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Me Market Structure Monopoly M7

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  • 1. MONOPOLY
  • 2. Meaning of Monopoly
    • Any condition which gives individual sellers, or groups of sellers acting as a unit, some measure of direct control over price is to some degree monopolistic.
    • Any such control on the part of buyers is monopsonistic.
  • 3.
    • The type of monopolistic and monopsonistic situations may be distinguished according to the deviation from conditions of perfect competition such as
    • Monopoly and Monopsony
    • Monopolistic Competition
    • Oligopoly and Oligopsony .
  • 4. Monopoly
    • Monopoly is a form of market structure in which a single seller or firm has control over the entire market supply, as there are no close substitutes for his products and there are barriers to the entry of rival producers.
    • The sole seller is called a Monopolist.
  • 5. Features of Monopoly
    • Single Firm – So firm and industry are identical.
    • No substitute – There are no close substitutes for the product. So no choice for the buyers. Either buy or do without it.
    • Anti-thesis of competition : Being a single source of supply, there is no competition from any source.
  • 6. Features of Monopoly
    • Single Firm – So firm and industry are identical.
    • No substitute – There are no close substitutes for the product. So no choice for the buyers. Either buy or do without it.
    • Anti-thesis of competition : Being a single source of supply, there is no competition from any source.
  • 7. Features of Monopoly(contd.)
    • Price Maker : A monopolist is a price-maker and not a price-taker. His price-fixing power is absolute. He can vary price from buyer to buyer as per his wish. Thus there may be price differentials in a monopoly.
    • Downward Sloping Supply Curve :Monopoly and the industry being one, it face a downward sloping demand curve. Thus, it cannot sell more output unless price is lowered.
  • 8. Features of Monopoly(contd.)
    • Entry barriers : There are no rivals due to certain entry barriers – which may be legal, technological, economic or natural obstacles , which block the entry of new firms.
    • Price-output determination : Having no substitute product or competitor, monopolist can fix the price as well quantity of output.
  • 9. What makes a Monopoly?
    • 1. Natural Source – Natural skill of a surgeon, lawyer, singer or actor.
    • Public utilities.
    • Exclusive ownership of a single source –
    • De-beers controls 80% of world’s diamond supply.
  • 10. What makes a Monopoly?
    • 2. Exclusive possession of Technical Knowledge.
    • 3. Exclusive ownership of raw materials.
    • 4. Legal sources – Patents, copyrights and trade marks grant monopoly by obstructing entry of competition.
    • 5. Economies of large scale. Competition unable to produce at the low cost – achieved through mass production.
  • 11. What makes a Monopoly?
    • 6. Business reputation.-Long standing established firms.
    • 7. Business combines – cartels, syndicates, trusts, pools, holding companies, joint monopolies ar created by big business houses to capture economic power. Business combines are made to eliminate competition. (Mittal-Arcelor).
  • 12. What makes a Monopoly?
    • 8. Creation of artificial barriers to new competition: adopting tactics like limit-pricing policy, heavy advertising, contiuous product differentiation.
  • 13. How does a Monopolist determine price and output.
    • Perfect Monopoly Model :Assumptions:
    • Single seller
    • Total supply is controlled by one seller.
    • No competition
    • No substitute products.
    • Demand curve is downward sloping.
    • Price Maker.
    • Firm attempts to maximise profits.
  • 14.
    • The monopolist has to make two decisions:
    • To determine the price to be charged.
    • To determine the equilibrium/optimum level of output.
    • The monopolist cannot have independent decisions about both price and output. He can either decide the quantity to be produced or the price to be charged, but not both as per his choice.
    • Being interested in profit maximisation, he follows the behavioural rule of equating marginal cost with marginal revenue to maximise profits.
  • 15.
    • Short-run Monopoly Equilibrium
    AR MR MC AC Price, Cost, Revenue Output PROFIT
  • 16. Monopoly price-output decisions
    • Illustration:
    • A monopoly firm’s demand and cost functions are as under:
    • Q = 100 – P
    • TC = 100 – 10Q + 20Q 2
    • Q = Quantity demanded 1000 units
    • P = Price TC = Total Cost
    • P = 100 – Q
    • TR = P x Q = Q (100 – Q) = 100Q – Q 2
    • MR = 100 – 2Q and MC = -10 + 40Q
    • Profit Maximisation Rule : MC = MR
    • -10 + 40Q = 100 – 2Q
    •  42Q  Q = 2.62 = 26,200 units.