1. Project Submitted
On
“Micro Economic”
By
Sagar Vishwa
(BBA 1st Year)
106/10 civil lines,Ajmer 305001
Website: www.dezyneecole.com
CONTENTS
1

2. CHAPTER PAGES
1. Introduction of Monopoly Market ______________ 3
2. Monopoly Price Determination ________________ 3
3. Assumptions_______________________________3
4. Price and Output Determination _______________4
5. Short-run Monopoly Equilibrium_______________4
6. Marginal Revenue-Marginal Cost Approach______5
7. Long—run Equilibrium______________________5
8. Introduction Of Oligopoly Market______________6
9. Price Determination Under Oligopoly___________6
10. The Sweezy Method of Kinked Demand Curve
(Rigid Price)_____________________________7
11. Assumption_______________________________7
12. The Modal________________________________8
13. Changes in Costs___________________________9
14. Changes in Demand________________________10
15. Conclusion_______________________________10
2

3. INTRODUCTION OF
MONOPOLY MARKET
Monopoly is the form of market organization in which
there is a single firm selling a commodity for which there
are no close substitutes.
Monopoly Price Determination
Two types of pricing:
 Short-run.
 Long-run.
Assumptions
There are no close substitutes for the product.
There is one seller or producer of a homogenous
product.
The monopolist is a rational being who aims of at
maximum profit with the minimum of cost.
There is no threat of entry of other firms.
The monopoly price is uncontrolled. There are no
restrictions on the power of the monopolist.
3

4. Price and Output Determination
If the demand for his product is highly elastic. He
can sell more by small production in price if on the other
hand the demand is less elastic the tendency will be to rise
the price and profit more by selling price.
𝑬
MC = MR in monopoly price = MC
𝑬−𝟏
𝑬
AR = MR and MC = MR
𝑬−𝟏
𝑬
Monopoly Price = MC
𝑬−𝟏
Short-Run Monopoly Equilibrium
In the short-run the monopoly firm attains
equilibrium when its profits are maximised or losses are
minimised.
4

5. Marginal Revenue – Marginal Cost
Approach
In short-run monopolist can change the price and
quantity for occurring the profit but price cannot be below
the variable condition: IN SHORT-RUN
Super Normal Profit: P > SMC = MR
So the firm has a super normal profit.
Normal Profit: P = SMC = MR
In this case firm earn normal profit.
Minimum Losses: P < SMC = MR
In this case when price is less than SMC = MR. So the
firm is suffering from minimum losses.
Long-Run Equilibrium
In monopoly perform has always earn super normal
profit.
P > MR = LMC
5

6. INTRODUCTION OF
OLIGOPOLY MARKET
Oligopoly is a market situation in which there are a
few firms selling homogeneous or differentiated products.
It is difficult is pinpoint the number of firms in the
oligopoly market. There may be three, four of five firms.
It is also known as competition among the few.
Price Determination under Oligopoly
We shall confine our study to the non-collusive
oligopoly model or Sweezy (the kinked demand curve)
and to the collusive oligopoly models relating to cartels
and price leadership.
6

7. The Sweezy Model of Kinked demand
curve (Rigid Price)
Sweezy presents the kinked demand curve analysis to
explain price rigid cities often observed in oligopolist
market. Sweezy assumes that if the oligopolist firm
lowers its price, its rivals will react by matching that
price cut in order to losing their customers. Thus the firm
lowering the price will not be able to increase its demand
much. This portion of its demand curve is relatively
inelastic.
Assumptions
There are few firms in the oligopolist industry.
The product produced by one firm in a close
substitute for the other firms.
The product is of the same quality. There is no
product differentiation.
There are no advertising expenditure.
 Each seller’s attitude depends on the attitude of his
rivals.
7

8. THE MODAL
Given this assumptions the price output relationship
in the oligopoly market is explained in figure where
KPD is the kinked demand curve and OP0 the
prevailing price in the oligopoly market for the OR
product of one seller. Starting from point P,
corresponding to the current price OP0’ any increases in
price above it, will considerable reduce his sales, for his
rivals are not expected to follow his price increase. This
is so because the KP portion of the kinked demand curve
is elastic and the corresponding portion KA of the MR
curve will not only reduce his total sales but also his total
revenue and profit.
8

9. Changes in Cost
In oligopoly under the kinked demand curve
analysis, changes in costs within a certain range do not
affect prevailing price. In case the cost of production
rises the marginal cost curve will shift to the left of the old
curve MC and MC2. So long as the higher MC curve
intersects the MR curve within the gap upto point A, the
price situation will be rigid. However with the rise in
costs the price is not likely to remain stable indefinitely
and if the MC curve rises above point A, it will intersect
the MC curve in the portion KA so that a lesser quantity
is sold at a higher point.
We may conclude that there may be price stability
under oligopoly even when costs change so long as the
MC curve cuts the MR curves in its discontinuous
portion. However, chances of the existence of price-
rigidity are greater where there is a reduction in costs
then there is a rise in costs.
9

10. Changes in Demand
We now explain price rigidity where there is a change in
demand with the help of figure D2 is the original demand
curve MR is its corresponding marginal revenue curve
and MC is the marginal cost curve.
This case can be reversed to show increase in demand by
taking D1 and MR1 as the original demand and
marginal revenue curves and D2 and MR2 as the higher4
demand and marginal revenue curves respectively. The
price OP is maintained but the output rises from OQ1 to
OQ. So long as the MC curve continuous to intersect the
MR curves in the discontinuous portion, there will be
price rigidity.
CONCLUSION
The whole analysis of the kinked demand curve point out
that price rigidity in oligopolistic market is likely to
prevail if there is a price reduction move on the part of all
sellers changes in costs and demand also lead to price
stability under normal condition so long as the MC curve
intersects the MR curve in its discontinuous portion. But
price increase rather than price rigidity may be found in
response to rising cost or increased demand.
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