This document discusses monopoly and price determination under monopoly. It defines monopoly as a market situation with a single seller and no close substitutes. A monopoly firm is a price maker that can influence the price of its product. The document examines how a monopoly firm determines price and equilibrium in the short and long run through total revenue and cost analysis and marginal revenue and marginal cost analysis. It maximizes profits by producing where marginal cost equals marginal revenue.

1. MONOPOLY AND
PRICE DETERMINATION

2. What is Monopoly?
• Monopoly is that situation of market in which there is a single
seller of a product.
• For example : If there is only one firm dealing in the sale of
cooking gas in a particular town.
• Hence, monopoly is a market situation in which there is only one
producer of a commodity with no close substitutes.

3. Features
• One seller & large number of buyers: Under monopoly there should
be single producer of the commodity. The buyers of the product are
in large number. Consequently, no buyer can influence the price but
the seller can.
• Monopoly is also an industry: Under monopoly situation, there is
only one firm & the difference between firm & industry disappears.
There is no difference between the study of a firm and industry.
• Restrictions on the entry of new firms: There are some restrictions
on the entry of new firms into monopoly industry. There is no
competitor o a monopoly firm.

4. Features
• No close substitutes: The commodity produced by the firm should
have no close substitute, otherwise the monopolist will not be able
to determine the price of his commodity as per his discretion.
• Price maker: Price of the commodity is fully under the control of the
monopolist. In case, the monopolist increases the supply of the
commodity, the price of it will fall. If he reduces the supply, the
price of it will rise. A monopolist may also indulge in price
discrimination. In other words, he may charge different prices of the
same product from different buyers.

5. Demand & revenue under monopoly
• In a monopoly situation there is no difference between firm & industry. Accordingly,
under monopoly situation, firm’s demand curve also constitutes industry’s demand
curve. Demand curve of the monopolist is also average revenue (AR) curve. It slopes
downward. It means if the monopolist fixes high price, the demand will shrink. On
the contrary, if he fixes low price, the demand will expand. Under monopoly, average
revenue & marginal revenue curves are separate from one another. Both slope
downwards.
• Following facts come to light as a result of negative AR & MR:
i. Demand rises with fall in price (AR). Hence, by lowering the price, a monopolist can
sell more units of the commodity.
ii. AR is another name of price per unit, i.e., P=AR.
iii. With fall in price, both AR & MR fall, but falling MR is more. Rate of fall in MR is
usually more than rate of fall in AR.
iv. AR is never 0, but MR may be 0 or even -ve.

6. Fig.: Demand and revenue under monopoly

7. Determination of price and
equilibrium under monopoly
• A monopolist will so determine the price of a product as to get
maximum profit. A monopolist is in equilibrium when he
produces that amount of output which yields him maximum
total profit. A monopolist is also in equilibrium in the short
period when he incurs minimum loss. Under monopoly, price &
equilibrium are determined by 2 different approaches:
1. TR & TC Analysis
2. MR & MC Analysis

8. Fig.: Total revenue & total cost curve analysis

9. MR & MC analysis
• In case of monopoly, one can know about price determination
or equilibrium position with the help of MR & MC analysis.
According to this analysis, a monopolist will be in equilibrium
when 2 conditions are fulfilled, i.e.,
1. MC=MR
2. MC curve cuts MR curve from below. A monopolist earns
maximum profit when he is in equilibrium.
• Price & equilibrium determination under monopoly are studied
with reference to 2 time periods:
A. Short period
B. Long period

10. Fig.: Marginal revenue & marginal cost analysis

11. Price determination under short period
• Short-run refers to that period in which time is so short that a
monopolist cannot change fixed factors like: machinery, plant etc.
Monopolist can increase his output in response to increase in demand
by changing his variable factors. Similarly, when demand decreases,
the monopolist will reduce his output by reducing variable factors &
by slowing down the intensive use of fixed factors. A monopolist will
face any of the 3 situations in the short period:
• Super normal profit: If the price (AR) fixed by the monopolist in
equilibrium is more than his AC, then he will get super normal profits.
The monopolist will produce upto the extent where MC=MR. If the price
of equilibrium output is more than AC then the monopolist will earn
super-normal profit.

12. Price determination under short period
• Normal profit: If in the short run equilibrium MC=MR, the monopolist
price AR=AC, then he will earn only normal profit.
• Minimum loss: In the short run, the monopolist may incur loss also. If in
the short-run price falls due to depression or fall in demand, the
monopolist may continue his production so long as the low price covers
his AVC. A monopolist in equilibrium, in the short period, may bear
minimum loss equivalent to fixed costs. In this situation, AR=AVC & the
monopolist bears the loss of fixed costs.

13. Fig.: Super normal profit Fig.: Normal profit

14. Determination of Long-run
• In the long run, the monopolist will be in equilibrium at a point
where his long-run marginal cost is equal to marginal revenue. In
the long run, because of sufficiently long period at the disposal of
the monopoly firm, all costs can be varied & supply can be
increased in response to increase in demand.

15. Fig.: Determination of long run price or long
run equilibrium

16. Monopoly equilibrium & law of costs
i. Elasticity of demand: If demand is inelastic, the monopolist will fix
high price of his product. On the contrary, if the demand is elastic,
the monopolist will fix low price per unit. Low price will not only
extend demand & increase the sales, also maximize his profits.
ii. Effect of laws of costs on monopoly price determination: While
fixing the price, a monopolist also takes into consideration cost of
production.
1) Diminishing costs: It means as production increases its cost per unit
goes on diminishing.
2) Increasing costs: It means as production increases, the cost of
production also increases.
3) Constant cost: It is a situation wherein cost of production remains
constant, whether production is more or less.

17. THANK YOU
Made By –
Jaimin Brahmbhatt
jaimin243@gmail.com