Note on Monopoly Market

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MEANING OF MONOPOLY MARKET

source:economicsworlds.blogspot.com
source:economicsworlds.blogspot.com

The word monopoly has been derived from two English words ‘mono’ and ‘poly.’ 'Mono' means single and 'poly' means sellers. Thus, monopoly means single seller and a large number of buyers. Consequently, no buyer can influence the price of the product. They sell different types of commodities or no homogenous products. The monopolists have full right to fix his/her product price. There is no free entry or exit of firm hence monopolist has full control over the supply of the product. According to Leftwich, “Monopoly is a market situation in which single firm sell a product for which there is no clues substitute.”

FEATURESS / ASSUMPTIONS / CHARACTERISTICS OF MONOPOLY MARKET

  1. No homogeneous product: - There is no availability of close substitute goods on a market for competition the product.

  2. No free entry or exit of the firm: - The entry and exit of the firm are restricted. Hence, monopolist has full control over the supply of the product.

  3. The firm is price maker: - The monopoly market are the price maker. They adopt their independent price policy.

  4. Price discrimination: - There may be price discrimination in the monopoly market. A monopolist can sell a product under the different consumer at the different price.
  5. Single seller and large number of buyers: The single seller or trader is the main feature of Monopoly market, which means single trader supply the goods in a market. So, there is no competition on the market.

PRICE AND OUTPUT DETERMINATIO UNDER MONOPOLY MARKET

The equilibrium of monopoly firm choosing the profit maximizing and cost minimizing level of output. It is explained in a short as well as long run context.

SHORT RUN EQUILIBRIUM

The objective of the firm is profit maximization. The price and output are determined under this situation. There are two approaches to determining the equilibrium output level in short run i.e. TR and TC approach and MR and MC approach. Here, price and output are determined only with the help of MR and MC approach.

MR AND MC APPROACH

In the short run, the monopolist firm is in equilibrium when it maximized its profit. According to MR and MC approach monopolist firm gets equilibrium position when the firm fulfills the following conditions:-

  1. MC=MR
  2. MC cuts MR from below
  3. MC cuts AC from minimum profit

There are generally three cases

  1. Abnormal profit (AR>AC)
  2. Normal profit (AR>AV)
  3. Loses (AR<AC)

These three cases are clearly explained with the help of figure below:

Figure: Condition of Excess Profit
Figure: Condition of Excess Profit
Figure: Condition of Noremal Profit
Figure: Condition of Normal Profit
Figure: Condition of Loss
Figure: Condition of Loss

In the above figure, we have to draw downward sloping AR(D) and MR curves. At point 'E', the monopolist is in equilibrium as the two condition for equilibrium are fulfilled. In the case of abnormal profit, AC curve lies below the AR curve at point 'A'. So that, AR is greater than AC and the region PABC is abnormal profit enjoyed by the firm which is shown in figure i) super normal profit.

In a case of loss, the AC curve at point 'A’. So that, AR is less than AC and the shaded region PABC is loss faced by the firm in figure ii) loss.

In a case of normal profit, the AC curve is tangent to AR curve at point 'A'. So that AR is equal to AC, which is shown in figure iii) normal profit

We can conclude that it is the level of AC that force firm to bear loses or enjoy abnormal profit or just stay with normal profit at equilibrium. In this way, at equilibrium price 'P', a firm sell OQ level of output. A firm in monopoly bear loses in rare condition only i.e. at the time of depression or initial stage of production.

LONG RUN EQUILIBRIUM

A monopolist in a long run always enjoys abnormal profit due to a strong barrier to entry or exists of the firm. There is enough time for a firm to adjust its factors of production and the level of output.

s

In the above figure, AR and MR are flatter than the short run AR and MR But price is less than that of the short run. The equilibrium, in the long run, is attained at point 'E' where equilibrium condition is fulfilled. The equilibrium price is OP and output is OQ. Here, average cost QB is greater than average revenue by AB. In this condition LAC, a curve is below AR curve at point A. So, A monopolists enjoy abnormal profit shown by the region i.e. PABC.

(Karna, Khanal and Chaulagain)(Khanal, Khatiwada and Thapa)(Jha, Bhusal and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

  1. Monopoly means single seller and a large number of buyers.
  2. The single seller or trader is the main feature of Monopoly market, which means single trader supply the goods in a market.
  3. There are two approaches to determining the equilibrium output level in short run i.e. TR and TC approach and MR and MC approach.
  4. A monopolist in a long run always enjoys abnormal profit due to a strong barrier to entry or exists of the firm. 
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