Therefore, the monopolist will be in equilibrium at output OM, where marginal revenue is equal to marginal cost and profits are the maximum the price at which output OM is sold in the market can be known from looking at demand curve or average revenue curve AR. It can be seen from the diagram that up until OM output, the marginal revenue is greater than marginal cost, but beyond OM the marginal revenue is less than marginal cost. MR is the marginal revenue curve, which lies below the average revenue curve AR.ĪC is the average cost curve and MC is the marginal cost curve. AR is the demand curve or average revenue curve facing the monopolist. The price-output equilibrium of the monopolist can be easily understood with the help of figure1.6 on the next page. If the production is carried beyond this point, the profits will start decreasing. He does so because profits will go on increasing as long as marginal revenue exceeds marginal cost.Īt the point where marginal revenue is equal to marginal cost, profits will be maximised. He will continue expanding output so long as marginal revenue exceeds marginal cost. In other words, the monopolist will be in equilibrium position at that level of output at which marginal revenue equals marginal cost. He will stop at that point beyond which additional units of production add more to cost than to revenue. He will go on producing so long as additional units add more to revenue than to cost. In other words, he will be in equilibrium at the price-output level, at which his profits are maximum. Therefore, he will produce to a point and charge a price, which gives him the maximum money profits. Equalising Maginal Revenue and Marginal Cost The aim of the monopolist, like every other producer, is to maximise his total money profits. He can only do one of the two things i.e. However, he cannot fix both the price and force people to buy a pre-determined quantity at that price. (b) he can fix the supply and then let price be determined by demand in relation to the supply fixed by him. (a) fix the price and offer to supply the quantity demanded at that price or Being in control of supply, the monopolist can Monopolist is a sole producer of the commodity and he can easily influence the price by changing his supply. the product of a rival cannot take the place of the monopolised product. In other words, the cross-elasticity of demand between the product of the monopolist and the product of the closest rival must be very low i.e. A monopolist is the sole producer of his product, which has no closely competing substitutes. It is under the control of the monopolist. However, the difference is that supply is not free to adjust itself to demand. Under monopoly conditions, too, there is bound to be interaction between the forces of demand and supply. These are created to eliminate competition and to earn huge profits i.e. Monopoly is the antithesis of competition. Thus, a monopolist sets price for his production in relation to the demand position and not just fix up any price he likes. He will produce that level of output, which maximises profits and charge only that price at which heis in a position to dispose of his entire output. If buyers refuse to buy at a very high price, he has to keep a lower price. This is because, he cannot disregard demand situation in the market. Though a monopolist is a price-maker, he has limited power to charge a high price for his product in the market. Since a monopolist has complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market.There are legal, technological, economic or natural obstacles, which may block the entry of new firms. A pure monopolist has no immediate rivals due to certain barriers to entry in the field.That means it cannot sell more output unless the price is lowered. A monopoly firm itself being the industry faces a downward-sloping demand curve for its product.Thus, in a competitive industry, there is single ruling price, while in a monopoly there may be price differentials. He can vary the price from buyer to buyer. He is in a position to fix the price for the product as he likes. In fact, his price fixing power is absolute. A monopolist is a price-maker and not a price-taker.Monopoly is a complete negation of competition.They have either to buy the product or go without it. Therefore, the buyers have no alternative or choice. There are no closely competitive substitutes for the product.Thus, under monopoly firm and industry are identical. The monopolist is the single producer in the market.The characteristic features of a monopolistic firm are: “Monopoly is a market situation in which the firm is independent of price changes in the product of each and every other firm.” Prof.
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