Lecture Notes

Monopoly
Monopoly: Single Seller, No close substitutes, Barriers to entry.
Sources of Monopoly:

1. Control of entire supply of raw material

2. A firm may own a patent or copyright for a product or
production process
3. Natural monopoly: The size of the market may not allow the
existence of more than a single large plant. The technology may
be such as to exhibit substantial economies of scale, which
require only a single plant, if they are to be fully reaped, e.g., in
case of transport, electricity, economies can be realized at large
scales of output. In these conditions it is said that market
creates a ‘natural monopoly’, usually govt. undertakes the
production to avoid exploitation of consumer.
4. A monopoly is set up by a govt. franchise. A firm is set up as
the sole producer and distributor of a product or service, but is
subject to govt regulation.
The dd curve faced by a monopoly is usual downward
sloping.
The marginal revenue curve lies below average revenue curve
Short-run Equilibrium of a Monopolist:
The slope of MR curve must be less than the slope of MC
curve at the point of equilibrium.
3 Possibilities: Positive, Zero or Negative Economic Profits
There is no unique Supply curve for the monopolist.

Same quantity offered at different prices

depending on the price elasticity of demand.
Various quantities may be offered at same prices
Long run Equilibrium: Either Positive or Zero Economic
Profits (If losses, monopolist will not stay in business).

Depending on the market conditions, the monopolist may remain

at sub-optimal scale (falling part of LAC)
Or reach at optimal scale (minimum point of LAC)
Social Cost of monopoly
Comparison of Perfect Competition and Monopoly

1. Equilibrium output under PC > Equilibrium output under

Monopoly
2. Equilibrium Price under PC < Equilibrium price under
Monopoly
3. In the LR, Firms under PC can earn only Normal profits
4. Firms under PC, in the LR would necessarily produce at
minimum efficient scale (lowest point of LAC).
5. No unique supply curve under monopoly.
6. Social cost of monopoly: Dead-weight loss under monopoly

There is great deal of disagreement regarding the efficiency of

PC over Monopoly.