There are four basic types of market structures by traditional economic analysis: perfect competition monopolistic competition oligopoly monopoly A monopoly is a market structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutesfor the product, then the market structure is that of a "pure monopoly"
MEANING OF MONOPOLY A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is business entity that has significant market power, that is, the power, to charge high prices.
Characteristics Profit Maximize Price Maker High Barriers to Entry Single seller and large no of buyers Price Discrimination Monopoly is Also an industry Demand curve under monopoly is downward sloping No selling cost required
How is Short run equilibrium of monopoly is determined? Short run is a period in which monopolist can change only variable factors. Fixed factors like machinery, plant cannot be changed. If demand increases monopolist will utilize fixed factors to their maximum capacity and using more of variable factors.
A monopolist will be in equilibrium when 2 conditions satisfied:- MC=MR MC cuts MR from below Monopolist in equilibrium may face 4 situations in short period:- Super normal profit- AR>AC Normal profits- AR=AC Minimum losses- AR<AC but AVC is covered Shut down point- AR<AVC
SUPER NORMAL PROFIT AR>AC monopolist will get super normal profits
DETERMINATION OF LONG RUNEQUILIBRIUM UNDER MONOPOLY Long run is a period when monopolist can vary all the factors and supply can be increased in response to increase in demand. 2 conditions need to be satisfied long run MC is equal to MR long run MC cuts MR from below
In long run a monopolist is not contented only with normal profits, rather it is in position to earn S.N.PThus fix price in such a way that there is S.N.P i.e. AR>LAC
MONOPOLY EQUILIBRIUM AND LAW OF COSTS Whether a monopolist will fix more or less price of his product in the long run depends upon 2 things: 1. elasticity of demand 2. effect of laws of costs on monopoly price determination
DIMINISHING COSTS Output obeys law of diminishing costs means as Production increases its cost per unit goes on diminishing. In this situation it is advisable for the monopolist to fix low price per unit and expand his sales in order to maximize profit.
INCREASING COSTS Production obeys the law of increasing costs, means as production increases – the cost of production also increases. It will be beneficial for the monopolist to produce less and fix high price per unit.
CONSTANT COSTS In this situation cost of production remain constant whether production is more or less.
Monopoly price with zero cost of productions It is situation where monopolist has to incur no cost of production for producing the output.
Comparison between monopoly and perfect competition Goal of firm Assumption regarding production Assumption regarding number of sellers and buyers Assumption regarding entry Implication regarding shape of demand curve Implication regarding decisions Control over price
How is price and output determined under discriminating monopoly? Meaning of price discrimination- A monopolist often charges different prices of thesame product from different consumers of differentindustries. This price policy of monopolist is called price discrimination.
Kinds of discriminatingpolicies Personal price discrimination Geographical price discrimination Price discrimination according to use
CONDITIONS FOR PRICE DISCRIMINATION Existence of monopoly Separate market Difference in elasticity of demand Expenditure in dividing and sub dividing market to be minimum Commodity to order Legal sanction Product differentiation Behavior of consumer
Equilibrium under discriminating monopoly The aim of monopolist under discriminating monopoly is to maximize total revenue and profit. Conditions: MR=MC, MC cuts MR from below.The discriminating monopoly is to decide about how much of the out[put is to be sold in diff markets and at what [price so as to get max profit.
To get max profit 2 conditions must be: MR in both markets should be same MR(A)= MR(B) =MC
DEGREES OF PRICE DISCRIMINATION DISCRIMINATION OF 1ST DEGREE-It refers to that discrimination where in monopolists charges different prices for each unit of commodity DISCRIMINATION OF 2ND DEGREE-It refers to that discrimination under which a monopolist sells a product at different prices in such a way that those who are prepared to pay more than price X are charged price X . On the contrary those who are prepared to pay less than price X and more than price Y are made to pay price Y for the product .
DISCRIMINATION OF 3RD DEGREE- It refers to that discrimination under which a monopolist divides the entire market of a product into 2 – 3 groups and charges different price from each group. For instance , a monopolist charging higher price of a product in the domestic market and lower price in the foreign market , dis discrimination found in real life.