monopoly market structure
DESCRIPTION
what is monopoly, its characteristics, probable cause & equilibrium price and output in short n long run. u can mail me ur views on [email protected]TRANSCRIPT
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ImperfectCompetition
MONOPOLY
Rajesh KumarPGP-I
MBA-ABMCABM,GBPUA&T
04
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/20
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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
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The characteristics of Monopoly are
Single SellerNo Close SubstitutesPrice MakerBlocked EntryNon-price Competition Availability of information(Imperfect)
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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
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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
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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
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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
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Monopoly: Equilibrium
y = Q
P
MR Demand
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Monopoly: Equilibrium
y
P
MC
MR Demand
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Monopoly: Equilibrium
y
PAC
MC
MR Demand
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Monopoly: Equilibrium
y
PAC
MC
MR
Output Decision
MC = MR
ym Demand
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Monopoly: Equilibrium
y
PAC
MC
MR Demand
Pm = the price
ym
Pm
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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
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Monopoly: Equilibrium
y
PAC
MC
MR Demand
The shaded area is the excess profit
ym
Pm
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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.
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EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN
MC
ATC
AR
MR
Output
Revenue/Cost
Profit
0
AVC
PROFIT-MAXIMIZING CASE:
P
E
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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.
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EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN
MC
ATC
AR
MR
Output
Revenue/Cost
0
AVC
NORMALPROFIT CASE:
P
E
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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.
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EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN SHORT RUN
MC
ATC
AR
MR
Output
Revenue/Cost
0
AVC
LOSS-MINIMIZING CASE:
P
E
Loss
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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
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EQUILIBRIUM PRICE AND OUTPUT UNDER MONOPOLY IN LONG RUN
MC
ATC
AR
MR
Output
Revenue/Cost
Profit
0
AVCP
E
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• thank-you…….• have a nice day.