Monopoly

 INTODUCTION

 CHARACTERISTICS AND REASONS

 SOURSES OF MONOPOLY

 PROFIT MAXIMIZATION
Presented By:

 Eisha Zainab (19010920-025)

 Gulbaz Shehbaz (19010920-024)
 Ayesha Akram (19010920-040)
 Faizan Shabir (19010920-039)
Introduction to Monopoly

 The word monopoly is derived from the Latin word. “Mono” means single and
“poly” means seller.
 Monopoly is the form of organization in which there is only one seller of the
particular commodity.
 There is no close substitute of the commodity sold by the seller.

 Pakistani railway is best example of monopoly.

Features and assumptions of monopoly

 One seller and large number of buyers.

 Monopoly is also an industry.
 Restrictions on the entry of new firms.
 No close substitution.
 Price maker.
 Price discrimination/fluctuation.
 Downward sloping demand curve.
 Average revenue curve is also the demand curve of the monopoly market.
 P= AR= DC
Types of Monopoly

There are basic five types of monopoly:

1. Natural monopoly
2. Public monopoly
3. Legal monopoly
4. Private monopoly
5. Voluntary/joint monopoly
Graph of monopoly:

The End
Characteristics and reasons of Monopoly

 Characteristics
1. Single firm
2. No close substitute
3. Elasticity of demand
4. No competition
5. Market price
6. Barriers to entry
Characteristics of Monopoly
 Single Firm: A single firm is having full control over the production and supply
of a commodity service. Thus these is no different firm and industry.
 No close Substitute: there is no close substitute of the product in the whole
market.
 Elasticity of demand: cross elasticity of demand for the product is zero.
 No competition: A monopolist firm has no competition with any other firm
moreover, new entry in the business is not possible.
 Market price: Because the total quantity of commodity depends upon the
production of one firm only thus the monopolist can affect the price by his own
policy while increasing or decreasing the output and market supply.
 Barriers to entry: when the price is lowered down either due to increased
production or for the purpose of enchanting sales, AR and MR curves start
falling. thus these curves are negatively slope.
Reasons of monopoly

 Monopoly comes into existence due to some reasons:

1. Natural resources
2. Social welfare
3. Patents and copyrights
4. Technical know-how
5. Unity among entrepreneurs
6. Heavy and costly projects

The End
Five Sources of Monopoly

 There are five factors which alone or in combination can enable a firm to become
a monopolist.
1. Exclusive Control over Important Inputs
2. Economies of Scale
3. Patent
4. Network economies
5. Government Licenses of Franchises
Exclusive Control over Important Inputs

 Complete or large control over necessary inputs for production causes some
companies to be
 the sole power in an industry, as competitors cannot form due to the lack of
inputs.

Examples
 Rough diamond explorer
 Almost 40% of world diamond production by value
 Sales and marketing through the diamond trading company
 This company sales almost half of the world’s rough diamond by
Economies of Scale

 Economies of scale are cost advantages that large firms gain because of their size.
 Natural monopolies arise as a result of economies of scale. Natural monopolies
have overwhelming cost advantages over potential competitors.

Examples
 Local telephone service
 tap water company
 Gas network
Patent

 A patent typically confers the right to exclusive benefit from all exchanges
involving the invention to which it applies. Patents can be harmful and beneficial
for a market, as they gives rise to monopolistic powers, but without them some
inventions would simply not occur at all  

Example
 Drug prescription
Network economies

 Network externalities (also called network effects) occur when the value of a
good or service increases as a result of many people using it. Because of network
effects, certain goods or services that are adopted widely will appear to be much
more attractive to new customers than competing goods or services.

Example
 most people use Microsoft word processing software. While other word
processing programs may be available, an individual would risk running into
compatibility problems when sending files to people or machines using the
mainstream software. This makes it difficult for new companies to enter the
market and to gain market share.
Government Licenses of Franchises

 Government-granted monopolies and government monopolies differ in the

decision-making structure of the monopolist. In a government-granted monopoly,
business decisions are made by a private firm. In a government monopoly,
decisions are made by a government agency.
 In a government-granted monopoly, the government gives a private individual
or a firm the right to be a sole provider of a good or service.
 In a government monopoly, an agency under the direct authority of the
government itself holds the monopoly.
 In both types of government-initiated monopoly competition is kept out of the
market through laws, regulations, and other mechanisms of government
enforcement.
Example

 the Dutch East India Company provides a historical example of a government-

granted monopoly. 
 Around the world, government monopolies on public utilities,
telecommunications systems, and railroads have historically been common.
 Postal Service: The postal service operates as a government monopoly in many
countries, including the United States.

The End
Faizan Shabir
(19010920-039)

Profit Maximization
Introduction
 Profit is the making of gain in business activity for the
benefit of the owners of the business.
 Generally Profits are the primary measure of the success of
any business.
 Profit maximization is the short run or long run process by
which a firm determines the price and output level that
returns the greatest profit.
 Profit maximization refers to the sales level where profits are
highest. You might assume that the higher the sales level, the
higher the profits - but that is not always true!
Definition
 A process that companies undergo to determine the best
output and price levels in order to maximize its return. The
company will usually adjust influential factors such as
production costs, sale prices, and output levels as a way of
reaching its profit goal.
 There are two main profit maximization methods used, and
they are Marginal Cost-Marginal Revenue Method and Total
Cost-Total Revenue Method.
 Profit maximization is a good thing for a company, but can be
a bad thing for consumers if the company starts to use
cheaper products or decides to raise prices.
Important Terms
 Profit is defined as total revenue minus total cost.
Profit = TR – TC

 Profit: The money left over once you pay all of your bills out of
funds that come in from your customers. So for example, if you sell
5 necklaces for $5 each, and the cost to purchase the necklaces is
$3, you will have revenues (customer monies in) of 5 necklaces * $5
each = $25, and costs of 5 necklaces * $3 each = $15. Your profit
will be $25 revenue - $15 cost = $10 remaining.
 TR: This stands for ‘Total Revenue’. Total revenue simply means
the total amount of money that the firm receives from sales of its
product or other sources or the total amount of money the firm
collects in sales.
 TC: This stands for ‘Total Cost’. Its the cost of all factors
of production.
Important Terms
 MC: This stands for 'marginal cost,' which means
the per-unit cost of your item. Marginal cost is the
additional cost incurred in producing one more unit
of output.
 MR: This stands for 'marginal revenue,' which
means the per-unit selling price of your item.
Marginal revenue is the additional revenue earned
by selling one more unit of a product.
Profit Maximization
 To maximize economic profits, the firm should
choose the output for which
 Marginal Revenue is equal to Marginal Cost

 ie., MR = MC
Diagram of Profit Maximization

 A firm can maximize profits if it produces at an output where

Marginal revenue (MR) = Marginal cost (MC)
Reasons For Aiming At Reasonable Profit

 Preventing Entry Of Competitors

 Projecting A Favorable Public Image

 Restraining A Trade Union Demand

 Maintaining Customer Goodwill

Profit maximization for a monopoly
Diagram
Profit maximization for a monopoly

 In this diagram, the monopoly maximizes

profit where MR=MC – at Qm. This enables
the firm to make supernormal profits (green
area). Note, the firm could produce more and
still make normal profit. But, to maximize
profit, it involves setting a higher price and
lower quantity than a competitive market.
Profit maximization for a monopoly

 Note, the firm could produce more and still

make a normal profit. But, to maximize
profit, it involves setting a higher price and
lower quantity than a competitive market.
 Therefore, in a monopoly profit
maximization involves selling a lower
quantity and at a higher price. see
also: Diagram of monopoly
Thank You