Monopoly_ppt_final 123456 (1)

8/8/2019 Monopoly_ppt_final 123456 (1)

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MONOPOLY

Made by:

-Anam Mehmood

-Shivani Babbar-Sagar Khandelwal

-Abrar Kadvekar

-Neethi Menon

-Rohit Seth

-Sahil khusro


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DEFINITION

A monopoly is a situation in whichsingle company owns all or nearly all

of the market for a given type of

product or service.


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MONOPOLY ARISESWHEN

Barriers to Entry: that allows the singlecompany to operate without competition.

In such an industry structure, the producer will

often produce a volume that is less than theamount which would maximize social welfare.

Three types of Barriers to Entry

Economic

Legal

Deliberate


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1. ECONOMICBARRIERS

Economies ofScale :

It refers economic efficiency that results from

carrying out a process (such as production orsales) on a larger and larger scale.

Declining cost coupled with large start upcosts give monopolies an advantage over

would be competitors.


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They are in position to cut prices below a

new entrant's operating costs and drive

them out of the industry.

The size of the industry relative to the

minimum efficient scale may limit the

number of firms that can effectively

compete within the industry.

Contd.


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TechnologicalSuperiority

May be better able to acquire, integrate and

use the best possible technology in

producing its goods while entrants do not

have the size or fiscal muscle to use the best

available technology.

In nut shell one large firm can sometimes

produce goods cheaper than several small

firms.

Contd.


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Non Availability ofSubstitute

Makes the demand for the good relatively

elastic enabling the monopolies to extracts

positive profits.

Capital Requirements:

Large fixed cost limits the number of firms in

the industry.

Difficult for small firms to enter an industry

and expand.

Contd.


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2. LEGAL BARRIERS

Legal rights can provide opportunity to

monopolise the market.

For eg :Intellectual property rights, including

patents and copyrights, give a monopolist

exclusive control over the production and

selling of certain goods.

Contd.


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3. DELIBERATEACTIONS

A firm wanting to monopolise a market may

engage in various types of deliberate action to

exclude competitors or eliminate competition.

Such actions include collusion, lobbying

governmental authorities, and force.

Contd.


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BENEFITSOFMONOPOLY

Reduction in price of good due to economies ofscale.

No risk of over production

There is enough capital for research

Company promotes R&D for their product tomaintain its competitive advantage


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DISADVANTAGESOFMONOPOLY

Exploitation of consumers

Restriction of consumers choice

Absence of competition leads to inefficiency

Increase in price of product

Exploitation of labor ie when price is greater thanmarginal cost


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DEMANDCURVEFOR MONOPOLY

The monopolistic

confronts a downwardsloping demand curve.

The Industry demand

curve is same as firmsdemand curve.


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MARGINAL REVENUECURVEFOR A MONOPOLIST


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MONOPOLY: EQUILIBRIUMPm = the price

Qm = quantity


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MONOPOLY: EQUILIBRIUM

Firm = Market

MR=MC

MCcurve cuts MR curve from below.


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PROFITMAXIMIZATION

To maximize profit ,monopolist should chooseto produce that output

level where MarginalRevenue equals MarginalCost.

Since MR = MCat the profitmaximizing output and P>MR for a monopolist, themonopolist will set a pricegreater than marginal cost


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MONOPOLY PROFIT

A maximizing monopolist

will raise the output as

long as MR exceed MC.

Above Q*units of output,

MCis greater than MR,

thus increasing the output

beyondQ*will reduce the

profits.


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PRICEAND OUTPUTCHOICESFOR A MONOPOLIST

SUFFERINGLOSSESINTHESHORT-RUN

It is possible for aprofit-maximizingmonopolist to suffershort-run losses.

If the firm cannotgenerate enoughrevenue to covertotal costs, it will go

out of business in thelong-run.


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NORMAL PROFIT IN SHORT- RUN

PERIOD

IN SHORT

RUN

EQUILLIBRUM1)(MC=MR),

2)(AR=AC),

So they will

earn only

normal profit.


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LONG- RUN EQUILIBRIUM:

The firm

will earn

super-normal

profits in

long run.


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SUPPLYCURVEOFMONOPOLY

A monopoly firm has no supply curve that is

independent of the demand curve for its product.

A monopolist sets both price and quantity, and the

amount of output that it supplies depends on both

its marginal cost curve and the demand curve that

it faces.


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PERFECT

COMPETITION ANDMONOPOLY

COMPARED


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MONOPOLYVS. COMPETITIVEMARKETS

Market Power

PerfectlyCompetitive Firms :

Zero market power, in terms of setting prices.Firm is a Price Taker.

Monopoly :Considerable market power.

Firm is a Price Maker.


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Price

PerfectlyCompetitive Firms:

Market Price is equal to MarginalCost

Monopoly:

Market Price is greater than MarginalCost.

Contd.


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ProductDifferentiationPerfectlyCompetitive Firms:

Homogeneous product

Close Substitute available.

Monopoly:

High product differentiation

No Close substitute available.

Contd.


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Contd.

Elasticity ofDemand

PerfectlyCompetitive Firms:

Demand curve is perfectlyElastic.

Monopoly:

DemandCurve is relatively inelastic.


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Number of BuyersPerfectlyCompetitive Firms:

Populated by an infinite number of buyers

and sellers.

Monopoly

It involves a single seller.

Contd.


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In a perfectly competitive industry in the long run, price will be equal to

long-run average cost. The market supply curve is the sum of all the short-

run marginal cost curves of the firms in the industry. Here we assume that

firms are using a technology that exhibits constant returns to scale: LRAC

is flat. Big firms enjoy no cost advantage.

A Perfectly Competitive Industry in Long-Run

Equilibrium


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Perfect Competition and Monopoly Compared

Comparison of Monopoly and PerfectlyCompetitive Outcomes for a Firm with Constant Returnsto ScaleIn the newly organized monopoly, the marginal cost curve is the same as the supply curve

that represented the behavior of all the independent firms when the industry was organized

competitively. Quantity produced by the monopoly will be less than the perfectly competitive

level of output, and the monopoly price will be higher than the price under perfect

competition. Under monopoly, P= Pm = $4 and Q = Qm = 2,500. Under perfect competition, P= P = $3 and Q = Q = 4,000.


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PRICEDISCRIMINATION

This occurs when a firm charges a different price to

different groups of consumers for an identical good or

service, for reasons not associated with the costs of

production.

It is important to stress that charging different prices

for similar goods is not price discrimination. For

example, price discrimination does not does not occurwhen a rail company charges a higher price for a first

class seat. This is because the price premium over a

second-class seat can be explained by differences in

the cost of providing the service.


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A monopoly engages in price discrimination if it

is able to sell otherwise identical units of output

at different prices.

Whether a price discrimination strategy is

feasible depends on the inability of buyers to

practice arbitrage

Contd.


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PERFECTPRICEDISCRIMINATION

If this monopolist wishes to practice perfect price

discrimination, he will want to produce the quantity for

which the marginal buyer pays a price exactly equal to

the marginal cost.

Contd.


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MARKETSEPARATION

The profit maximizing price will be higher inmarkets where demand is inelastic.


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Monopoly_ppt_final 123456 (1)

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