Monopoly single producer strong barriers to entry price marker no close substitute discriminates the price

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1 Monopoly A monopoly market form exists when the output of an entire industry is produced and sold by a single firm. he word monopoly is derived from two Greek words monos means one and polein means to sell. herefore, monopoly is market characterized by a single seller, who can charge different price for his product by changing the quantity of output.as a result a monopolist has total control over price and the quantity he offers for sale. From the above definition we can bring forth several important characteristics of monopoly. a) In monopolistic form of market there is a single producer, selling a product which does not have close substitutes, b) here are strong barriers to entry of other firms into the market, c) A monopolist is a price marker he can decide the price of his product by increasing or decreasing the output, d) he product has no close substitute, and e) A monopolist discriminates the price. rice and output determination under monopoly Monopolist like a perfectly competitive firm tries to maximize his profit. his is to say that the motive of a monopolist is same as the motive a perfectly competitive firm. A firm under perfect competition faces a horizontal straight line parallel to x-axis demand curve and M=A.Where as a monopolist faces a downward sloping demand curve or A curve. It should be noted that the M curve of a monopolist lies below the A curve. his is because a monopolist can decide the price of his product and profit maximization is his objective so he will sell lesser quantity at higher price and higher quantity at lower price. With help of equilibrium a monopolist is able to determine the profit maximizing output. he producer will continue producer as long as marginal revenue exceeds the marginal cost. At the point where M is equal to M the profit will be maximum and beyond this point the producer will stop producing.

2 nder monopoly there are two types of equilibrium, short run and long run. hey are explained as under - quilibrium under short run: During short run there are three possibilities under the monopoly market form. hey are as follows - i) Abnormal profit ii) ormal rofit iii) Loss rice and output determination under these three scenarios is explained below hort run equilibrium-abnormal profit he average revenue curve of the firm is downward sloping straight line. And marginal revenue is lying half way between A curve and y- axis. As shown in figure 1 M and M are equal at point. he monopolist is in equilibrium at where both first order (M=M) and second order (M cuts M from below) conditions are fulfilled. Figure 1- short run equilibrium - Abnormal profit M A A 0 Q M

3 he firm produces equilibrium output Q at price. Firm earns total revenue of Q where as its total cost is Q. he difference between total revenue and total cost is. hus the firm makes more than normal profit equal to the area. hort run equilibrium - ormal rofit In figure 2 both the conditions of equilibrium [first order (M=M) and second order (M cuts M from below)] are satisfied of point and the total revenue of the firm is equal to total cost. M A A 0 Q M he firm produces equilibrium output Q at price. he total revenue of the firm is Q and the total cost is also the same. hus = and the monopolist is earning only normal profit.

4 hort run equilibrium - Loss A monopolist operating during short run may also incur losses as shown in figure 3. hough both the conditions of equilibrium are satisfied at, firm s total revenue is less than total cost. Figure 3: hort run Losses. M A A 0 Q M he total revenue is Q and total cost is Q. As the is greater than, the monopolist loss is equal to the shaded portion. Long un quilibrium: During long run when a monopoly firm is in equilibrium, the industry is also in equilibrium. nder perfect competition if a firm is making abnormal profit during short run, more firms will join the industry and during long run the abnormal profit will disappear. But in monopoly, due to entry barriers this is not possible.

5 In the long run, the monopolist can change the size of plant in according to a change in demand. He will also make adjustment in the amount of the factors, fixed and variable, so that M equals not only to short run M but also long run M. he long run equilibrium of the firm is explained with the help of figure 4. It can be seen in figure 4 that till Q output, marginal cost is less than marginal revenue and beyond Q the marginal cost is greater than marginal revenue. hus Q is the equilibrium output of the monopolist where marginal revenue is equal to marginal cost and the profits are the maximum. he equilibrium determines the prices or Q. It can be seen from the diagram at output Q, while Q is the average revenue, Q is the average cost, therefore, is the profit per unit. M 0 Q M Figure 4 : Long run equilibrium of a monopolist A A

6 ow the total profit is equal to (profit per unit) multiplied by Q (total output). In other words the total revenue of the firm is Q and the total cost is Q. he difference between and (as is greater than ) is total profit i.e..

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