Monopoly Market

D r. Va s e e m A k r a m
Assistant Professor
Phone No:6398012849
Session No:14
Email Id:[email protected]

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 Agenda

• Monopoly (Definition and Characteristics)

• Sources of monopoly
• Price and output determination in the short and long term
• Difference between perfect competition and monopoly market

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 Objective

• Understanding the sources of monopoly and examining the welfare

components associated with consumers and producers.

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 Monopoly: Definition

• Prof. Ferguson: “A pure monopoly exists when there is only one

producer in the market”. There are no direct competitors”.
• McConnlel: “A pure or absolute monopoly exists when single firm is
sole producer of commodity for which there is no close substitute”.
• A key difference between monopoly and competitive market is
market power.

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 Characteristics

1. Single seller/firm
2. No close substitute
3. Barrier to entry
4. Demand curve is downward sloping
5. Price maker
6. Firm is industry

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 Sources of Monopoly
Why monopoly arise

1. Resources based monopoly: E.g.-DeeBeers owns most

world mine.

2. Government created monopoly: Government gives the

right to single firm based on political and public interest.
Duke energy or water supply.

3. Natural monopoly: Single firm produces entire market Q

at lower cost. E.g.-Distribution of water.

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 Economies of scale

Elasticity
• AC is downward sloping due to
huge fixed cost and small MC
• AC is lower one firm produces
for entire market.

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 Monopoly demand curve
6
Q P TR AR MR

0 4.5 0 NA NA 5

1 4 4 4 4 4

2 3.5 7 3.5 3 3

3 3 9 3 2 2

4 2.5 10 2.5 1 1

5 2 10 2 0
0
1 2 3 4 5 6
6 1.5 9 1.5 -1
-1 AR MR

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E.g.

Q P TR AR MR
0 550
100 450
200 400
300 350
400 300
500 250
600 200
700 150

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Monopoly power/Degree of monopoly

See the additional pdf file named as “Monoply Power”

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 Price and output determination
Profit maximization
Conditions for profit maximization
• MR=MC
• MR<AR
• P>MR=MC

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 Short run and long term

•In the short run, firms in competitive markets and monopolies could make supernormal profit.

•In monopolies, there are barriers to entry – which prevent new firms from entering the market.

•In competitive markets barriers to entry and low – so new firms can enter the market causing lower
profit.

•Therefore, in the long-run in competitive markets, prices will fall and profits will fall.

•However in the long-run in monopoly prices and profits can remain high.

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 Efficiency and monopoly

• Monopolies set a price greater than MC which is

allocative inefficient.

• By producing at Qm, the monopoly is

productively inefficient (not lowest point on AC
curve).

• With less competition, a monopoly has fewer

incentives to cut costs and therefore will be x-
inefficient.

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 Welfare loss to society

• In a competitive market, the output will be at Pc and Qc. (point C).

• In a monopoly, the output will be QM and PM – causing a fall in consumer surplus.

• Monopoly also causes a fall in producer surplus (less is sold). But, some of the consumer surplus
is captured by firms (from setting higher price).

• The blue triangle shows the net loss of consumer and producer surplus to society.

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 Welfare loss to society

• In a competitive market, the output will be at Pc and Qc. (point C).

• In a monopoly, the output will be QM and PM – causing a fall in consumer surplus.

• Monopoly also causes a fall in producer surplus (less is sold). But, some of the consumer surplus
is captured by firms (from setting higher price).

• The blue triangle shows the net loss of consumer and producer surplus to society.

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 Difference between perfect competition
and monopoly market
Perfect competition Monopoly market

Many sellers Single sellers

There is close substitute There is no close substitute

MR=MC=P P>MR=MC

There are no barriers to entry or exit from the There is barriers to entry
market.

No market control There is market control

Normal Profit in the long run Super normal profit in both

Undifferentiated products Single product

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Advantages and disadvantages of monopolies

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 Example on monopoly

Steps:

Step 1: Compute the MR from the demand curve and the MC.

Step 2: Compute the profit maximizing output: MR=MC.

Step 3: Compute P the “right price” for Q (i.e., the price at which buyers are willing to buy Q units of output)
by substituting Q in the demand curve.

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(1) Q = 100 – P
(2) C = 1000+ 20Q

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