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- 1. MONOPOLY.REPRESENTED BY:-Prof. S.D.BHARDWAJAND PROF. BHAWANA BHARDWAJ
- 2. MONOPOLY The word monopoly has been derived from greek words, Mono+Pollein which means single control. Monopoly is a market situation in which there is a single producer of a commodity which has no close substitutes. According to Leftwitch, “ Pure monopoly is a market situation in which there is a single seller of a particular product for which there are no good substitutes.”
- 3. In the words of Stonier and Hague, “ A monopolist is the sole producer of his product and the distinction between the firm and the industry, both producing, the same product so important in perfect competition goes.” According to E.H.Chamberlin, “ In monopoly, there is only one seller of the product and he has full control over its supply.”
- 4. FEATURES OF MONOPOLY There is only one seller of the product, who has full control over the supply of the commodity. No close substitutes of the commodity are available in the market i.e. cross elasticity of demand for the product is zero. There is no difference between firm and industry.
- 5. Revenue curves of the monopolist are downwards sloping from Left to Right i.e. the monopolist has to reduce the price to increase the sale of his product. Epx<1 AR,MR AR(D) o MR x Output
- 6. Complete restrictions is imposed onthe entry of the firm in the industry.No selling costs are incurred by themonopolist.Price discrimination is possible inmonopoly.Excess capacity exists in monopoly i.e.scarce resources are not optimallyused.
- 7. Basic foundation of monopolypower.Legal Prohibition:- firms are prohibited to enter in industry by laws like railways,atomic energy and defence services. It will continue till the law is not changed.Natural monopoly:- when a firm has full control over the supply of raw materials of a commodity is called natural monopoly.
- 8. Combination:- when firms join hand together i.e. they form a cartel it is called combination monopoly. It may be voluntary or compulsory of forced. Good will and Good reputation of a firm:- If a firm enjoys a high reputation and good will the other firms cannot enter in the industry. All types of monopoly are short lived except social monopoly i.e, legal monopoly.
- 9. A monopolist can earn maximum profits only at that level of output at which the gap between TR and TC is maximum. Therefore, he tries to find out this level of output by fixing different prices. In this way he can attain the equilibrium situation where slope of TC= slope of TR which can be explained with help of the following diagram:-
- 10. AIMS OF MONOPOLIST AND WAYSTO ACHIEVE THEM.Though the monopolist has full control over the supply but has no control on the demand would that he could control demand he would have been the God of the earth,but it is not impossible, therefore,he also follows the same conditions of equilibrium:-
- 11. TOTAL REVENUE AND TOTAL COST APPROACH:- Amonopolist can earn maximum profits only at that level ofoutput at which the gap between TR and TC is maximum.Therefore he tries to find out this level of output by fixing different prices.In this way he can attain the equilibrium Situation where Slope of TC= Slope of TR which can be explained with the help of following diagram:-
- 12. MARIGINAL APPROACH As the slope of TR which is∑MR=Slope of TC whichis∑MC, therefore the monopolist will also be in equilibrium with the help of mariginal approach and will earn maximum profits. When he satisfies the following two conditions,i.e. MC=MR and MC cuts MR from below. i) Market period price determination under monopoly:- Market period is a period in which monopolist has no time to produce the commodity, therefore supply is limited Upto the existing stock of the commodity with the monopolist. Hence he would like to charge such a price for his product at which is TR is maximum when MR is zero.
- 13. Market period price determinationunder monopoly. Market period is a period inwhich the monopolist has no time toproduce the commodity, therefore supplyis limited upto the existing stock of thewith the monopolist. Hence, he would liketo charge such a price for his product atwhich has TR becomes maximum. AsTR=∑MR therefore TR will be maximumwhere MR is zero.
- 14. Y AR0 M M1 MR X
- 15. Costs curves are not shown as there is no production possible in market period. Therefore the monopolist will sell his output upto that level at which TR is maximum. Suppose his stock is OM. If he wants to sell all his stock is OM, he has to charge P1M1 price. But here his TR will not be maximum and will charge P1M1 price. In this way M1 M stock of his commodity will remain unsold. He can also fix reserve price for durable commodity by keeping in view the cost of its storage,rate of interest,liquidity prefernce,law of returns and future expected price etc.
