General Economics

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Price & Output
Determination in
Monopoly & Imperfect
Markets
General Economics

Monopoly
• Derived from Greek word “Mono”
means “Single” and “Polein” means
“Seller”.
• Monopoly means “Alone to Sell”.
• Monopoly signifies absolute power to
Produce & Sell a Product which has no
Close Substitute.
• Industry is a Single-Firm-Industry.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

2

Monopoly
• Monopoly is a Market situation in which
there is a Single Seller, there are no Close
Substitutes for Commodity it produces, there
are Barriers to Entry.
- Koutsoyiannis
• Pure or Absolute Monopoly exists when a
Single Firm is the Sole Producer for a Product
for which there are no Close Substitutes.
- Mc Connel
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

3

Features of Monopoly
• One Seller & Large Number of Buyers
• Monopoly is also an Industry
• Restrictions on the Entry of New Firms
– Economic, Institutional, Legal or Artificial
Barriers
• No Close Substitutes
– Cross Elasticity of Demand is Zero or Very Small
– Price Elasticity of Demand < 1
• Price Maker

General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

4

Legal
Restrictions
“Franchise
Monopoly”

Patent
Monopolies

Barriers to
Monopoly

Raw Material
Monopoly

Efficiency
“Natural
Monopolies”
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

5

Sources of Monopoly (Barriers)
• Legal Restrictions
– Created by Law in Public Interest
– Like Postal, Telephone, Generation &
Distribution
of
Electricity,
Railways,
Roadways, Airlines, etc.
– State may create Monopolies in Private
Sector by restricting Entry of other Firms.
Such Monopolies are known as “Franchise
Monopoly”.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

6

Sources of Monopoly (Barriers)
• Control over Key Raw Materials
– Firms that acquire Monopoly because of
their Traditional Control over certain Scarce
& Key raw Materials, which are essential for
the Production of certain other Goods, are
known as “Raw Material Monopolies”.
– For Example, Aluminium Company of
America had monopolized the Aluminium
Industry by acquiring control over almost all
sources of Bauxite Supply.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

7

Sources of Monopoly (Barrier)
• Efficiency
– Primary and Technical reason for
growth of Monopolies is the
Economies of Scale.
– Emerges either due to Technical
Efficiency or is Created by the Law on
Efficiency grounds.
– Termed as “Natural Monopolies”.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

8

Sources of Monopoly (Barriers)
• Patent Rights
– Patent Rights are granted by Government to
a Firm to produce a Commodity of Specified
Quality & Character or to use a Specified
Technique of Production.
– Patent Rights gives a Firm Exclusive Rights to
produce the specified commodity or to use
the Specified Technique of Production.
– Termed as “Patent Monopolies”.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

9

Demand & Revenue Under
Monopoly

• Firm’s Demand Curve also constitutes
Industry’s Demand Curve.
• Demand Curve of Monopolist is also
Average Revenue (AR) Curve.
• AR Curve & MR Curve are separate from
one another.
• MR Curve lies below the AR Curve.
• Slope of MR Curve is TWICE the Slope of
AR Curve.
General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

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10

Demand & Revenue Under
Monopoly
Y

Revenue

A
E > 1 (Increase in TR)

P

L

N

E = 1 (Maximum TR)
E < 1 (Decrease in TR)

O

D = AR

MR

Q

Zero

Output

X

General Economics:Price & Output
determinatin in Monopoly & Imperfect
Market

11
11

Relationship between AR & MR of...
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