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Friday, 6 May 2011

Define Monopoly and explain that how Price and Out put is determined under Monopoly

MONOPOLY :- In a monopolistic market there is no perfect substitute for the product of a single seller and there is a separate demand curve for the product of each seller.
Pure monopoly and pure competition are the two extremes.

1. SINGLE SELLER :- A single seller controls the whole supply of the product. He may increase or decrease the product.

2. NO CLOSE SUBSTITUTE :- The production of the firm is such type that it has no close substitute.

3. INELASTIC DEMAND :- The price may increase but demand remains constant.

4. CONTROL OVER PRICE :- A monopolist has considerable control over the price of the commodity.

5. NO ENTRY OF THE NEW FIRMS :- No new firm can enter into the market, it may be due to legal restriction or due to technical advancement of the firm.

6. NEGATIVE SLOPE DEMAND CURVE :- The monopolist faces the negatively sloped demand curve. Because he can increase the sale by lowing the price.

PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY

The object of the monopolist is to earn maximum profit. The monopolist will charge such a price which will give him the maximum profit. He always compares marginal revenue with cost at its out put rate. The profit of firm is maximum when its MR = MC and Marginal cost curve cuts the marginal revenue curve from below. The MR curve in negatively sloped and it also lies below the AR curve at all levels of out put, except the first unit. The monopolist controls the whole market and no new firm can enter into the market so the distinction between a long run and short run is not necessary. The price and out put determination can be explained by the following diagram :



EXPLANATION :- In this diagram AR curve is higher than the MR curve.The MC curve cuts the MR curve at a point E. Equilibrium occurs at a point E, where MR = MC. So the best level of out put for the monopolist firm is OF.
As regards the determination of price monopolist fixes the price OP because the total revenue of the firm will be maximum at the equilibrium out put OF.
The cost of the firm will be = OSEF
The revenue of the firm will be = OPKF

3 comments:

sppanday 15 October 2011 at 08:14  

nice..thanks&regards
shard panday
+91-9464544651

jalal haider,  9 January 2013 at 06:03  

why is AR greater than MR....?

Anonymous,  24 November 2016 at 10:04  

Very very helpful to me thanks a lot for this.keep doing.

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