- 16. PRICE AND OUTPUT DETERMINATION INSHORT RUN UNDER MONOPOLY Shortrun is a period in which the monopolist cannot change the fixed factors like plant and machinery etc, therefore he can make change in supply only by changing the variable factors alone. Therefore he remains unable to adjust supply according to the market demand for his product. As a result there are possiblities that the monopolist may earn abnormal or supernormal profits or normal profits or he may sustain losses in the short run.
- 17. THERE ARE THREE POSSIBILITIES ARE EXPLAINED BELOW:ABNORMAL OR SUPER NORMAL PROFITS:-IF THE MONOPOLIST IS INEQUILIBRIUM(MC=MR AND MC CUTS MR FROM BELOW) AT THAT LEVELOF OUTPUT AT WHICH THE PRICE(AR) DETERMINED BY HIM IS MORETHAN HIS AVERAGE COSTS, HE WILL EARN ABNORMAL ORSUPERNORMAL PROFITD,WHICH CAN BE EXPLAINED WITH THE HELP OFFOLLOWING DIAGRAM:- Y Abnormal profits= TR -TC = AR X Q- AC XQ = PM X OM- TM X OM = OMPP1-OMTS =STPP1 C,R,P SMC SACAbnormal Profits P1 P P P1 S t Q 0 X OUTPUT M
- 18. NORMAL PROFITS. Y SMC SAR=SAC=PM. P= AVC P SAC R AVC Q SAR 0 M x Output
- 19. LOSSES Y SMC SAC LOSSES. S T P is the shut down AVC point for the monopolist.C,R,P P1 P (Price OP1=AVC(PM)). SAC(TM)>SAR(PM) LOSSES= STC-STR = SACXQ- SARXQ Q = TM X OM- PMX OM = OMTS-OMPP1=P1PTS SMR SAR 0 M OUTPUT X
- 20. INCREASING RETURNS TO SCALE. Y ABNORMAL PROFITSC,R,PAB.PROFITS P1 P S T Q LMC LAC LMR LAR 0 M Output x
- 21. LAW TO CONSTANT RETURNS TOSCALE. Y Abnormal Profits P1 PC,R,P S Q LAC=LMC 0 M Output x
- 22. LAW OF DIMINISHING RETURNSTO SCALE. y LMC ABNORMAL PROFITS LAC P1 PC,R,PAB.PROFITS S T 0 M Output x
- 23. DETERMINATION OF MONOPOLY PRICE OF A COMMODITYWITH ZERO COST OF PRODUCTION. It is an extreme situation in which a monopolist does not incure any cost of production to produce a commodity. Suppose a monopolist has the patent- right of producing a natural mineral water, whose cost of production is zero. He will fix its price at that level of output at which his MR is zero,where, his profits will be maximum.
- 24. y ABNORMAL PROFITSRevenue Price P1 P AR(D) Q 0 MR Output x
- 25. Measurement of Monopoly Power Monopoly Power refers to the degree of control which a producer or seller possesses over the price and output of a commodity. It means the power to influence the quantity of output and price on the part of the monopolist is known as monopoly power.
- 26. LERNER’S MEASURE. Prof. A.P. LERNER suggested the following measure to determine the monopoly power. Monopoly Power= (P-MC/P) Monopoly Power= AR-MC Price=AR AR The firm will be in equilibrium when its MC=MR, Therefore, monopoly power= AR-MR AR
- 27. In perfect competition AR=MR Monopoly power of a firm=AR-MR = 0 =0 AR AR• We know that MR= ARX(e-1)------(2)• e {e=elasticity of demand}• By putting the value of MR from eqn.(1) we get• Monopoly power= AR- ARX(e-1)• e• AR
- 28. Monopoly Power= AR-(e AR-AR) 1 e AR =e AR-e AR+ AR = AR e e AR AR AR X 1 = 1 e AR e Monopoly Power= 1/e
- 29. BAIN’S MEASURE Prof. J.S.BAIN has used the rate of super- normal profits as a measure of monopoly power,i.e.,monopoly power is measured by the difference between AR(price)and Average Cost,greater will be the monopoly power. A firm under perfect competition earns only normal profits in equilibrium in the long run. Its super normal profit is zero, hence its monopoly power is also zero. But a monopolist always earns super-normal profits he earns,greater will be his monopoly power.
- 30. TRIFFIN’S MEASURE Prof.N.Kaldor suggested to measure the monopoly power with the help of the concept of elasticity of demand for the first time. Later on Prof. Robert Triffin developed a theory of cross elasticity of demand explains the dependence of demand for the product of a firm to the price of a commodity produced by the other firm.
