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4.
1 Monopoly
The word monopoly has been derived from the combination of two words i.e., 'Mono'
and 'Poly'. Mono refers to a single and poly to control. In this way, monopoly refers to a
market situation in which there is only one seller of a commodity. There are no close
substitutes for the commodity it produces and there are barriers to entry. The single
producer may be in the form of individual owner or a single partnership or a joint stock
company. In other words, under monopoly there is no difference between firm and industry.
Monopolist has full control over the supply of commodity. Having control over the
supply of the commodity he possesses the market power to set the price. Thus, as a
single seller, monopolist may be a king without a crown. If there is to be monopoly, the
cross elasticity of demand between the product of the monopolist and the product of any
other seller must be very small. Pure or absolute monopoly exists when a single firm is
the sole producer for a product for which there are no close substitutes. We may state the
features of monopoly as:
1. One Seller and Large Number of Buyers: The monopolist's firm is the only firm; it
is an industry. But the number of buyers is assumed to be large.
2. No Close Substitutes: There shall not be any close substitutes for the product sold
by the monopolist. The cross elasticity of demand between the product of the
monopolist and others must be negligible or zero.
3. Difficulty of Entry of New Firms: There are either natural or artificial restrictions
on the entry of firms into the industry, even when the firm is making abnormal
profits.
4. Monopoly is also an Industry: Under monopoly there is only one firm which
constitutes the industry. Difference between firm and industry comes to an end.
5. Price Maker: Under monopoly, monopolist has full control over the supply of the
commodity. But due to large number of buyers, demand of any one buyer constitutes
an infinitely small part of the total demand. Therefore, buyers have to pay the
price fixed by the monopolist.
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5. Nature of Demand and Revenue under Monopoly : Under monopoly, it becomes
essential to understand the nature of demand curve facing a monopolist. In a
monopoly situation, there is no difference between firm and industry. Therefore,
under monopoly, firm's demand curve constitutes the industry's demand curve.
Since the demand curve of the consumer slopes downward from left to right, the
monopolist faces a downward sloping demand curve. It means, if the monopolist
reduces the price of the product, demand
of that product will increase and vice-versa.
In Fig. 4.1 average revenue curve of

the monopolist slopes downward from left
to right. Marginal revenue (MR) also falls
and slopes downward from left to right. MR
curve is below AR curve showing that at
OQ output, average revenue (= Price) is PQ
where as marginal revenue is MQ. That
way AR > MR or PQ > MQ.
7. Costs under Monopoly: Under monopoly,

shape of cost curves is similar to the one
under perfect competition. Total fixed costs
curve is parallel to OX-axis whereas
average fixed cost is rectangular hyperbola.
Moreover, average variable cost, marginal
cost and average cost curves are of U-shape. Under monopoly, marginal cost curve as in
the perfect competition. Price is higher than marginal cost.
4.2 Monopoly: Price and Equilibrium

Under monopoly, for the equilibrium and price determination there are two
different conditions which are: 1. Marginal revenue must be equal to marginal cost. 2.
MC must cut MR from below.
1. Short Run Equilibrium under Monopoly: Short period refers to that period in which
the monopolist has to work with a given existing plant. In other words, the monopolist
cannot change the fixed factors like, plant, machinery etc. in the short period. Monopolist
can increase his output by changing the variable factors. In this period, the monopolist
can enjoy super-normal profits, normal profits and sustain losses.
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4.

In Fig. 4.1 average revenue curve of

7. Costs under Monopoly: Under monopoly,

4.2 Monopoly: Price and Equilibrium

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