Riphah International University

Faculty of Management Sciences

Riphah School of Leadership
Final Term Examinations – BBA/BS/B.Com
Fall-2020

Subject : Principles of Microeconomics Teacher Name: Ikram Ullah

Marks: 100 (weightage 40) Time Allowed : 3 hours

Instructions:
1. Carefully read the paper and attempt all questions.
2. it’s an open book exam, so avoid plagiarism. Present your own ideas and learnings from this subject.
3. Its preferred to write the answers in MS Word Format and then upload on Moellim.

Q – 1 : Discuss in detail with examples the factors which shifts the Demand Curve.

(Marks 20)
Ans: Normally, the demand for a product decreases as its price goes up. On the contrary
,demand increases as its price declines. However, other factors can cause the demand curve
to shift to either the right, which indicates increased demand, or to the left, which indicates
decreased demand. These factors represent fundamental shifts in the marketplace.
Q – 2: The market for Pizza has the following demand and supply schedules:

a. Make a diagram showing demand and supply curves. Highlight equilibrium price and
quantity in this market?
b. If the actual price in this market is low/below the equilibrium price, what would drive the
market toward the equilibrium? (Marks 20)
Q – 3: Given the following Demand (Qd) and Supply (Qs) functions:
Qd = 60 – 2 P
Qs = 15 + P
i) Find Equilibrium Quantity and Price (Marks 10)

ii) Find values of Qd and Qs by making a table with putting values of P as (5, 10, 15, 20 and
25) with explanation. (Marks 10)
iii) Make a diagram with explanation showing Equilibrium Quantity (Q) and Price (P).

(Marks 20)

Q – 4: Discuss the topic of your presentation in detail (chapter assigned for presentation).
(Marks 20)

********************

Write up of Chapter 15 Monopoly

Submitted by :Syed Husnain Ali
Sap ID :25831
Submitted to : Professor Sir Ikramullah
Sahib
 Monopoly
A monopoly is a market situation In which there is one
seller large number of buyers and no close substitute
When there is only one producer in a market, a
monopoly exists.Like Pakistan railway has no close
substitute ..

Why monopoly arise

Barriers to entry have three resources
A single firm own key resources :Key resources are
required for production .If key resources are captured by
single firm then Once Upon a time there is a person in
knowledge monopoly will be created .
For example :A classical example of market power arising
from the ownership of Key resources is DeBeers ,the
south African diamond company South African company
the Debeers has at times controlled up to 80% of the
production From the worst diamond minds although its
market share is less than 100% yet it created monopoly
to some extent
Government Created monopoly :Sometimes government
gives afirm exclusive right to produce goods . Like Patent
or copyright .And that firm monopoly is created. Like in
current situation suppose a pharmaceutical drug
company make original corona vaccine then
government will give that company a patent .And that
drug company monopoly will be created.Suppose a
novelist publish a novel .He will demand to government
to give him copyright law As no one can copy his novel.
monopoly will be arised.
Natural monoply:Natural Monopoly Arises Because a
single firm can produce goods at a lower price than two
or more firm.
A natural monopoly arises when there are economies of
scale greater than over the relevant range of output
economics of scale means when there is increase in
production the cost will be lowest .
Examples : Electric company _(Wapada)
Figure 15-1: Economies of Scale as a Cause of Monopoly
    Monopoly vs. Competition: 
In a competitive market, the market demand curve slope
s downward. but the demand curve for any individual fi
rm’s product is horizontal at the market price. Because 
a competitive firm sells a product with many perfect su
bstitutes, the demand curve any firm faces is perfectly e
lastic.  The firm can increase Q without lowering P,so 
MR = P  for the competitive.
A monopolist is the only seller, so it faces the market d
emand curve. As monopolist is single seller has market
power he can influence price .
To sell a larger Q, the firm must reduce P.  Thus, MR 
≠ p. A monopoly’s 
revenuep= AR, same as for a competitive firm.Here, M
R < P, whereas MR = P for a competitive firm.
A monopoly revenue :
.When a monopoly increases the amount it sells by
one unit, there are two effects on total revenue P 
Q.
The output effect: when an additional unit of output
is sold, the monopolist charges a price for it.
Therefore, total revenue increases by P, the price.
The price effect: to sell the additional unit, the price
must be reduced MR < P. Therefore, total revenue
from the units that the monopolist would have
decreases.
The overall effect will depend on the price elasticity
of demand.
If demand is elastic—that is, PED > 1—an increase