- 31. Lesser the coefficient of cross elasticity of demand for the commodity produced by a firm , greater will be the monopoly power of this firm and vice-versa. According to Triffin and other economists cross elasticity of demand is infinity under perfect competition, hence monopoly power is zero whereas cross elasticity of demand is zero in pure monopoly, hence monopoly power is infinity. But these are two extreme limits between which cross-elasticity of demand lies. Lesser the coefficient of cross elasticity of demand, greater will be the degree of monopoly power of a firm and vice-versa.
- 32. Features of Monopoly Price The monopoly price is always greater than marginal cost,because AR>MR,in the equilibrium MC=MR therefore price or AR>MC. The monopoly price is never the highest price because the monopolist charges that price at which his total super normal profits are maximum i.e.,where MC=MR and MC cuts MR from below.
- 33. The monopolist fixes higher price if Epx of his product is less than one and vice-versa. Excess capacity exists in monopoly because production is stopped by the monopolist where his MC=MR and MC cuts from below and there AC is still falling, therefore,he never produces at minimum average cost. So he never fixes the lowest price. He is always interested in maximising his profits and not minimising the cost.
- 34. According to M.M.Bobber, “ The monopolist does not produce a commodity but produces the profits.” The elasticity of AR or demand curve will be greater than one at the point of equilibrium. e= A = A = A A-M A-(something+ve) less than A
- 35. Ordinarily monopoly price is higher than competitive price but under certain circumstances, the monopolist can charge even lower price than competitive price. E.g. when he enjoys the economies and benefits of large scale of production. When there is a fear of potential competitors to enter into the industry. When he is keen to have respect in society. When he is able to borrow sufficient capital at a very low rate of interest.
- 36. MULTIPLANT MONOPOLY. The multiplant monopoly refers to that situation in which a monopolist produces his output with two or more plants producing identical goods. The main aim of the monopolist is to earn maximum super-normal profits. In order to produce the profit maximisation output, the monopoly firm will operate each plant in such a way the marginal cost(MC)in each plant is equal to his MR.
- 37. ASSUMPTIONS: The monopolist produces with two plants X and Y. Both the plants produce identical goods. Plant X is more efficiency than Plant Y. The cost structure is different in both the plants. The monopolist has the complete knowledge of the market demand curve and the corresponding marginal revenue curve.
- 38. The monopolist fixes the same price for the output of both the plants. Since the two plants are not equally efficient, therefore, the monopolist would have two cost-functions representing the two plants.
- 39. Multiplant Monopoly. y MCx MCy P1 P MCx+ MCyC,R,PAb. Profits s Q MR AR(D) 0 Output x
- 40. The total marginal cost curve (MCx+Mcy) is equal to MR at Q also its cuts MR from below. It means the monopolist is equilibrium at Q also its cuts MR from below. It means the monopolist is in equilibrium at Q producing total output OM at PM price.We draw a perpendicular QS from Q on y-axis which intersect MCx at Qx determining OMx output for x-plant and it intersect MCx at Qx determining OMx output for Y-plant. We know plant X is more efficient than plant Y. Therefore MCx<Mcy. Hence , the monopolist will transfer some unit of output to be produced from plant Y to plant X in such way that MCx=MCy
- 41. The profit of the monopolist is the difference between his TR(Total revenue) and his total cost of production for both the plants. Thus the equation of total pr of it can be written as given below: r=R(Mx+My)-Cx(Mx)-Cy(My). where Mx and My are the Quantity of output produced in plants X and Y respectively. R(Mx+My) is his total revenue function. Cx(M)x and Cy(M)y are his cost functions for two separate function. Cx(Mx) and Cy(My) are his cost functions for two separate functions for two separate plants.
- 42. For profit maximisation we set the partial derivatives of the monopolist profit function equal to zero.∂r =R’(Mx+My)-Cx’(Mx)=0-------------(1)∂MxWhere Mx and My are the Quantity of output produced in plants X and Y respectively. R(Mx+ My) is his total revenue function. Cx(Mx) and Cy(My) are his cost function for two separate function∂r =R’(Mx+My)-Cx’(Mx)=0--------------(2)∂My
- 43. Since R’(Mx+My) represents the monopolist MR and Cx’(Mx) and Cy’(My) depict the the marginal cost of the two plants. From equation(2) and equation(3) we may conclude that marginal cost of two plants is equal to marginal revenue and MC cuts MR from below thus the monopolist will earn maximum profit when MR=MCx=Mcy=MCx+MCy.

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