MONOPOLY

• Meaning:
• The word monopoly has been derived from the
combination of two words i.e., ‘Mono’ and ‘Poly’. Mono
refers to a single and poly to control.
• Monopoly refers to a market situation in which there is
only one seller of a commodity.
• Definition
• “Market form in which a single producer controls the
whole supply of a single commodity which has no close
substitutes.”
 MONOPOLY
• FEATURES
• There is single producer or seller of a product. The single producer
may be in the form of individual owner or a single partnership or a
joint stock company.
• There is complete absence of competition
• There are no close substitutes for the commodity it produces
• There are barriers to entry of new firm.
• Under monopoly there is no difference between firm and industry.
• Monopolist has full control over the supply of commodity. Having
control over the supply of the commodity he possesses the market
power to set the price. Thus, as a single seller, monopolist may be a
king without a crown. If there is to be monopoly, the cross elasticity
of demand between the product of the monopolist and the product
of any other seller must be very small.
 MONOPOLY
• TYPES
• Simple Monopoly and Discriminating Monopoly:
• A simple monopoly firm charges a uniform price for its output sold to
all the buyers. While a discriminating monopoly firm charges
different prices for the same product to different buyers. A simple
monopoly operates in a single market a discriminating monopoly
operates in more than one market.
• Natural Monopoly:
• When a Monopoly is established due to natural causes then it is
called natural monopoly. To-day India has got Monopoly in mica
production and Canada has got Monopoly in nickel production. These
Monopoly natures has provided to these countries.
• Voluntary Monopoly
• Voluntary monopoly arises from the combinations between different
producers. Cartels in Germany and trusts in USA are examples.
 MONOPOLY
• TYPES
• Legal Monopoly:
• When anybody receives or acquires Monopoly due to legal provisions
in the country it is legal monopoly. For Example: When legal
monopolies emerge on account of legal provisions like patents, trade-
marks, copyrights etc.
• Industrial Monopolies or Public Monopolies:
• In the general interest of the nation, when a government nationalizes
certain industries in the public sector, whereby industrial or public
monopolies are created. Example - arms and ammunition, atomic
energy and railways will be the sole monopoly of the Central
Government. Industrial monopolies are created through statutory
measures.
•
 MONOPOLY
• Pricing under monopoly
• Monopolist is a price maker not a price taker
• A Monopolist being the only producer and seller of that commodity
can determine its price and the output. He cannot do both the things
simultaneously. Either he fixes the price and leaves the output to be
determined by the consumer demand at that price or he can fix the
output to be produced and leave the price to be determined by the
consumers’ demand for his product
• Short Run Equilibrium of the Monopoly Firm: In the short period,
the monopolist behaves like any other firm. A monopolist will
maximize profit or minimize losses by producing that output for
which marginal cost (MC) equals marginal revenue (MR). Whether a
profit or loss is made or not depends upon the relation between price
and average total cost (ATC). It may be made clear here that a
monopolist does not necessarily makes profit. He may earn super
profit or normal profit or even produce at a loss in the short ran.
 MONOPOLY
• Conditions for the Equilibrium of a Monopoly Firm:
• There are two basic conditions for the equilibrium of the monopoly
firm.
• First Order Condition: MC = MR.
• Second Order Condition: MC curve cuts MR curve from below.
• in a short period, three different situations may arise before the
monopolist:
• (i) When the monopolist earns abnormal profits,
• (ii) When he gets only normal profits, and
• (iii) When he suffers losses.
•
 MONOPOLY
• SHORT RUN EQUILIBRIUM WITH ABNORMAL PROFITS

In this diagram, the monopoly firm is in equilibrium at t K where SMC

= MR. The short run marginal cost (SMC) curve cuts MR from below. At
point K both the equilibrium conditions are fulfilled. As a result,
therefore, OE is monopoly price and OB, the monopoly output. At the
monopoly output OB, the average total cost OF = BN. The profit per
unit is FE. The short run monopoly profit is ETNF
 MONOPOLY
• SHORT RUN EQUILIBRIUM WITH NORMAL PROFITS

In the figure a firm is in the short run equilibrium at point K, where

SMC = MR. The price line is tangent to SAC at point C. The firm charges
CB price per unit for units of output OB. The total revenue of the firm
is equal to the area OPCB. The total cost of the firm is also equal to the
area OPCB. The firm earns only normal profits and continues
operating.
 MONOPOLY
• SHORT RUN EQUILIBRIUM WITH LOSS

In thE figure above, the best short run level of output is OB units which is given by
the point L where MC = MR. A monopolist sells OB units of output at price CB. The
total revenue of the firm is equal to OBCF. The total cost of producing OB units is
OBHE. The monopoly firm suffers a net loss equal to the area FCHE. If the firm ceases
production, it then has to bear to total fixed cost equal to GKHE. The firm in the
short run prefers to operate and reduces its losses to FCHE only. In the long, if the
loss continues, the firm shall have to close down.
 MONOPOLY
• LONG RUN EQUILIBRIUM
•

In the long run, all the factors of production including the size of the
plant are variable. A monopoly firm will maximize profit at that level
of output for which long run marginal cost (MC) is equal to marginal
revenue (MR) and the LMC curve intersects the MR curve from
below. In the figure (16.6), the monopoly firm is in equilibrium at
point E where LMC = MR and LMC cuts MR curve from below. QP is
the equilibrium price and OQ is the equilibrium output.