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Price determination under monopoly
The document discusses the features and types of monopoly, emphasizing that a monopoly is characterized by a single seller with no close substitutes and barriers to entry. It explains price determination in monopolistic markets, detailing approaches to achieving equilibrium through marginal revenue and cost analysis, along with the short and long run scenarios. Additionally, the text addresses misconceptions about monopoly pricing compared to free competition and discusses the implications of demand elasticity on pricing strategies.
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Price determination under monopoly
- 1. Price Determination underMonopoly JITHIN K THOMAS BERCHMANS INSTITUTE OF MANAGEMENT STUDIES
- 2. Monopoly • Monopoly isa market situation where there is a single seller. There are no close substitute of the commodity it produces, there are barriers to entry • .
- 3. Features • Single sellerand large number of Buyers • No Close substitute • Firm is the Industry • Barriers on entry of new firms • Producer is price maker
- 4. Types of Monopoly •Natural Monopoly • Pure Monopoly • Imperfect Monopoly • Legal Monopoly • Public Monopoly • General Monopoly • Discriminating Monopoly
- 5. Demand under Monopoly •Demand • Cost
- 6. Equilibrium & PriceDetermination • A monopolist is in Equilibrium when he produces that much amount of output which yields maximum total profit. – MR must be equal to MC – MC must cut MR from below
- 7. Approaches to Equilibrium& Price Determination • Total revenue & Total Cost Approach • Maximum profit when difference between TR and TC is maximum.
- 8. Marginal Revenue andMarginal Cost Approach • A monopolist is in equilibrium when – MC = MR – MC cut MR from Below • Analysis can be conducted in two time periods – The short run – The long run
- 9. Marginal Revenue andMarginal Cost Approach • Short Run Equilibrium Under Monopoly – Supernormal profit
- 10. Short Run EquilibriumUnder Monopoly • Normal profit – AR = AC
- 11. Short Run EquilibriumUnder Monopoly • Minimum Loss – Due to depression – Fall in demand • Continue to produce AR=AVC
- 12. Long Run EquilibriumUnder Monopoly • All factors are variable • LMC cuts MR from below
- 13. Elasticity of Demandand Monopoly Price • Monopoly Equilibrium and Lows of costs – Elasticity of demand • Inelastic Demand - Fix high price • Elastic Demand - Fix law price
- 14. Effects of lawsof Costs • Diminishing Costs • Constant Costs • Increasing costs
- 15. Degree of MonopolyPower • Concentration Ratio • Profit rate • Leaners measure – Degree of Monopoly Power = 𝑃−𝑀𝐶 𝑃
- 16. Misconceptions • Prices underfree competition are lower than Monopoly. • Monopolist seek maximum per unit profit
- 17. Misconceptions • Maximum profit,not maximum price • Maximum total profit, not maximum profit per unit • Economies of scale • Law of increasing return
- 18. Monopoly Price • Largescale of production • Fear of rivals • Little risk • Public welfare • Other factors