Monopoly Market
The term Monopoly means ‘alone to sell’. In a monopoly market, there is a single seller
of a particular product with no strong competition from any other seller.The word
monopoly has been derived from the combination of two words i.e., ‘Mono’ and
‘Poly’. Mono refers to a single and poly to control.
Prof. E.H. Chamberlin laid a great stress in his original thought providing work, “The
theory of monopolistic competition.”
“Pure monopoly is represented by a market situation in which there is a single seller of
a product for which there are no substitutes; this single seller is unaffected by and does
not affect the prices and outputs of other products sold in the economy.” Bilas
“Monopoly is a market situation in which there is a single seller. There are no close
substitutes of the commodity it produces, there are barriers to entry”. Koutsoyiannis
Features of Monopoly Market
A Lack of Substitutes
One firm producing a good without close substitutes. The product is often unique.
Barriers to Entry
There are significant barriers to entry set up by the monopolist. If new firms enter the
industry, themonopolistwillnothavecompletecontrolofafirmonthesupply.
These barrier simply that under a monopoly there is no difference between a firm and
anindustry.
Competition
There are no close competitors in the market for that product.
Price Maker
The monopolist decides the price of the product since it has the market power. This
makes the monopolist a price maker.
Profits
While a monopolist can maintain supernormal profits in the long run, it doesn’t
necessarily make profits. A monopolist can be a loss-making or revenue-maximizing
too.
Demand and Revenue under Monopoly:
Under monopoly, it becomes essential to understand the nature of demand curve facing
a monopolist. In a monopoly situation, there is no difference between firm and
industry. Therefore, under monopoly, firm’s demand curve constitutes the industry’s
demand curve. Since the demand curve of the consumer slopes downward from left to
right, the monopolist faces a downward sloping demand curve. It means, if the
monopolist reduces the price of the product, demand of that product will increase and
vice- versa.
Price –Output
Output Equilibrium:
Monopolists also tries to earn maximum profit, on which is based the equilibrium
analysis of the
he perfectively competitive firms, which is also taken to be most valid
assumptions about the behaviour of the monopolists.
Short Run Equilibrium
In short run firm has three conditions that are:
1. Earning normal profit AC=AR
2. Earning supernormal profit AR>AC
3. Incurring loss AR<AC
Nominal Profit
In the diagram monopolists firm is earning nominal profit. According to equilibrium
point total output is OQ and price is OP. To know about the level of profit of firm we
have to introduce Average Cost curve same with the perfect competition. In monopoly
when AR should be equal to price. In this diagram AC curve cuts AR curve at T point,
where it is AR=AC, so firm is earning normal profit
Super Normal Profit
In AC curve less than AR curve that means total revenue is higher than total cost. So
that firm is earning super normal profit. According to diagram output is OQ where
price is OP. Total revenue is AR= Q QT and AC is QR, where OT T >QR
>QR. So firm is
earning supernormal profit at ‘‘TRMP’.
Loss
As per the diagram firm is incurring loss because AC is more than AR, means average
cost is higher than average revenue. In the figure OQ is output and OP is price where
total revenue is AR or QC and total cost of firm is AC or QT. Here QT>QC or AC>AR
AC>
so that firm is incurring loss at ‘PTCH’.
Long Run Equilibrium:
In the long run monopolist would make adjustment in the size of the plant and earn
super-normal
normal profit. If he was incurring losses in the short run he has enough time to
make change in hiss existing plant by which he can earn super-normal
super normal profit. The scale
of the plant depends upon the position the position of the demand (AR) curve and
corresponding MR curve. The most profitable level of the output is at the point where
the LMC curve intersectect the MR curve from below and the SMC curve passes through
this point. The SAC curve must be tangent to the LAC curve at this level of output.
