪ Under monopoly situation, firm’s demand curve also constitutes industry‟s
    demand curve.
    ▪ Demand curve of the monopolist is also average revenue
    curve.
    ▪ It slopes downward. It means if the monopolist fixes high price,
    the demand will shrink or decrease. On the contrary, if he fixes
    low price, the demand will expand or increase.
    ▪ Under monopoly, average revenue and marginal revenue curves
    are separate from one another. Both slope downwards.
    ▪ Next fig. will show average revenue (demand) curve & marginal
    revenue curve. Both are sloping downward. Marginal revenue
    curve is below average revenue or demand curve.
    12
    Demand & Revenue Under Monopoly

    Revenue, Cost & Price


    • Demand curve of the
    monopolist is also
    P L
    average revenue (ARC)
    N
    curve. It slopes
    downward. It means if
    the monopolist fixes D = Average Revenue
    high price, the demand O Marginal revenue X
    will shrink. Q OUTPUT

    • Demand rises with fall in price(AR)


    • At point N total revenue (TR) will be maximum.( i.e. ,TR = P x Q)
    • Average revenue (AR) is never zero, but marginal revenue (MR) may be
    zero or even negative
    • At OP price, the monopolist will produce OQ quantity of output, because
    this price affords him maximum total revenue. 13
    PRICE DETERMINATION UNDER SHORT RUN

    A Monopolist in Equlibrium may face any of Three


    Situations in the Short Run.

    1. Super Normal Profit

    2. Normal Profit

    3. Loss
    14
    SUPER NORMAL PROFIT
     In This Figure ,The
    Y
    Monopolist is in
    MC
    equilibrium at point E .
     Because at this point AC

    MC=MR . C A

     The Monopolist Produces D B


    OM Units & sell it at AM
    price E
     Thus in this Situation the AR
    super normal profit of the
    monopolist will be ABCD
    MR
     Profit = OMAC-OMBD X
    O M OUTPUT
    15
    = DBAC
    NORMAL PROFIT
     In This Figure ,The Firm is in Y MC
    equilibrium at point E .
     Where MR = MC & OM is
    the equilibrium output . AC

     At this output AC Curve P


    A
    Touches Average
    Revenue(AM) curve at point
    A.
     At point A price OP (AM) is E
    equal to the average Cost of AR
    the product .
     Therefore firms earn only
    normal profit in equilibrium MR
    situation as at equilibrium X
    OUTPUT
    output its AR = AC O M
    16
     Profit = OMAP-OMAP = 0
    LOSS
     In this Figure , The monopolist Y
    is in equilibrium at point E ,
    Where MR=MC & produces MC
    OM output. AC
     The price of equilibrium output
    OM is fixed at OP1 (AM). N
    P
     At this Price The Average
    Loss A
    P1
    Variable Cost(AVC) Curve AVC
    Touches AR curve at point „A‟.
    E
     At this situation the firm will
    get only AVC from the
    Prevailing Price AR
     .The firm will bear the loss of
    MR X
    fixed cost , AN per Unit. O
    M OUTPUT
     Profit = OMAP1 – OMNP = -
    ANPP1 17
    The firm will bear total loss equivalent to NAP1P as shown
    by the shaded area.
    PRICE DETERMINATION UNDER LONG RUN
     In the Figure ,Point E Indicates the equilibrium of the monopolist .

     At Point E, MR = LMC . Hence OM is Y


    the equilibrium Output & ON (=AM) is
    the equilibrium Price.BM is the long
    run average cost.
    A LAC
     Price (Average Revenue) AM is N LMC
    being more than long run average B
    P
    cost (AR > LAC), the Monopolist
    earn (AM–BM =AB) Super Normal
    Profit Per Unit. E AR

     The Firm’s Super Normal Profit will


    be ABPN as Shown by Shaded Area MR
    OUTPUT X
    O M
    18

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