monopoly

1. Monopoly Presented By : Anuj Kr.Sharma Brajesh Rawat Dumpy S. Chauhan Prateek S.Rathore Sachin Kheradiya Tarun S. Gahlot Submitted To : Dr. Ashish Pareek

2. Monopoly The Word Monopoly is a Latin Term. ‘ Mono ’ means Single and ‘ Poly ’ means Seller . 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. Example : Indian Railways 2

3. Definitions According To Koutsoyiannis , “Monopoly Is a Market Situation in Which There is A single Seller, There are no close substitutes for commodity it produces ,there are barriers to entry.” According To Baumol , “ A pure Monopoly is defined as the firm that is also an industry. It is the only supplier of some particular commodity for which there exist no close substitutes.” 3

4. Existence of monopoly True monopolies generally exist in government controlled markets . Ex. : Indian railway Monopoly in private business is rare . Private firms who have considerable market share . Like : Google Microsoft Apple 4

5. Features or assumptions of Monopoly One seller and large number of Buyers. Monopoly is also an Industry. Restrictions on the Entry of the New Firms. No close Substitutes. Price Maker. Price Discrimination. Downward Sloping Demand Curve. 5

6. Causes and sources of monopoly power Control over Raw Materials or Ownership of Natural Resources. Patents. Technical Barriers. Government Policy. Historical and Entry Lag. Limit-Pricing Policy or Unfair Competition. Capital Size. Business Mergers. 6

7. Types of Monopoly Natural monopoly, Geographic monopoly, Technological monopoly, Government monopoly, 7

8. Type of Barriers to Entry Institutional barriers to entry. Exclusive franchising Licences Patent protection Technical barriers to entry. Unique resources Economies of scale and scope Economy of experiences 8

9. Type of Barriers to Entry Strategic barriers to entry. Limit pricing Excess capacity Product differentiation (brand proliferation) 9

10. MONOPOLY v/s PERFECT COMPETITION Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales Perfect competitive Firm Is one of many producers Has a horizontal demand curve Is a price taker Sells as much or as little at same price 10

11. Quantity of Output Demand (A)Perfect competitive Firm (b) A Monopolist’s Demand Curve Price Quantity of Output Price Demand 11

12. DEMAND AND REVENUE UNDER MONOPOLY In a monopoly situation, there is no difference between firm & industry. Under monopoly situation, firm’s demand curve also constitutes industry’s demand curve. Demand curve of the monopolist is also average revenue curve. It slopes downward. It means if the monopolist fixes high price, the demand will shrink or decrease. On the contrary, if he fixes low price, the demand will expand or increase. Under monopoly, average revenue and marginal revenue curves are separate from one another. Both slope downwards. Fig.1 will show average revenue (demand) curve & marginal revenue curve. Both are sloping downward. Marginal revenue curve is below average revenue or demand curve. 12

13. DEMAND AND REVENUE UNDER MONOPOLY Demand curve of the monopolist is also average revenue (ARC) curve. It slopes downward. It means if the monopolist fixes high price, the demand will shrink. P Marginal revenue E > 1 Increase In TR E<1 (Decrease inTR ) E=1 (TR Maximum) D = Average Revenue Q OUTPUT Revenue N O L A Y X D emand rises with fall in price(AR ) At point ‘N’ , total revenue will be maximum .( i.e. ,TR = P x Q) Average revenue is never zero, but marginal revenue may be zero or even negative At OP price, the monopolist will produce OQ quantity of output, because this price affords him maximum total revenue. 13

14. Price Determination Under Short Run A Monopolist in Equlibrium may face any of Three Situations in the Short period . Super Normal Profit Normal Profit Minimum Loss 14

15. Super normal profit D MC AC AR MR O M B A OUTPUT REVENUE / COST C E M R=MC Super Normal Profit Y X In This Figure ,The Monopolist is in equilibrium at point E . Because at this point MC=MR . The Monopolist Produces OM Units & sell it at AM price Thus in this Situation the super normal profit of the monopolist will be ABCD 15

16. Normal profit MC AC AR MR O M A OUTPUT REVENUE / COST P E M R=MC Normal Profit Y X In This Figure ,The Firm is in equilibrium at point E . Where MC=MR & OM is the equilibrium output . At this output AC Curve Touches Average Revenue(AM) curve at point A . At point ‘A’ price OP (AM) is equal to the average Cost of the product . Therefore firms earn only normal profit in equilibrium situation as at equilibrium output its AC=AR 16

17. MINIMUM LOSS In this Figure , The monopolist is in equilibrium at point E , Where MC=MR & produces OM output. The price of equilibrium output OM is fixed at OP 1 (AM). At this Price The Average Variable Cost (AVC) Curve Touches AR curve at point ‘A’. At this situation the firm will get only AVC from the Prevailing Price .The firm will bear the loss of fixed cost , AN per Unit. P 1 MC AC AVC AR MR O M A N Loss OUTPUT REVENUE / COST P E M R=MC Y X The firm will bear total loss equivalent to NAP 1 P as shown by the shaded area. 17

18. Price Determination Under Long Run In the Figure ,Point E Indicates the equilibrium of the monopolist . At Point E, MR = LMC . Hence OM is the equilibrium Output & ON (=AM ) is the equilibrium Price. BM is the long run average cost. Price (Average Revenue ) AM is being more than long run average cost ( AR > LAC ), the Monopolist earn ( AM –BM =AB ) Super Normal Profit Per Unit. The Firm’s Super Normal Profit will be ABPN as Shown by Shaded Area P LMC LAC AR MR O M B A OUTPUT REVENUE / COST N M R=MC Super Normal Profit Y X E 18

19. BOOKS : MICRO ECONOMICS . T.R. Jain O.P. Khanna Ajay Tiwari INTERNET : www. slideshare .net/‎ 19

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