SUBMITTED TO: Dr.

MANOJ VAIDAYA
SUBMITTED BY:
VIKAS DOGRA (H -2008-MBA-43)

Department of Business Management

Dr. Y. S. Parmar University of Horticulture &
Forestry Nauni, Solan (H.P.) Pin- 173230
 WHAT IS MONOPOLY?
The term monopoly is derived from the Greek word monopolin
which mean exclusive sale .Thus pure monopoly is a market
structure in which a single firm is the sole of a product for which
there are no close substitute’s .Since monopoly is the only seller
in the market; it has neither rivals nor direct competitors.

DEFINITIONS:

“Monopoly is a market situation in which there is a single seller,

there are no close substitutes for commodity it produces, and
there are barriers to entry”. In the words of KOUTSOYIANNIS.

And according to BAUMOL”A Pure monopoly is defined as the firm

that is also an industry. It is the only supplier of some particular
commodity for which no close substitutes.”

FEATURES OF MONOPOLY:
1 ONE SELLER AND LARGE NUMBER OF BUYERS:

Under this monopoly there should be a single producer of

the commodity. Thus there is only one firm in monopoly
there is no distension between firm and industry

2 MONOPLY IS ALSO AN INDUSTRY:

UNDER MONOPLY SITUITION THRER IS only one firm and the

difference between firm and industry disappears

3 RESTRICTIONS ON THE ENTRY OF THE NEW FIRMS

 Barriers like patent rights, govt., laws, economy of scale etc. put
restriction on the entry of new firms

4. NO CLOSE SUBSTITUTES

Acc. To Boulding ” A PURE MONOPLY FIRM IS ONE THAT

PRODUCES SUCH A COMODITY AS HAS NO EFFECTIVE
SUBSTITUTE IN THE PRODUCTION OF OTHER FIRMS”

5. PRICE MAKER

A monopolist is a price maker; price of the commodity is fully

under the control of the monopolist

6. PRICE DISCREMINATION

A monopolist may be able to charge diff. prices for the same

product from diff. customers. Thus monopolist can practice price
discrimination

SOURCES OF MONOPOLY POWER

1. CONTROLE OVER RAW MATERIAL

A firm may control the total supply of a raw material. He

may be the sole owner of a natural recourse.

2. PATENTS

A patent is an exclusive rights granted by the govt. to use

some productive technique or to produce a certain product.
It is a sort of legal right to monopoly

3. GOVERNMENT POLICY

The govt. may grant a license to a firm to have the exclusive

privilege to produce a given good or service in a particular
area.
 4. HISTORICAL OR ENTRY LAG

A firm may enjoy monopoly because of early start in the field

and no one else has the necessary no how. The first firm to
market some product will usually enjoy the monopoly
position.

5. CAPITAL SIZE

Monopoly may also be posed due to the huge amount of

capital required to established particular productive unit.

DEMAND AND REVENUE UNDER

MONOPOLY

Under monopoly situation, firms demand curve also constitute

industry demand curve. Demand curve of the monopolist is also
avg. revenue 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.

FIG. shows avg. revenue (demand) curve and marginal revenue

curve. Both are sloping downward.

Following facts comes to light as a result of negative AR&MR

1. Demand arises with fall in price (AR).

2. At point N TR will be maximum and equals to P*Q.

3. Average revenue is another name of price per unit i.e. P=AR.

4. With fall in price MR falls more than AR.

5. AR is never zero but MR may be zero or negative.

Slope of MR is twice the slope of AR as PL=LN.

At ‘pt.N’ TR is maximum, at Q ‘MR=0.

Fig. DEMAND AND REVENUE UNDER

MONOPOLY

DETERMINATION OF PRICE AND EQULIBRIUM

UNDER MONOPOLY
A monopolist will so determine the price of a product as to get
maximum profit. Under monopoly, price and equilibrium are
determined by two different approaches.

1 Total revenue and total cost analysis

2 Marginal revenue and marginal cost analysis.
 Total revenue and total cost analysis
Monopolist can earn maximum profit by selling that amount of
output at which difference between total revenue and total cost is
maximum. That amount of output at which a monopolist
earns maximum profit will constitute his equilibrium
situation. In the below given figure TC is total cost curve and TR
is total revenue curve.

At zero output the total revenue is also zero

TC curve begins from point P it means that if the firm stops

production for some time then still they have to pay fixed cost
shown by OP

Total profit is by TP curve. It begins from point R and signifying

that initially the company faces initially the negative profit.

As the firm increases the production the total revenue also

increases.

At initial stage TR is less than TC.

RC proportion of TC refers to the firm is incurring the loss.

