Lecture 10 - Price and Output Determination Under Monopoly | Microeconomics- Interaction between individual buyer-seller PDF Download

 Page 1


Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Price and Output Determination Under Monopoly 
Lesson Developer: Bidhadhar Majhi 
College/Department:Shyamlal College, University of Delhi 
Page 2


Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Price and Output Determination Under Monopoly 
Lesson Developer: Bidhadhar Majhi 
College/Department:Shyamlal College, University of Delhi 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
Contents 
1. Learning Outcomes 
2. Introduction 
3. Forms of Monopoly  
4. Features of Monopoly 
5. Nature of Demand and Cost Curves under Monopoly 
6. Monopoly Equilibrium – Price and Output Determination 
 6.1 Total Revenue (TR) and Total Cost (TC) Approach 
 6.2 Marginal Revenue (MR) and Marginal Cost (MC) Approach 
7. Price Discrimination or Discriminating Monopoly 
8.Inefficiency and Loss of Social Welfare under Monopoly 
9. Regulation of  Monopoly and  Anti-trust Law 
10. Perfect Competition and Monopoly – A Comparison  
11. Review Points 
12. Questions for Practice 
13. Suggested Readings 
 
1. Learning Outcomes 
 
The objective of the present chapter is to acquaint the readers about:  
 
? Definition of monopoly and distinction between monopoly and other market forms. 
? Types of monopoly 
? Characteristics of monopoly 
? Behaviour of demand and cost curves under monopoly 
? Monopoly equilibrium in the short run and long run 
? Discriminating monopoly 
? Possibility and Profitability of price discrimination 
? Dumping – a special case of price discrimination 
? Inefficiency and loss of social welfare under monopoly 
? Regulation of monopoly and anti-trust law 
? Monopoly and perfect competition comparison 
 
 
2. Introduction 
Page 3


Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Price and Output Determination Under Monopoly 
Lesson Developer: Bidhadhar Majhi 
College/Department:Shyamlal College, University of Delhi 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
Contents 
1. Learning Outcomes 
2. Introduction 
3. Forms of Monopoly  
4. Features of Monopoly 
5. Nature of Demand and Cost Curves under Monopoly 
6. Monopoly Equilibrium – Price and Output Determination 
 6.1 Total Revenue (TR) and Total Cost (TC) Approach 
 6.2 Marginal Revenue (MR) and Marginal Cost (MC) Approach 
7. Price Discrimination or Discriminating Monopoly 
8.Inefficiency and Loss of Social Welfare under Monopoly 
9. Regulation of  Monopoly and  Anti-trust Law 
10. Perfect Competition and Monopoly – A Comparison  
11. Review Points 
12. Questions for Practice 
13. Suggested Readings 
 
1. Learning Outcomes 
 
The objective of the present chapter is to acquaint the readers about:  
 
? Definition of monopoly and distinction between monopoly and other market forms. 
? Types of monopoly 
? Characteristics of monopoly 
? Behaviour of demand and cost curves under monopoly 
? Monopoly equilibrium in the short run and long run 
? Discriminating monopoly 
? Possibility and Profitability of price discrimination 
? Dumping – a special case of price discrimination 
? Inefficiency and loss of social welfare under monopoly 
? Regulation of monopoly and anti-trust law 
? Monopoly and perfect competition comparison 
 
 
2. Introduction 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
Market may be broadly classified as perfect competition and imperfect competition. Various aspects of 
perfect competition have been discussed in the previous lesson. In the present and in subsequent few 
lessons we shall focus on various forms of imperfect competition. Based on 
the degree of imperfection (due to market power), markets are classified as 
monopoly, monopolistic competition, oligopoly, and duopoly. The present 
chapter deals with various aspects of monopoly market.  
 
Monopoly is an extreme form of imperfect competition where a single firm 
of a product in the market decides what price it charge from the consumers 
for its product and how much it sell in the market, of course not both. A monopoly may be an individual 
ownership firm or a single partnership firm or a joint stock company. It is a market structure which said 
to be exit when a single firm produces a commodity in the market which has no close substitutes. Since 
there is single producer/seller of a product in the market, there is no distinction between firm and 
industry under monopoly. Firm is the price maker in such market structure. The consumers have no role 
to play in deciding the price. They are in a situation of ‘take or leave it’ in the market. Though 
monopolist is the price maker and has complete control over the market price of the commodity 
produced by it, it does not mean that the monopolist can set both price as well as volume of output. A 
monopolist can set either of the two i.e. price or output. It may be noted that though a monopoly firm 
decides the price of its products, its pricing decision is not independent of the elasticity of demand of 
the product in the market. 
 
3. Forms of Monopoly  
 
Based on the various causes of occurrence, different terminology may be prefixed before the word 
monopoly to signify a different connotation of it. A firm may enjoy monopoly power in a market owing 
to ownership of raw materials, exclusive knowledge, exclusive techniques of production, legal sanction, 
imposition of barriers, limited size of the market, etc. Accordingly, there may be different forms of 
monopoly. Following are their brief explanation: 
i) Pure/Perfect Monopoly: In pure monopoly there is absolutely only one seller of a product in the 
market and no other products are available in the market which can be remotely used as its 
substitutes. The level of competition in a pure monopoly market is absolutely zero.  
ii) Imperfect Monopoly: Contrary to pure monopoly there are some areas of production where 
monopoly power can be exercised to a limited extent because of availability of some products in the 
market which can be used as substitute to a limited extent. However, such products can neither be 
termed as close substitutes or perfect substitutes of the product produced by the monopolist. We 
may call such market as imperfect monopoly market. For example; for a single cell phone producing 
firm landline telephone producers may pose a competitive threat, even though both products are 
not close substitute to each other. Here, the cell phone producing firm cannot said to be enjoying 
absolute or perfect monopoly power rather, imperfect monopoly power in the market.   
What is Monopoly? 
 
