MONOPOLY

Definition:
It is a market situation where there is one seller or producer in the
market,
who controls the entire market supply.
There are no close substitutes for the Product,
thus the monopolist can charge a very high price.
The firm and the industry are identical and there is no free entry.
The sole seller in the market is called the Monopolist.
Eg. Indian Railways
 MONOPOLY- FEATURES
4. There is no free entry of the
2. There are no other firms in the market
close substitutes
for the product
1. There is only 5. Since there is only one seller in
one seller or the market, the firm and the
producer of the industry are identical
product in the
market
3. The 6. There are many buyers in the
monopolist can market, but no single buyer can
charge a high influence the price of the
price, he is a product in the market.
price maker
7. It is the complete opposite of perfect
competition, because in perfect competition
there are large number of buyers and sellers in
the market. In Monopoly, only one seller and
many buyers.
 MONOPOLY- FEATURES
8. The demand curve faced by the monopolist
is downward sloping from left to right.
It is also the average revenue curve of the
firm. [D= AR]
The Corresponding Marginal Revenue Curve is
also downward sloping from left to right
and lies below the average revenue curve.
So AR ≠ MR
Conditions for equilibrium: -
• MC = MR
• MC curve must cut the MR curve from
below and rise above the MR curve after
the point of equilibrium.
 MONOPOLY- REASONS
2. Control of
1. Natural 4. Legal Restrictions: Rules like trademarks,
Raw Material:
Factors: patents, copy rights etc., give monopoly power
Monopoly also
The to some firms. Ex. when a trade mark is given
arises due to
natural to a Firm, no other firm can imitate its
ownership and
skills and products ex. Coke & Pepsi
control of raw
talents of materials. Ex. Oil
an reserves in
individual Middle East 5. Economies of Large-Scale Production: Big
leads to countries; firms produce on a large scale, so their cost of
monopoly. Diamonds in production is low, this will reduce their price
For ex; South Africa. and prevent other firms from entering the
Doctors, market. This leads to monopoly power.
Singers, 3. Business Reputation:
Actors etc., Established firms having a 6. Business Combines: By forming business
good reputation will have combines like, cartels, syndicates, trust etc., big
monopoly power over business houses can join hands and acquire
other firms in the market. monopoly power. This will eliminate
Ex. Tata, Reliance competition in the market. Eg. Walmart and
Flipkart.
 EQUILIBRIUM OF THE FIRM UNDER
MONOPOLY
Definition
• It is a market situation where there is one seller or producer in the market,
who controls the entire market supply.
• There are no close substitutes for the Product,
• thus the monopolist can charge a very high price.
• The firm and the industry are identical and there is no free entry.
• The sole seller in the market is called the Monopolist.
The Monopoly equilibrium is achieved at the point where:
• MC = MR
• the MC curve must cut the MR curve from below and rise above the MR
curve after the point of equilibrium.
 Short Run Monopoly
equilibrium
• There are three situations in the short run: SNP=AR>AC
1. Monopolist is making supernormal profit AR = QM/unit
[ AR > AC] AC = SM/unit
• In the diagram AR and MR are the average
SNP = AR - AC
revenue curve and marginal revenue curve
• both are downward sloping from left to = QM - SM
right. = QS/unit
• SMC is the short run marginal cost curve. The total profit is the area PQSR.
• It intersects the MR curve at point E.
• E is the point of equilibrium where MC =
MR.
• OM is the equilibrium output and OP is the
equilibrium price.
• AC is the short run average cost curve. The
firm is making supernormal profits.
 Short Run Monopoly
equilibrium
2. Monopolist is making Normal Profit
[ AR = AC]
• SMC cuts MR at point E.
• It is the point of equilibrium where OM is the
equilibrium output and OP is the equilibrium
price.
• The firm is making only normal profits i.e [AR =
AC].
• SAC is the short run average cost curve which
is tangent to AR at point A.
• Normal Profits
• AR = AC
• AR = AM per unit
• AC = AM per unit
• Since AR = AC
• i.e. AM = AM [ normal profit]
 Short Run Monopoly
equilibrium
3. Monopolist is making a loss
[ AC > AR]
SMC cuts MR at point E.
It is the point of equilibrium where OQ is the
equilibrium output and OP is the equilibrium
price.
The firm is making the loss i.e AC > AR
• LOSS
• AC > AR
• AC = AQ per unit
• AR = BQ per unit
• LOSS = AC - AR
• = AQ - BQ
• = AB per unit
• The total loss is the shaded area PBAC.