in output is accompanied by an increase in total

revenue. It is wise to thoroughly understand
marginal revenue as a key piece of information in
this pricing process. It can be derived several ways.
First, it is the first derivative of the total revenue
function. Second, when price is reduced, marginal
revenue is the difference between the extra money
gained from the new sales that occur and the
revenue lost because previous items sold must be
sold at a lower price.
Profit Maximization:
For any firm, the profit-maximizing quantity supplied
is that at which marginal revenue equals marginal
cost: MR = MC
In equilibrium, quantity supplied = quantity
demanded
A monopoly firm then uses the demand curve to find
the price that will induce consumers to buy the profit-
maximizing quantity.

The demand curve shows the price consistent with the

quantity .The intersection of the marginal revenue curve and
marginal cost curve determines the profit maximizing
quantity .The price greater then marginal revenue and equal to
marginal cost in equlibrium.The rectangle below the demand
curve shows profit maximization of monopolist. As price is
increased, total cost drops because less output
needs to be produced. When both revenue and cost
drop, it is important to know which is dropping
faster. As long as costs are falling faster than
revenue, profit is increasing. At the point where
both drop by the same amount, profits are
maximized.
The Welfare cost of Monopolies:
Dead weight loss.
Deadweight loss is the cost to society created by market
inefficiency when supply and demand are out of
equilibrium .
As monopolist set its prices above marginal cost in order
to maximize its profit that creates a wedge between
consumer willingness to pay producer.
Dead weight loss is a excess burden for society .As
monopolist higher price makes him profitable but it
becomes undesirable for consumer .We also call
deadweight loss social cost because it affects the entire
society adversely .
The dead weight loss is represented by the area of
triangle between the demand curve ( which reflects the
value of good to buyer) and the marginal cost curve which
reflects the cost of the monopoly producer. As monopolist
charges high price the quantity produced and sold by
monopolist is below the socially efficient level.

Price Discrimination:
Price Discrimination :Price discrimination is the
business practice of selling the same good at
different prices to different customers, even though
the cost of production is the same for all customers.
Examples:
Match tickets: In stadium match tickets price
discrimination practices is followed .Front seats
ticket price is high as compared to last seats.
Electric bills: Commercial bills units price is high as
compared to homes bill unit price.
Figure a shows monopolist that charges the same
price to all consumers. Total surplus in the market
equals the sum of profit producer and consumer
surplus .
Figure 2 shows perfectly price discrimination
because consumer surplus zero and total surplus
now equals the firm profit .

Important effects of price discrimination :

It increases monopolist profit.
It reduces deadweight loss.
Under perfect price discrimination deadweight loss
is zero.
Enhance economic welfare .
Public policies towards monopoly :
Governments may respond to the problem of monopoly in
one of four ways.
Making monopolized industries more competitive.
Regulating the behavior of monopolies.

Turning some private monopolies into public enterprises.

Doing nothing at all.
Increasing competition with antitrust laws:
Antitrust laws are laws aimed at curbing monopoly power.
Antitrust laws give government various ways to promote
competition.
They allow government to prevent mergers.
They allow government to break up companies.
They prevent companies from performing activities that
make markets less competitive.
Two Important Antitrust Laws
Sherman Antitrust Act (1890)
Reduced the market power of the large and powerful
“trusts” of that time period.
Clayton Act (1914)
Strengthened the government’s powers and authorized
private lawsuits
Regulation:
Government may regulate the prices that the monopoly
charges.
Example: ConEd, LIPA, etc.
The regulator may force the monopolist to implement the
efficient outcome
Recall that the allocation of resources is efficient when
price is set to equal marginal cost (P = MC).
But it might be difficult for government regulators to force
the monopolist to set P = MC
In practice, regulators will allow monopolists to keep some
of the benefits from lower costs in the form of higher profit
This requires some departure from marginal-cost pricing.
Public ownership :
Rather than regulating a natural monopoly that is
run by a private firm, the government may run the
monopoly itself
e.g. in the United States, the government runs the
U.S. Postal Service.
The prevalence of monopoly :
How prevalent are the problems of
monopoly

– Monopolies are common. Most firms have some

control over their Prices because of differentiated
products.Firms with substantial monopoly power are
rare. Few goods are truly unique.