Post on 06-Apr-2018
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MONOPOLY
Made by:-AnamMehmood-ShivaniBabbar-Sagar
Khandelwal-Abrar
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Definition
A monopoly is a situation inwhich single company ownsall or nearly all of the market
for a given type of product orservice.
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Monopoly arises when
Barriers to Entry :that allowsthe single company to operatewithout competition.
In such an industry structure, theproducer will often produce avolume that is less than the amount
which would maximize socialwelfare.
Three types of Barriers to Entry
Economic
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1. Economic Barriers
Economies of Scale :
It refers economic efficiency thatresults from carrying out a process(such as production or sales) on alarger and larger scale.
Declining cost coupled with largestart up costs give monopolies anadvantage over would becom etitors.
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They are in position to cut pricesbelow a new entrant's operatingcosts and drive them out of the
industry.
The size of the industry relative tothe minimum efficient scale maylimit the number of firms that caneffectively compete within the
industry.
Contd
.
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Technological SuperiorityMay be better able to acquire,
integrate and use the best possible
technology in producing its goodswhile entrants do not have the sizeor fiscal muscle to use the best
available technology.
In nut shell one large firm can
sometimes produce goods cheaper
Contd
.
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Non Availability of Substitute
Makes the demand for the goodrelatively elastic enabling themonopolies to extracts positive
profits.
Capital Requirements:
Large fixed cost limits the numberof firms in the industry.
Difficult for small firms to enter an
Contd
.
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2. Legal barriers
Legal rights can provide opportunityto monopolise the market.
For eg :Intellectual property rights,including patents and copyrights,give a monopolist exclusivecontrol over the production andselling of certain goods.
Contd
.
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3. Deliberate Actions
A firm wanting to monopolise amarket may engage in various types
of deliberate action to excludecompetitors or eliminatecompetition.
Such actions include collusion,lobbying governmental authorities,
and force.
Contd
.
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Benefits of Monopoly
Reduction in price of good due toeconomies of scale.
No risk of over production
There is enough capital for research
Company promotes R&D for theirroduct to maintain its com etitive
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Disadvantages of Monopoly
Exploitation of consumers
Restriction of consumers choice
Absence of competition leads to
inefficiency
Increase in price of product
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Demand Curve forMonopoly
The monopolisticconfronts adownward slopingdemand curve. TheIndustry demandcurve is same asfirms demandcurve.
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Marginal Revenue Curve For aMonopolist
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As observed from the figure
At every level of output except 1 unit, amonopolists marginal revenue (MR) is belowprice
This is so because
1. We assume that the monopolist must sell allits product at a single price (no pricediscrimination).
2. To raise output and sell it, the firm mustlower the price it charges. Selling the
additional output will raise revenue, but this
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Monopoly: Equilibrium
Pm = theprice
Qm =quantity
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Monopoly: Equilibrium
Firm = Market
MR=MC
MC curve cuts MR curve from below.
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Profit Maximization
To maximize profit , monopolist shouldchoose to produce that output levelwhere Marginal Revenue equals
Marginal Cost.
Since MR = MC at the profit maximizingoutput and P> MR for a monopolist, themonopolist will set a price greater thanmarginal cost
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Monopoly Profit
A maximizingmonopolist willraise the output
as long as MRexceed MC.
Above Q* units ofoutput, MC isgreater than MR,
thus increasing
Pr ce and Output C o ces or a
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3/11/12Pr ce and Output C o ces or aMonopolist Suffering Losses in the
Short-Run
It is possible fora profit-maximizingmonopolist to
suffer short-runlosses.
If the firm cannotgenerate enough
revenue to covertotal costs, it willgo out ofbusiness in thelong-run.
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Normal profit in short- run period
IN SHORTRUN
EQUILLIBRUM1)(MC=MR),2)(AR=AC),
So they willearn onlynormal
profit.
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Long- run equilibrium:
The firmwill earn
super-normalprofits inlong run.
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Supply Curve of Monopoly
A monopoly firm has no supply curvethat is independent of the demandcurve for its product.
A monopolist sets both price andquantity, and the amount of output thatit supplies depends on both itsmarginal cost curve and the demandcurve that it faces.
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Perfect
CompetitionAnd Monopoly
Compared
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Monopoly Vs. CompetitiveMarkets
q Market Power
Perfectly Competitive Firms :
Zero market power, in terms ofsetting prices.
Firm is a Price Taker.
Monopoly :
Considerable market power.
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q Price
Perfectly Competitive Firms:
Market Price is equal toMarginal Cost
Monopoly:
Market Price is greater thanMarginal Cost.
Contd
.
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q
Product DifferentiationPerfectly Competitive Firms:
Homogeneous product
Close Substitute available.
Monopoly:High product differentiation
No Close substitute available.
Contd
.
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3/11/12Contd
.
q Elasticity of DemandPerfectly Competitive Firms:
Demand curve is perfectlyElastic.
Monopoly:Demand Curve is relativelyinelastic.
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q
Number of BuyersPerfectly Competitive Firms:
Populated by an infinite number
of buyers and sellers.
Monopoly
It involves a single seller.
Contd
.
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In a perfectly competitive industry in the long run, pricewill be equal to long-run average cost. The market supplycurve is the sum of all the short-run marginal cost curvesof the firms in the industry. Here we assume that firms areusing a technology that exhibits constant returns to scale:
APerfectlyCompetitiveIndustryinLong-RunEquilibrium
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Perfect Competition and MonopolyCompared
Comparison of Monopoly and Perfectly CompetitiveOutcomes for a Firm with Constant Returns toScaleIn the newly organized monopoly, the marginal cost curveis the same as the supply curve that represented thebehavior of all the independent firms when the industry
was organized competitively. Quantity produced by the
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Price Discrimination
This occurs when a firm charges adifferent price to different groups ofconsumers for an identical good or service,for reasons not associated with the costs of
production.
It is important to stress that charging
different prices for similar goods is not pricediscrimination. For example, pricediscrimination does not does not occur whena rail company charges a higher price for a
first class seat. This is because the price
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A monopoly engages in pricediscrimination if it is able to sellotherwise identical units of output at
different prices.
Whether a price discriminationstrategy is feasible depends on theinability of buyers to practicearbitrage
Contd
.
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Perfect Price Discrimination
If this monopolist wishes to practiceperfect price discrimination, he will wantto produce the quantity for which themarginal buyer pays a price exactly equal
to the marginal cost.
Contd
.
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Market Separation
The profit maximizing price will behigher in markets where demand isinelastic.
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