19749 monopoly part 1

1. MONOPOLY
Definition
Types of Monopoly
Features andcomparison with Perfect Competition
Revenue curves in a Monopoly

2. Definition of Monopoly
• Monopoly is the complete opposite of perfect
competition.
• Monopoly is a market structure in which a
single firm makes up the entire market.

3. Three necessary conditions for
Monopoly to exit
1. There is a single producer or seller of the
product
2. There are no close substitutes for the
product
3. Strong barriers to entry of new firms exist in
the industry

4. Types of monopoly
1. Perfect Monopoly
• It is also called as absolute monopoly. In this
case, there is only a single seller of product
having no close substitute; not even remote
one. There is absolutely zero level of
competition. Such monopoly is practically
very rare

5. Types of monopoly
2. Imperfect Monopoly
It is also called as relative monopoly or limited
monopoly. It refers to a single seller market in
which a product may have a remote
substitute. So, there is fear of competition to
some extent e.g. Mobile telecom industry (e.g.
Vodafone) is having competition from fixed
landline phone service industry (e.g. BSNL).

6. Types of Monopoly
3. Public Monopoly/Welfare Monopoly
• When production is owned, controlled and
managed by government, it is called public
monopoly. It is welfare and service oriented.
• e.g. Railways, Defence, postal services, public
utility companies like water, electricity, etc.

7. Types of Monopoly
4. Private Monopoly
When production is owned, controlled and
managed by the individual, or private body or
private organization, it is called private
monopoly. e.g. Tata, Reliance, Bajaj, etc.
groups in India. Such type of monopoly is
profit oriented.

8. Types of Monopoly
5. Simple Monopoly
Simple monopoly firm charges a uniform price or
single price to all the customers. He operates in a
single market.
6. Discriminating Monopoly
Such a monopoly firm charges different price to
different customers for the same product. It
prevails in more than one market.

9. Types of Monopoly
7. Legal Monopoly
When monopoly exists on account of trade marks, patents,
copy rights, statutory regulation of government etc., it is
called legal monopoly. Music industry is an example of legal
monopoly.
8. Natural Monopoly
It emerges as a result of natural advantages like good
location, abundant mineral resources, etc. e.g. Gulf
countries are having monopoly in crude oil exploration
activities because of plenty of natural oil resources.

10. Types of Monopoly
7. Legal Monopoly
When monopoly exists on account of trade marks, patents,
copy rights, statutory regulation of government etc., it is
called legal monopoly. Music industry is an example of legal
monopoly.
8. Natural Monopoly
It emerges as a result of natural advantages like good
location, abundant mineral resources, etc. e.g. Gulf
countries are having monopoly in crude oil exploration
activities because of plenty of natural oil resources.

11. Types of Monopoly
9. Joint Monopoly
• A number of business firms acquire monopoly position
through amalgamation, cartels, syndicates, etc, it
becomes joint monopoly. e.g. Actually, pizza making
firm and burger making firm are competitors of each
other in fast food industry. But when they combine
their business, that leads to reduction in competition.
So they can enjoy monopoly power in market.
• Another example is OPEC

12. Differences between Perfect
competition and Monopoly
1. Number of firms:
Large number of firms
Just one firm
2. Nature of Product:
Homogeneous product
Unique product without close substitutes

13. Differences between Perfect
competition and Monopoly
3. Price Elasticity of Demand:
Infinite (Horizontal demand curve)
Very small (Downward sloping demand curve)
4. Degree of Price Control:
None (Price Taker)
Very large (Price Maker)
5. Ease of Entry
Free Entry
Strong barriers to entry

14. TR, AR and MR formulae
• Total Revenue
P × Q = TR
• Average Revenue
TR/Q = AR = P
• Marginal Revenue
∆TR/∆Q = MR

15. TR, AR and MR of a Monopoly

16. Demand curves of Perfectly
competitive Firm and Monopolistic
firm

17. Comparison of Demand Curves between Perfect
Competition and Monopoly
Perfect Competition
• Demand curve (demand by the consumers) for
the whole industry/market is downward sloping.
• But demand curve of an individual firm is
horizontal (Why? Cannot influence price)
Monopoly
Under monopoly, a single firm constitutes the
whole industry. Therefore that single firm (aka
monopolist firm) faces the downward sloping
demand curve for the whole industry.

18. Therefore....
Therefore, if the monopolist wants to increase
the quantity sold of his good, he must lower
the price
If the monopolist wants to increase the price of
his good, he must be prepared for lower
quantity sold of his good

19. Hence....
Hence, while a perfectly competitive firm has to
deal with the problem of choosing only
equilibrium quantity to maximize profit (Since
the firm cannot choose price, it is a price
taker)....
The monopoly has to deal with the problem of
choosing both equilibrium price and quantity
to maximize profit

20. AR and MR curve of a monopoly firm

21. Relation between AR and MR in case
of Monopoly
Remember:
• In case of horizontal demand curve, P(=AR)=MR.
• Therefore demand curve (or AR curve or price curve) is
the same as MR curve (Case of Perfect Competition)
• But in case of downward sloping demand curve
P(=AR)>MR.
• Therefore Demand curve (or AR curve or price curve) is
always above the MR curve (Case of Monopoly)
• (Study the tables and the graphs)