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Book No. – 3 (Economics)
Book Name – Principles of Microeconomics (HL Ahuja)
What’s Inside the Chapter? (After Subscription)
1. MONOPOLY: ITS MEANING AND CONDITIONS
2. THE NATURE OF DEMAND AND MARGINAL REVENUE CURVES UNDER MONOPOLY
3. PRICE-OUTPUT EQUILIBRIUM UNDER MONOPOLY
3.1. Monopoly Equilibrium and Price Elasticity of Demand
3.2. Monopoly Equilibrium in Case of Zero Marginal Cost
4. LONG-RUN EQUILIBRIUM UNDER MONOPOLY
4.1. Long-run Equilibrium Adjustment under Monopoly
5. SOURCES OR REASONS OF MONOPOLY POWER
6. MONOPOLY EQUILIBRIUM AND PERFECTLY COMPETITIVE EQUILIBRIUM COMPARED
7. SOCIAL COST OF MONOPOLY, ALLOCATIVE INEFFICIENCY AND WELFARE LOSS
7.1. Dead-Weight Loss (Social Cost) under Monopoly in Case of Increasing Marginal Cost
8 ABSENCE OF SUPPLY CURVE UNDER MONOPOLY
9. MEASUREMENT OF MONOPOLY POWER
9.1. Critique of Lerner’s Measure of Monopoly Power
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Price and Output under Monopoly
Chapter – 26
MONOPOLY: ITS MEANING AND CONDITIONS
- Monopoly exists when there is a single producer or seller of a product with no close substitutes.
- A single producer may be an individual, partnership, or joint stock company.
- Perfect competition or monopolistic competition arises when there are many producers; oligopoly exists when there are a few producers.
- Monopoly requires one firm in the industry; the term “mono” means one and “poly” means seller.
- A monopolistic firm must have no close substitutes for its product. If substitutes exist, there is competition, not monopoly.
- An example of competition: In India, Binaca toothpaste cannot be monopolistic because substitutes like Colgate, Promise, Forhans, Meclean exist.
- Monopolist power: Being the only seller does not necessarily mean the firm can set prices; competition (even indirect) limits pricing power.
- Cross elasticity of demand: The change in demand for a product due to price changes in another product. For monopoly, cross elasticity between monopolist’s product and others must be very small.
- In a monopoly, the barriers to entry are so strong that they prevent other firms from entering the market.
- Barriers to entry may be economic, institutional, or artificial.
- In a monopoly, only one firm controls production, and other firms cannot enter due to strong barriers.
- Three necessary conditions for monopoly:
- Single producer or seller of the product.
- No close substitutes for the product.
- Strong barriers to entry into the industry.
THE NATURE OF DEMAND AND MARGINAL REVENUE CURVES UNDER MONOPOLY
- The demand curve faced by a monopolist is downward sloping because the monopolist must lower the price to sell more and can increase the price by reducing output.
- In perfect competition, the demand curve for an individual firm is a horizontal straight line, meaning the firm is a quantity adjuster with no influence over price.
- The demand curve for the whole competitive industry slopes downward because it reflects the consumers’ demand, which is generally downward sloping.
- A monopolist, being the only firm in the industry, faces the entire consumer demand curve, which is downward sloping.
- The monopolist can lower the price to increase sales or raise the price to reduce sales, unlike a perfectly competitive firm.
- A monopolist faces a more complicated problem: every change in quantity affects the price at which the product can be sold.
- For example, if the monopolist wants to sell a larger quantity, the price must be lowered, and if the monopolist restricts quantity, the price will increase.
- The monopolist seeks an optimum price-quantity combination that maximizes profit.
- The demand curve facing the monopolist is the average revenue curve, which is downward sloping.
- Since the average revenue curve slopes downward, the marginal revenue curve lies below it, due to the average-marginal relationship.
- The implication is that the marginal revenue (MR) will be less than the price or average revenue (AR) because the price falls as quantity increases.
- Formula for relationship between average revenue and marginal revenue: where e represents price elasticity of demand.
- The MR curve lies below the AR curve because the price elasticity (e) is always greater than 1, meaning MR < AR.
- At a given quantity, MR will always be less than AR; for instance, at quantity OM, AR (or price) is MP, and MR is MQ, which is less than MP.
- The extent to which the MR curve lies below the AR curve depends on the value of elasticity (e).
- A monopolist has a distinct demand curve that is identical to the consumer’s demand curve.
- Unlike an oligopolist or a firm under monopolistic competition, a monopolist does not consider the impact of price changes on other firms since the monopolist’s product is distinct with no close substitutes.
