MONOPOLY

The word monopoly is made up of two

syllables, Mono and poly. Mono means single
while poly implies selling.
Thus 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. Pure monopoly is
a market situation in which a single firm sells a
product for which there is no good substitute.
 FEATURES OF MONOPOLY
• Single person or a firm: A single person or a firm
controls the total supply of the commodity. There
will be no competition for monopoly firm. The
monopolist firm is the only firm in the whole
industry.
• No close substitute: The goods sold by the
monopolist shall not have closely competition
substitutes. Even if price of monopoly product
increase people will not go in far substitute. For
example: If the price of electric bulb increase
slightly, consumer will not go in for kerosene lamp.
 FEATURES OF MONOPOLY
• Large number of Buyers: Under monopoly, there may
be a large number of buyers in the market who
compete among themselves.
• Price Maker: Since the monopolist controls the whole
supply of a commodity, he is a price-maker, and then he
can alter the price.
• Supply and Price: The monopolist can fix either the
supply or the price. He cannot fix both. If he charges a
very high price, he can sell a small amount. If he wants
to sell more, he has to charge a low price. He cannot sell
as much as he wishes for any price he pleases.
 FEATURES OF MONOPOLY
• Downward Sloping Demand Curve: The
demand curve (average revenue curve) of
monopolist slopes downward from left to
right. It means that he can sell more only by
lowering price.
 PRICING UNDER MONOPOLY
• Monopoly refers to a market situation where
there is only one seller.
• He has complete control over the supply of a
commodity.
• He is therefore in a position to fix any price.
Under monopoly there is no distinction
between a firm and an industry.
• This is because the entire industry consists of a
single firm.
 Pricing under Monopoly
• Being the sole producer, the monopolist has
complete control over the supply of the
commodity.
• He has also the power to influence the market
price.
• He can raise the price by reducing his output
and lower the price by increasing his output.
• Thus he is a price-maker. He can fix the price to
his maximum advantages.
 Pricing under Monopoly
• But he cannot fix both the supply and the price,
simultaneously. He can do one thing at a time.
• If the fixes the price, his output will be
determined by the market demand for his
commodity.
• On the other hand, if he fixes the output to be
sold, its market will determine the price for the
commodity.
• Thus his decision to fix either the price or the
output is determined by the market demand.
 Pricing under Monopoly
• The market demand curve of the monopolist
(the average revenue curve) is downward
sloping.
• Its corresponding marginal revenue curve is
also downward sloping.
• But the marginal revenue curve lies below the
average revenue curve as shown in the figure.
 Pricing under Monopoly
• The monopolist faces the down-sloping
demand curve because to sell more output, he
must reduce the price of his product.
• The firm’s demand curve and industry’s
demand curve are one and the same.
• The average cost and marginal cost curve are
U shaped curve. Marginal cost falls and rises
steeply when compared to average cost.
 PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
• The monopolistic firm attains equilibrium when
its marginal cost becomes equal to the marginal
revenue.
• The monopolist always desires to make
maximum profits. He makes maximum profits
when MC=MR.
• He does not increasing his output if his revenue
exceeds his costs.
• But when the costs exceed the revenue, the
monopolist firm incur loses.
 PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
• Hence the monopolist curtails his production.
• He produces up to that point where additional
cost is equal to the additional revenue
(MR=MC).
• Thus point is called equilibrium point.
• The price output determination under
monopoly may be explained with the help of a
diagram.
 PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
• In the diagram 6.12 the quantity supplied or
demanded is shown along X-axis.
• The cost or revenue is shown along Y-axis.
• AC and MC are the average cost and marginal cost
curves respectively.
• AR and MR curves slope downwards from left to
right.
• AC and MC and U shaped curves.
• The monopolistic firm attains equilibrium when its
marginal cost is equal to marginal revenue (MC=MR).
 PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
• Under monopoly, the MC curve may cut the MR curve
from below or from a side.
• In the diagram, the above condition is satisfied at point E.
• At point E, MC=MR.
• The firm is in equilibrium.
• The equilibrium output is OM.
• The above diagram (Average revenue) = MQ or OP
• Average cost = MR
• Profit per unit = Average Revenue-Average cost=MQ-
MR=QR
• Total Profit = QRXSR=PQRS
PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
 PRICE OUTPUT DETERMINATION
(EQUILIBRIUM POINT)
• The area PQRS represents the maximum profit earned by the
monopoly firm.
• t it is not always possible for a monopolist to earn super-
normal profits. If the demand and cost situations are not
favourable, the monopolist may realize short run losses.
• Through the monopolist is a price marker, due to weak
demand and high costs; he suffers a loss equal to PABC.
• If AR > AC -> Abnormal or super normal profits.
• If AR = AC -> Normal Profit
• If AR < AC -> Loss
• In the long run the firm has time to adjust his plant size or to
use existing plant so as to maximize profits.
 Perfect
Basis Monopoly
Competition
It is a market
situation where a It is a market
large number of situation where
buyers and sellers there is only one
Meaning deal in a seller in the market
homogeneous selling a product
product at a fixed with no close
price set by the substitutes.
market.
This market has a
This market has a
Number of Sellers very large number
single seller.
of sellers.
 This market has There are no close
Number of
homogeneous substitutes in this
Product
products. market.

There is a
There is freedom of restriction on the
Entry and Exit of
entry and exit in entry of new firms
Firms
this market. and exit of old
firms.

This market is less

This market has a
elastic and has a
Demand Curve perfectly elastic
downward-sloping
demand curve.
demand curve.
 As the firms in this
As each of the firms
market are price-
in this market is a
Price maker, there is a
price-taker, the
possibility of price
price is uniform.
discrimination.
In this market, no In this market, only
Selling Costs selling costs are informative selling
incurred. costs are incurred.
There is perfect There is imperfect
Level of
knowledge of the knowledge of the
Knowledge
market. market.