MONOPOLY ♣

Presented By

Niranj Raksha Shetty Mayuri Danish

Introduction:

Monopoly is a form of market structure in which a single seller or firm has control over the entire market supply.

Meaning:Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others. The product has no close substitutes.

Here, no other firms produce a similar product.

Monopolistic can sell his commodity at any price he likes.

He has control over price.The sole seller in the market is called “monopolist”

Definition:

Acc to Kautsoyiannis – “Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry.”

Ferguson – “A pure monopoly exists when there is only one producer in the market. There are no direct competitions.”

Features of monopoly:

• Single producer and large number of buyers.

• No close substitutes.• Barriers to entry.• Full control over price.• Price discrimination.• No competition.• No distinction between firm and

industry.

CAUSES OF MONOPOLY

Legal Restrictions or barriers to entry of new firms

Sole control over the supply of scarce and key raw materials

Efficiency in production Economies of scale

Kinds of monopoly

Natural monopoly

It arises because of natural factors like soil, rainfall etc

Social monopoly It is in the hands of the

government. In certain fields, competition is not desirable.

Legal monopoly it is created by the law of the country. Voluntary monopoly It arises due to voluntary factors.

OUTPUT AND PRICE DETERMINATION UNDER MONOPOLY

Output and price determination under monopoly in short-run and long-run

Short-run monopoly equilibrium

The monopolist maximises his short run profit, when he produces that level of output at which.

• The short run marginal cost is equal to the short run marginal revenue (SMC = SMR)

• The marginal cost is rising

Short run monopoly

A monopoly firm equates its MC with MR and determine equilibrium output.

Price is determined in view of demand or average revenue curve.

Equilibrium point B is determined by the intersection of the SMR curve and the SMC curve. SMC = SMR

OQ equilibrium output is produced by the firm. The firm can sell this output only at price OP.

In this illustration profit is PABC.

Once the output is decided, the price is determined correspondingly in relation to the given demand curve.

Though pure monopolist has full control over the market supply, he can not determine price independently in market.

when equilibrium output is decided at the point of equality between MR and MC the price is automatically determined in relation to the demand of product.

Equilibrium output is determined at falling path of AC curve. Which means the monopolist restrict output before producing it at the optimum level in order to maximise his profit.

Long run monopoly equilibrium

Long run equilibrium, determined by the equality of long run marginal cost (LMC) and the marginal revenue (LMR), so that profit is maximised.

If the firm is earning some profit in short run it has to determined the most profitable long run plant size and corresponding price and output.

Long run equilibrium

Long run monopoly Equilibrium Curve D is the demand curve/ average

revenue curve. LAC and LMC are the long run average

and marginal cost curves. LAC is envelope to various SAC

curves. LMC and LMR intersect with the point

E where is having optimum level of output.

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