At point’ M’ TR =TC i.e. no loss no profit stage

Point ‘m’ is also called as ‘break even point’

When the firm produces more than the ‘M’ point the TR
exceed the TC

TP curve also slope upward from point ‘C’ onward this

indicate that firm is earning the profit . This amount of
output will be called equilibrium output
 MARGINAL REVENUE AND MARGINAL COST
ANALYSIS

A Monopolist will be in equilibrium when two conditions are

fulfilled;

1 MC=MR

2 MC curve cuts MR curve from below

A monopolist earns maximum profit when he is in

equilibrium .
It is explained with the help of fig. given below:

Here MC is marginal cost curve.AR & MR are average

revenue and marginal revenue curves.

Point ’E’ is an equilibrium point where MC =MR and MC curve

cuts MR curve from below .OQ is the equilibrium output.

Price and equilibrium determination under monopoly are

studied with reference to two time periods

1) Short period

2) Long period

SHORT RUN EQUILIBIRIUM

Short run refers to that period in which time is so short that
a monopolist cannot change fixed factors like machinery,
plant etc. A monopolist will be in equilibrium when he
produces that amount of output at which (1) marginal cost is
equal to marginal revenue (2) marginal cost curve cuts
marginal revenue curve from below. A monopolist in
equilibrium may phase any of the three situations in the
short periods, viz (1) supernormal profit (2) normal profit (3)
minimum loss.

1) Supernormal profit – if the price (AR) fixed by the

monopolist in equilibrium is more than his average cost
( AC).

FIG: SUPER- NORMAL PROFIT

2) NORMAL PROFIT – if in the short run equilibrium ( MC =

MR ) the monopolist price ( AR ) is equal to its average
cost ( AC ) i.e. AR = AC , then he will earn only normal
profit.
 FIG. NORMAL PROFIT

3) MINIMUM LOSS: In the short 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 average
variable cost (AVC). In case the monopolist is obliged to
fix a price which is less average variable cost ,then he will
prefer to stop production. Accordingly, a monopolist in
equilibrium ,I the short period , may bear minimum loss
equivalent to fixed costs. In this situation ,equilibrium
price (AR)is equal to average variable cost (AVC )and the
monopolist bears this loss of fixed cost .thus minimum
loss=AC-AVC.

This situation of equilibrium is expressed in the figure

given below

At point E MC=MR produces OM output .

The price of equilibrium output OM is fixed at OP1(AM).

At OP1 price AVC touches the Arc at point

FIG. MINIMUM LOSS

LONG RUN EQUILIBRIUM:

In the long run the monopolist will be equilibrium at a

point where his long run marginal cost equal to MR.

Long run equilibrium of the monopolist is explained with

the help of figure.

In this figure the point E indicates the equilibrium of the

monopolist at point E , MR=LMC, hence OM is the
equilibrium and ON (=AM) is the equilibrium price .BM is
 the long run average cost .price AM being more than long
run average cost BM(AR>LAC) ,the monopolist will get
super normal profit .

COMPARISON BETWEEN MONOPOLY AND PERFECT

COMPETITION
1) Goals of the firms – a firms that aims at maximizing
profit is called a rational firm.

2) Assumptions regarding the production –

Under perfect competition it is assumed that all firms

produce/ sell homogeneous products. A monopoly firm
may or may not produce homogeneous products

3) Assumptions regarding the number of sellers and

buyers - Under perfect competition there are large
number of buyers and sellers of homogeneous product.
No seller by changing his supply and no buyer by
changing his demand can influence the price. On the
contrary , under the monopoly there is only one seller
and large numbers of buyers.

4) Assumptions regarding the entry – Under perfect

competition, there is no restriction on the entry of new
firms in to, and exit of the old firms from the industry.
In case of the monopoly, there is restriction on the
entry of the new firms.

5) Implication regarding the decisions-Under perfect

competition, a firm can take decision only in respect
of the quantity to be produced .On the other hand , a
monopolist can determined either the quantum of
output or the price , but even he cannot determined
both.
6) Comparison regarding supply-In case of perfect
competition, supply curve can be known. It is so
because firstly, under perfect combination , all firms
can sell as much quantity of product as they like at the
given price. Secondly ,there is no price discrimination
under perfect competition. On the other hand , under
monopoly ,supply curve cannot be calculated.

7) Competition regarding profit – In the short run, a firm

whether operating under perfect competition or
monopoly, may earn super-normal profit, or normal
profit or incur losses. In the long run ,a firm under
perfect competitive equilibrium earns only normal
profit. On the other hand , a monopoly firm under long
run equilibrium continuous to earn supernormal profit.