Advance Economic Analysis MGT-313

Monopoly Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes are available

Characteristics of Monopoly
Single seller: A pure or absolute monopoly is an industry ,in which a single firm is the sole producer or supplier of some specific good No close substitutes : A monopolist produces such product which is unique. The consumer who chooses not to buy it must do without it. means no substitute. Price Maker: The monopolist controls the total quantity thus has a considerable control over the price.

 Blocked Entry: There are certain barriers that that keep away the potential competitors from entering into the market. These barriers may be economic, technological legal or of some other type e.g Patents: a patent is the exclusive right of an inventor to use or allow another person to use his product Licences: govt may also limit the entry into an industry through licencing

Causes of the monopoly

Ownership of strategic raw material/exclusive knowledge of production technique Patent rights for the production of some specific good Govt licensing or intervention through imposition of trade barriers etc. The size of the market

Demand and Revenues

Since there is single seller so the demand of the firm is the industrys demand or market demand curve which can not be perfectly elastic A monopolist demand curve is downward sloping due to the fact that he has to decrease the price to sale a higher level of output Consequently the marginal revenue will be lower than the price

Monopoly Demand and Marginal and Total Revenue

(a) Demand and Marginal Revenue

Dol lars per diamond

$3,750

0 Marginal revenue 16

D = Average revenue 32 1-carat diamonds per day

(b) Total Revenue

Short-Run Losses and the Shutdown Decision

A monopolist is not assured of profit
The demand for the monopolists good or service may not be great enough to generate economic profit in either the short run or the long run

In the short run, the loss-minimizing monopolist must decide whether to produce or to shut down
If the price covers average variable cost, the firm will produce If not, the firm will shut down, at least in the short run

The Monopolist Minimizes Losses in the Short Run

Recall that average variable cost and average fixed cost sum to average total cost . Loss minimization occurs at point e, where the marginal revenue curve intersects the marginal cost curve Q and p are the loss minimization quantity and price, respectively. Notice that at point b, the firm is covering its average variable cost it is making some contribution to its fixed costs. However, it is not covering all of its costs. The average loss per unit, measured by ab area.
0

Marginal cost

a Loss p b

Average total cost Average variable cost

e Demand = Average revenue Marginal revenue Q Quantity per period

9

Short Run Monopoly Equilibrium With Economic Profit

As the monopolist is a price maker. There is a greater tendency for the monopolist to have a price which earns positive profits. This can only be possible if the price (AR) is higher than average total cost (ATC). The short run profit earned by the monopolist is displayed in the diagram
Output

 There is a false impression regarding the powers of a monopolist. It is said that the monopolistic entrepreneur always earns profits. The fact, however, is that there is no guarantee for the monopolist to earn profit in the short run. If a monopolist firm produces a new commodity and attempts to change the taste pattern of the consumers through advertising campaigns etc., then the firm may operate at normal profit or even produce at a loss minimizing price in the short run (Covering variable cost only). The normal profit short run equilibrium of the monopoly firm is explained, in brief, with the help of the diagrams.

Short Run Equilibrium With Normal Profit Under Monopoly

Output