MONOPOLY

‘Mono’ means one and ‘poly’ means sell.

Monopoly is that part of market in which single

seller sells a product which has no substitute.

MEANING
Pure monopoly is that market situation in which
there is absolutely no substitute of the product, and
the entire market is in the control of a single firm.

Example – Indian railway is a monopoly, since there

is no other agency in the country that provides
railway services.
 The fundamental cause of monopoly is
the existence of barriers to entry. These
barriers are
1. Legal Barriers
• Patents
Why does a • Licenses
2. Technical Barriers
monopoly • Unique resources
arise? • Economies of scale and scope
3. Strategic Barriers
• Limit pricing
• Excess capacity
 One seller and large number of buyers.
No close substitutes.
Features or
Assumptions of Single seller.
monopoly
No distinction between firm and industry.
Price Discrimination.
Downward sloping demand curve.
 1. Legal Monopoly
• Created by the laws of a country in the greater
public interest.
• To prevent disparity in distribution of wealth, or
imbalanced growth of economy.
2. Economic Monopoly
• Created due to super efficiency of a particular
Types of player.
• Technical know-how restrained in the hold of
monopoly single firm.
3. Natural Monopoly
• Formed when the size of the market is so small
that it can accommodate only one player.
4. Regional Monopoly
• Geographical or territorial aspects also help in
the creation of monopolies
Equilibrium Output and
Profit Maximisation

• When MC<MR, monopolist produces

smaller quantity and charges higher price.
• When MC>MR, monopolist produces larger
quantity and charges lower price.
• Therefore, equilibrium output is achieved at
MC=MR.
• Also, at MC=MR the profit is maximum.
Profit
Maximisation

• Firm maximizes profit

where
i. MC=MR
ii. MC cuts MR from below

• Equilibrium Price = Ops

• Equilibrium output = OQs
 Economies of scale.

High profit can be used for research and

Advantages development.

of The reward for getting patent can encourage

Monopoly investment.

Governments can regulate to get best of both

worlds – economies of scale and best prices.
 Higher prices for consumers.

Less choice for consumers.

Disadvantages
of Monopoly
Price discrimination.

Restricted output.
Monopoly and Perfect Competition

Monopoly Perfect Competition

• One seller with no competition and • A fair number of buyers and sellers.
control over supply and price.
• Demand is inelastic. Demand curve • Demand is perfectly elastic.
slopes downwards. Demand curve is a horizontal
straight line.
• Higher price • Normal price
• Small output • Large output
• Excess profit • Normal profit