Monopoly is the market situation, where a single firm is to make the whole industry. That single firm has a complete control over the goods produced by monopolist firm and has no close substitute in the market.
Reasons of Monopoly:
Following are the reasons of Monopoly.
1. Ownership of Essential Raw Material:
Sometimes a firm has a complete control over the raw material of a particular commodity, thus it enjoy monopoly in its production like “De Bear” company of diamond of South Africa.
2. Patent and Copy Rights:
Sometime government in order to encourage research gives patent and copyrights to invention. Thus, they have monopoly in its production.
3. State Ownership:
Sometime government itself own’ some business thus they have a monopoly in the market like supply of electricity.
4. Economies of Scale:
A firm can reduce its cost of production so that revenues are large in number. In this situation no other firm can exist and thus monopoly arises.
5. Unfair Competition:
Sometime firms may join together to create monopoly in the market. Thus, they use different tact to make the new firms away from the market.
AR and MR Curves under Monopoly:
The revenue curves under monopoly can be derive with the help of following schedule.
Quantity Price TR =P*Q AR MR
1 10 10 10 10
2 09 18 09 08
3 08 24 08 06
4 07 28 07 04
5 06 30 06 02
6 05 30 05 0
7 04 28 04 -2
Unlike Perfect Competition the AR and MR curves are not horizontal and parallel to X-axis. As the monopolist is the price maker in the market. They can increase its sale by lowering the price and vice versa. The AR and MR curves are thus negatively sloped but MR curve remains below than the AR curve.
The law will be explaining in two following sections.
Short-run is the period in which some factors of productions remains constant.
Conditions of equilibrium in short-run:
There are two conditions of equilibrium in the short-Run
® Necessary condition MC = MR.
® Sufficient condition is MC curve should cut the MR curve from below.
Equilibrium in short-run:
It is wrong concept about monopoly that he cannot bear loses or he only enjoys super-normal profit. There are different conditions to earn profit in monopoly these are as under.
1. Normal Profit
2. Super-Normal Profit
1. Normal Profit:
In this figure, E is the equilibrium point OQ is the equilibrium output OP is the equilibrium price. Total cost is OQSP which is equal to total revenue. So, the firm is earning only normal profit.
2. Super-Normal Profit:
In this figure, E is the equilibrium point; OQ is the equilibrium output OP is the equilibrium price. Total cost is OQKN and total revenue is OQSP. The firm is earning supernormal profit, which is NKSP.
In this figure, E is the equilibrium point; OQ is the equilibrium output OP is the equilibrium price. Total cost is OQKN and total revenue is OQSP. Where TR is OQSP, the loss is represented by shaded area SKNP.
Reason to Bear Lose:
In the short run monopolist can bear loss for some time. However, if loss continues in the long run, the firm wills have to shut dawn. However, in short run loss condition, the monopolistic will try to minimize he loss and make adjustment in long run.
Equilibrium in Long Run:
It is period in which all the factors of production become variable.
Adjustment in Plant size:
Following adjustment can be made in long run in plant size.
Þ Produce less optimal scale
Þ Produce equal than optimal scale
Þ Produce more than optimal scale
Equilibrium will be maintained at the level when:
a. MC = MR
b. MC curve must cut the MR curve from below
Also monopolist earns only super-normal profit in long run under all the adjustment:
1. Less than optimal scale:
In this diagram firm is in equilibrium at point E. Firm cost of production is OS and price is OP. Firm is earning abnormal profit equal to the shaded area PNKS.
2. Equal to optimal scale:
Firm is producing the OQ that is the equilibrium level of output optimally, because the AC is minimum and firm is earning abnormal profit equal to the area SENP.
3. More than Optimal Scale:
In this above figure firm is in equilibrium at point E, firm is producing OQ level of the output. The total cost of production is ON and firm charging OP price and enjoying the profit equal to the shaded area NFSP.