Monopoly Market Structure

what is monopoly, its characteristics, probable cause & equilibrium price and output in short n long run.
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1. Imperfect Competition MONOPOLY Rajesh Kumar PGP-I MBA-ABM CABM,GBPUA&T 12/9/2009 1 continued...

2. Imperfect Competition An imperfectly competitive industry is an industry in which single firms have some control over the price of their output . Some examples are Monopoly, Oligopoly and Monopolistic competition . Monopoly:- A market structure in which only one producer or seller exists for a product that has no close substitutes 12/9/2009 2 continued...

3. The characteristics of Monopoly are Single Seller No Close Substitutes Price Maker Blocked Entry Non-price Competition Availability of information( Imperfect ) 12/9/2009 3 continued...

4. Monopolies exist because of barriers to entry into a market that prevent competition . ex:-railways, electricity. There are three general classes of barriers to entry(CAUSE): Natural barriers, the most common being economies of scale Actions by firms to keep other firms out Government (legal) barriers MONOPOLY 12/9/2009 4 continued...

5. In some industries, the larger the scale of production, the lower the costs of production. Entrants are not usually able to enter the market assured of or capable of a very large volume of production and sales. This gives incumbent firms a significant advantage . Examples are electric power companies and other similar utility providers. Economies of Scale 12/9/2009 5 continued...

6. Governments often provide barriers, creating monopolies. As incentives to innovation, governments often grant patents , providing firms with legal monopolies on their products or the use of their inventions or discoveries for a period of 17 years. Government 12/9/2009 6 continued...

7. Natural monopoly : A monopoly that arises from economies of scale. The economies of scale arise from natural supply and demand conditions, and not from government actions. Local monopoly : a monopoly that exists in a limited geographic area. Bilateral Monopoly : only one buyer, very rare ex; expensive defence goods-govt.is single buyer. Regulated monopoly : a monopoly firm whose behavior is overseen by a government entity . Monopolization : an attempt by a firm to dominate a market or become a monopoly. Types of Monopolies 12/9/2009 7 continued...

8. Monopoly: Equilibrium y = Q P MR Demand 12/9/2009 8 continued...

9. Monopoly: Equilibrium y P MC MR Demand 12/9/2009 9 continued...

10. Monopoly: Equilibrium y P AC MC MR Demand 12/9/2009 10 continued...

11. Monopoly: Equilibrium y P AC MC MR Output Decision MC = MR y m Demand 12/9/2009 11 continued...

12. Monopoly: Equilibrium y P AC MC MR Demand P m = the price y m P m 12/9/2009 12 continued...

13. Monopoly: Equilibrium Firm = Market Short run equilibrium diagram = long run equilibrium diagram ( apart from shape of cost curves ) At q m : p m > AC therefore you have excess (abnormal, supernormal) profits Short run losses are also possible 12/9/2009 13 continued...

14. Monopoly: Equilibrium y P AC MC MR Demand The shaded area is the excess profit y m P m 12/9/2009 14 continued...

15. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN PROFIT-MAXIMIZING CASE: A firm in the short run earns maximum profit when it meets the following conditions; MR = MC and MC curve cuts MR from below Average Revenue is greater than Average Total Cost. 12/9/2009 15 continued...

16. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN MC ATC AR MR Output Revenue/ Cost Profit AVC PROFIT-MAXIMIZING CASE: P E 12/9/2009 16 continued...

17. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN NORMAL PROFIT CASE: A firm in the short run earns normal profit when it meets the following conditions; MR = MC and MC curve cuts MR from below Average Revenue is equal to Average Total Cost. 12/9/2009 17 continued...

18. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN MC ATC AR MR Output Revenue/ Cost AVC NORMALPROFIT CASE: P E 12/9/2009 18 continued...

19. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN LOSS-MINIMIZING CASE: A firm in the short run minimize loss in following way; MR = MC and MC curve cuts MR from below Average Revenue is less than Average Total Cost but greater than AVC. 12/9/2009 19 continued...

20. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN MC ATC AR MR Output Revenue/ Cost AVC LOSS-MINIMIZING CASE: P E Loss 12/9/2009 20 continued...

21. A monopoly firm will be in equilibrium in long run and will earn Economic profit if; MC = MR and MC cuts MR curve from below AR is greater than Average Cost and There is no threat of new entry into the market If there is threat of new entry so monopolist will reduce prices and will earn only normal profit. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN LONG RUN 12/9/2009 21 continued...

22. EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN LONG RUN MC ATC AR MR Output Revenue/ Cost Profit AVC P E 12/9/2009 22 continued...

23. thank-you……. have a nice day. 12/9/2009 23 continued...