04/10/2023 continued... 1

ImperfectCompetition

MONOPOLY

Rajesh KumarPGP-I

MBA-ABMCABM,GBPUA&T

04

/10

/20

23

2

contin

ued...

IMPERFECT COMPETITION

An imperfectly competitive industry is an industry in which single firms have some control over the price of their output.

Some examples are Monopoly, Oligopoly and Monopolistic competition.

Monopoly:- A market structure in which only one producer or seller exists for a product that has no close substitutes

04/10/2023continued... 3

The characteristics of Monopoly are

Single SellerNo Close SubstitutesPrice MakerBlocked EntryNon-price Competition Availability of information(Imperfect)

04/10/2023continued... 4

Monopolies exist because of barriers to entry into a market that prevent competition.

ex:-railways, electricity.

There are three general classes of barriers to entry(CAUSE):◦Natural barriers, the most common being

economies of scale◦Actions by firms to keep other firms out◦Government (legal) barriers

MONOPOLY

04/10/2023continued... 5

In some industries, the larger the scale of production, the lower the costs of production.

Entrants are not usually able to enter the market assured of or capable of a very large volume of production and sales.

This gives incumbent firms a significant advantage.

Examples are electric power companies and other similar utility providers.

Economies of Scale

04/10/2023continued... 6

Governments often provide barriers, creating monopolies.

As incentives to innovation, governments often grant patents, providing firms with legal monopolies on their products or the use of their inventions or discoveries for a period of 17 years.

Government

04/10/2023continued... 7

Natural monopoly: A monopoly that arises from economies of scale. The economies of scale arise from natural supply and demand conditions, and not from government actions.

Local monopoly: a monopoly that exists in a limited geographic area.

Bilateral Monopoly: only one buyer, very rare ex; expensive defence goods-govt.is single buyer. Regulated monopoly: a monopoly firm whose

behavior is overseen by a government entity. Monopolization: an attempt by a firm to

dominate a market or become a monopoly.

Types of Monopolies

04/10/2023 continued... 8

Monopoly: Equilibrium

y = Q

P

MR Demand

04/10/2023 continued... 9

Monopoly: Equilibrium

y

P

MC

MR Demand

04/10/2023 continued... 10

Monopoly: Equilibrium

y

PAC

MC

MR Demand

04/10/2023 continued... 11

Monopoly: Equilibrium

y

PAC

MC

MR

Output Decision

MC = MR

ym Demand

04/10/2023 continued... 12

Monopoly: Equilibrium

y

PAC

MC

MR Demand

Pm = the price

ym

Pm

04/10/2023continued...

13

Monopoly: Equilibrium

Firm = MarketShort run equilibrium diagram = long run

equilibrium diagram (apart from shape of cost curves)

At qm: pm > AC therefore you have excess (abnormal, supernormal) profits

Short run losses are also possible

04/10/2023 continued... 14

Monopoly: Equilibrium

y

PAC

MC

MR Demand

The shaded area is the excess profit

ym

Pm

04/10/2023continued... 15

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

PROFIT-MAXIMIZING CASE:

A firm in the short run earns maximum profit when it meets the following conditions;

◦ MR = MC and MC curve cuts MR from below

◦ Average Revenue is greater than Average Total Cost.

04/10/2023 continued... 16

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

MC

ATC

AR

MR

Output

Revenue/Cost

Profit

0

AVC

PROFIT-MAXIMIZING CASE:

P

E

04/10/2023 continued... 17

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

NORMAL PROFIT CASE:

A firm in the short run earns normal profit when it meets the following conditions;

MR = MC and MC curve cuts MR from below

Average Revenue is equal to Average Total Cost.

04/10/2023 continued... 18

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

MC

ATC

AR

MR

Output

Revenue/Cost

0

AVC

NORMALPROFIT CASE:

P

E

04/10/2023 continued... 19

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

LOSS-MINIMIZING CASE:

A firm in the short run minimize loss in following way;

MR = MC and MC curve cuts MR from below

Average Revenue is less than Average Total Cost but greater than AVC.

04/10/2023 continued... 20

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN

MC

ATC

AR

MR

Output

Revenue/Cost

0

AVC

LOSS-MINIMIZING CASE:

P

E

Loss

04/10/2023continued... 21

A monopoly firm will be in equilibrium in long run and will earn Economic profit if;

◦ MC = MR and MC cuts MR curve from below◦ AR is greater than Average Cost and ◦ There is no threat of new entry into the market

If there is threat of new entry so monopolist will reduce prices and will earn only normal profit.

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN LONG RUN

04/10/2023 continued... 22

EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN LONG RUN

MC

ATC

AR

MR

Output

Revenue/Cost

Profit

0

AVCP

E

04/10/2023 continued... 23

• thank-you…….• have a nice day.