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Monopoly
Monopoly
 Monopoly is that situation of market in which
there is a single seller of a product.
 This situation of market Monopoly ,where a
single (mono) firm controls (poly) the
production of a commodity is called
monopoly.
Features of monopoly
 One seller and large number of
buyers-under monopoly there should be a
single producer of the commodity. thus, thee is
only one firm in monopoly and there is no
distinction between firm and industry.
 Monopoly is also an industry- under
monopoly situation ,there is only one firm and
the difference between firm and industry
disappears. There is no difference between the
study a firm and industry.
 Restriction on the entry of the
new firms- Under monopoly , there are
some restriction on the entry of new firms into
monopoly industry. There is no competitor of a
monopoly firm.
 Full control over price – Being a single
of the product a monopolist has full control over
its price. A monopolist thus is a price maker.
 No close substitutes- A monopoly firm
produces there is no close substitutes in this
market.
Determination of price and
equilibrium under monopoly
A monopolist is in equilibrium when he produces
that amount of output which yield him
maximum total profit. Under monopoly, price
and equilibrium are determined by two
different approaches:
1) Total revenue and total cost analysis
2) Marginal revenue and marginal cost analysis
Total revenue and total cost
analysis
 A firm is in equilibrium at that level of output where
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difference between TR and TC is maximum.
TC is total cost curve and TR, total revenue curve.TR curve
begins from point of origin o, TC begins from p.
The firm increases its production , total revenue is also
increasing . Then , in the beginning total revenue is less
than total cost. At point m , total revenue is equal to total
cost (TR=TC).
Point M is called ‘Break even point.’ when firm produces
more than point M, then its total revenue will be exceeding
its total cost (TR>TC).
When TP curve will reach its highest point ‘E’ then the firm
will be earning maximum profits. This amount OQ)will be
called equilibrium output.
COST/REVENUE
YY
X
N
M
P
Q
R
Marginal revenue and marginal
cost analysis
According to this analysis, a monopolist will be in
equilibrium when two conditions are fulfilled,
i.e .
(i) MC=MR and (ii)MC curve cuts MR curve from
below. A monopoly earns maximum profit
when he is in equilibrium.
(ii) In this fig. output is shown on ox-axis and cost
/revenue on oy-axis .
(iii) Point ‘E’ is an equilibrium point where MC=MR
and MC curve cuts MR curve from below.
Y
E
O
X
price determinaton under short
period or short-run equilibrium
 A monopolist will be equilibrium when he
produces that amount of output at which (i)
marginal cost is equal to marginal revenue
and (ii) marginal cost curve cuts marginal
revenue curve from below. A monopolist in
equilibrium may face any of the three
situation in the short-period ,viz., (1)super
normal profit ; (2)normal profit ; (3) minimum
loss.
Super normal profit

If the price (AR) fixed by the monopolist
in equilibrium is more than his average
cost(AC), then he will get super normal
profits.

If the price of equilibrium output is more
than average cost (AR>AC) then the
monopolist will earn super –normal
profit.

In this figure , the equilibrium at point E,
because at this point marginal cost is
equal to marginal revenue .

The monopolist will produce OQ units of
output and sell it at BQ price , which is
more than average cost BM by AB per
units . (AM-BM=AB).

Thus , in this situation the total super
normal profit of the monopolist will be
BCDP.
Normal profit

monopolist will produce OQ units of output
and sell it at BQ price , which is more than
average cost BM by AB per units . (AMBM=AB).

Thus , in this situation the total super normal
profit of the monopolist will be BCDP.

If the price (AR) fixed by the monopolist in
equilibrium is more than his average cost(AC),
then he will get super normal profits.

If the price of equilibrium output is more than
average cost (AR>AC) then the monopolist will
earn super –normal profit.

In this figure , the equilibrium at point C,
because at this point marginal cost is equal to
marginal revenue .
Minimum loss
 In the short run, the
monopolist may incur loss
also. If in the short-run price
falls due to depression or fall
in demand .
 In this figure , the monopolist
is in equilibrium at point E,
where MC=MR and produces
OQ2 output is fixed OP1
(FQ2).
 The firm will bear total loss
equivalent to GFHP2 as
shown by the shaded area.
Determination of long- run or
long –run equilibrium
 In the long –run , the monopolist will be in
equilibrium at a point where his long-run
marginal cost is equal to marginal revenue
(LMC=MR).
 In this figure , point E indicates the equilibrium of
the monopolist. At point E, MR=MC hence OQ
=(BQ). BQ being more than long-run average
cost CQ (AR>AC), the monopolist will get supernormal profit.
 The monopolist earns (BQ-CQ=BC) super normal
profit per unit. His total super –normal profit will
be BCDP as shown by shaded area.
Comparison between monopoly and
perfect competition
 Goals of the firms: A firms ‘s objective , whether operating under
perfect competition or monopoly ,is to earn maximum profit. A firm that aims at
maximizing profit is called a rational firm.
 Production: under perfect competition it is assumed that all firms
produce homogenous products. But monopoly firm not produce homogenous
products.
 Number of sellers and buyers: under perfect competition
there are large number of buyers and sellers of homogenous product. On the
contrary , under monopoly , there is only one sellers and large number of
buyers. Firm is also an industry under monopoly .
 Shape of demand curve: under perfect competition , due to large
number of firms and the assumption of homogenous product ,demand curve is
perfectly elastic. Under perfect competition ,average revenue (AR)curve is equal
to marginal revenue(MR).Firm therefore , is a price-taker. On the contrary ,
under monopoly ,average revenue (AR) curve slopes downward . In this case , AR
and MR curves are separate from one another as shown in figure , MR curve not
only slopes downward, but is below AR curve . Monopolist is the price- maker.
AR=MR
Price and output determination
or equilibrium under
discriminating monopoly
There are two conditions are following:(i) He must get same marginal revenue in both
markets.
MR1=MR2
(i) Equality between MR and MC
MR1=MR2=MR3
 In this figure(i)marginal cost of total output is
equal to combined marginal revenue.
 (ii) marginal revenue of both markets is equal
.
 (iii) marginal revenue of both markets is equal
to marginal cost of total output.
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