 Long Run Monopoly
equilibrium
In the long run the monopolist must make super
normal profits, to remain in the business.
In the diagram, LMC cuts MR at point E.
It is the point of equilibrium where OM is the
equilibrium output and OP is equilibrium price.
The monopolist makes super normal profits
[ AR > AC].
LAC is the long run average cost curve.
• SNP = AR > AC
• AR = JM per unit
• AC = HM per unit
• SNP = AR - AC
• = JM - HM
• = JH per unit
• Total Profit is the shaded area PP1HJ
 PRICE DISCRIMINATION UNDER
MONOPOLY
• Definition:
Price discrimination means
• charging different prices from different consumers
• [For ex. When a doctor charges higher fees for rich patients
and lower fees for poor patient]
• or different prices for different units of the same products
• [for e.g. Shampoo in a sachet is cheaper compared to
shampoo in a bottle].
 PRICE DISCRIMINATION-TYPES
2. Nature of 4. Time of Service - Hotels charge a
the Product - lower price during off season and
For example in higher price during the peak season
1. Personal - case of books
This the paper
discrimination backs are
is based on the 5. Use of the Product - Many public
cheaper than
income of the sectors and governments services
the hard-
person for ex. a follow this kind of discrimination.
bound copies.
doctor charges For eg. the state electricity board
a high fee for a charges a lower rate for industrial and
rich patient agricultural purposes and a higher rate
and lower fee 3. Age and gender - For for domestic purpose [use].
for a poor example Children,
patient. Women and Senior
Citizens are given
concessions for different 6. Geographical - The monopolist may
services e.g. Travel in charge a higher price in the home
railway is cheaper for market and a lower price in the
senior citizens foreign market for the same product.
 Price Discrimination under Monopoly- EQUILIBRIUM
• Price discrimination under monopoly occurs when 7. Since the monopolist sells in two
the monopolist divides the consumers into
different groups and charges different price to different markets
each group. the most profitable monopoly
The assumptions of Price discrimination under output will be determined at a point
Monopoly are:
1. The elasticity of demand in the two markets
where the combined marginal
must be different. revenue of both the markets is equal
2. The market in which the demand is inelastic, a to the marginal cost
higher price will be charged.
Thus, monopoly equilibrium is given
3. In another market the demand is elastic such
that a lower price is charged as
4. Thus, the prices charged in the two markets is MR1 = MR2 = MC,
different i.e. one is high and the other is low
5. There is no possibility of resale from one where MR1 and MR2 are the marginal
market to another market revenue curves of the two different
6. The number of buyers in each market is very markets.
large and there is perfect competition among
them
 Price Discrimination under Monopoly-
EQUILIBRIUM
• From the diagram the monopolist sells the
product in two markets, Market 1 and
Market 2.
• Market 1 has a relatively elastic demand for
the product
• while Market 2 has a relatively inelastic
demand for the product.
• In Market 1 average revenue and marginal
revenue curves are AR1, and MR1.
• In the Market 2, the average revenue and
the marginal revenue curves are AR2 and
MR2.
• Diagram C shows the output produced in the
total market.
• MRT is the total marginal revenue curve,
which is found by adding MR1 and MR2
curves [ MR = MR + MR ].
 Price Discrimination under Monopoly-
EQUILIBRIUM
• In diagram C, the MC curve
intersects the MRT curve at point E.
• Thus, E is the point of equilibrium
which determines the equilibrium
level of output OQ.
• The monopolist divides this output
between the two markets Market 1
and Market 2.
• This is done by equating the
marginal cost with the marginal
revenue of each market.
• So, a horizontal straight line is
drawn which is parallel to the x-axis-
BE. It cuts MR1 at E1 and MR2 at E2.
 Price Discrimination under Monopoly-
EQUILIBRIUM
• In Market 1[ demand is elastic], the point of
equilibrium is E1, such that equilibrium output sold is
OQ1 at the equilibrium price OP1.
• In Market 2[ demand is inelastic], the point of
equilibrium is E2, such that equilibrium output sold is
OQ2 at the equilibrium price OP2.
• Thus the monopolist has discriminated between the
two markets.
• In Market 1 where demand is elastic, the monopolist
has sold a larger output OQ1 at a lower price OP1.
• In Market 2 where demand is inelastic, the
monopolist has sold a smaller output OQ 2 at a
higher price OP2.
• Thus
• OQ1 > OQ2
• But
• OP1 < OP2.
• The total profits earned by the monopolist is shown
by the shaded area MEC.