Monopoly is an extreme 
form of imperfect 
competition where a single 
producer/seller produces or 
sales a product which has no 
close substitutes available in 
the market. 
Page 4


Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Price and Output Determination Under Monopoly 
Lesson Developer: Bidhadhar Majhi 
College/Department:Shyamlal College, University of Delhi 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
Contents 
1. Learning Outcomes 
2. Introduction 
3. Forms of Monopoly  
4. Features of Monopoly 
5. Nature of Demand and Cost Curves under Monopoly 
6. Monopoly Equilibrium – Price and Output Determination 
 6.1 Total Revenue (TR) and Total Cost (TC) Approach 
 6.2 Marginal Revenue (MR) and Marginal Cost (MC) Approach 
7. Price Discrimination or Discriminating Monopoly 
8.Inefficiency and Loss of Social Welfare under Monopoly 
9. Regulation of  Monopoly and  Anti-trust Law 
10. Perfect Competition and Monopoly – A Comparison  
11. Review Points 
12. Questions for Practice 
13. Suggested Readings 
 
1. Learning Outcomes 
 
The objective of the present chapter is to acquaint the readers about:  
 
? Definition of monopoly and distinction between monopoly and other market forms. 
? Types of monopoly 
? Characteristics of monopoly 
? Behaviour of demand and cost curves under monopoly 
? Monopoly equilibrium in the short run and long run 
? Discriminating monopoly 
? Possibility and Profitability of price discrimination 
? Dumping – a special case of price discrimination 
? Inefficiency and loss of social welfare under monopoly 
? Regulation of monopoly and anti-trust law 
? Monopoly and perfect competition comparison 
 
 
2. Introduction 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
Market may be broadly classified as perfect competition and imperfect competition. Various aspects of 
perfect competition have been discussed in the previous lesson. In the present and in subsequent few 
lessons we shall focus on various forms of imperfect competition. Based on 
the degree of imperfection (due to market power), markets are classified as 
monopoly, monopolistic competition, oligopoly, and duopoly. The present 
chapter deals with various aspects of monopoly market.  
 
Monopoly is an extreme form of imperfect competition where a single firm 
of a product in the market decides what price it charge from the consumers 
for its product and how much it sell in the market, of course not both. A monopoly may be an individual 
ownership firm or a single partnership firm or a joint stock company. It is a market structure which said 
to be exit when a single firm produces a commodity in the market which has no close substitutes. Since 
there is single producer/seller of a product in the market, there is no distinction between firm and 
industry under monopoly. Firm is the price maker in such market structure. The consumers have no role 
to play in deciding the price. They are in a situation of ‘take or leave it’ in the market. Though 
monopolist is the price maker and has complete control over the market price of the commodity 
produced by it, it does not mean that the monopolist can set both price as well as volume of output. A 
monopolist can set either of the two i.e. price or output. It may be noted that though a monopoly firm 
decides the price of its products, its pricing decision is not independent of the elasticity of demand of 
the product in the market. 
 
3. Forms of Monopoly  
 
Based on the various causes of occurrence, different terminology may be prefixed before the word 
monopoly to signify a different connotation of it. A firm may enjoy monopoly power in a market owing 
to ownership of raw materials, exclusive knowledge, exclusive techniques of production, legal sanction, 
imposition of barriers, limited size of the market, etc. Accordingly, there may be different forms of 
monopoly. Following are their brief explanation: 
i) Pure/Perfect Monopoly: In pure monopoly there is absolutely only one seller of a product in the 
market and no other products are available in the market which can be remotely used as its 
substitutes. The level of competition in a pure monopoly market is absolutely zero.  
ii) Imperfect Monopoly: Contrary to pure monopoly there are some areas of production where 
monopoly power can be exercised to a limited extent because of availability of some products in the 
market which can be used as substitute to a limited extent. However, such products can neither be 
termed as close substitutes or perfect substitutes of the product produced by the monopolist. We 
may call such market as imperfect monopoly market. For example; for a single cell phone producing 
firm landline telephone producers may pose a competitive threat, even though both products are 
not close substitute to each other. Here, the cell phone producing firm cannot said to be enjoying 
absolute or perfect monopoly power rather, imperfect monopoly power in the market.   
What is Monopoly? 
 
Monopoly is an extreme 
form of imperfect 
competition where a single 
producer/seller produces or 
sales a product which has no 
close substitutes available in 
the market. 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
iii) Natural Monopoly: Monopoly may also occur due to exclusive ownership raw materials of strategic 
importance from the production point of view or exclusive techniques of production in the market. 
Such type of monopoly is known as natural monopoly. Example: Indian Railways, electricity 
distribution companies in India, natural gas exploration and distribution companies in India, etc. 
Natural monopoly may also emerge due to availability of specific natural advantages to a firm in the 
form of good location, mineral resources, etc.  
iv) Legal Monopoly: Sometimes a firm enjoys monopoly power due to legal sanction or policy decision 
of the government. In such scenario, government through various policy measures and legislation 
prohibits other players to enter into the market. For example; in many states in India private bus 
operators are not allowed to operate by the government leading to monopoly power of the state 
run road transport corporations.  
 
4. Features of Monopoly 
 
Following are the features/characteristics of monopoly market: 
 
i) One Producer/Seller and Large Number of Buyers:  The word monopoly is derived from the Greek 
word ‘monos polein’ meaning single seller. Accordingly, monopoly is a market where there is only one 
producer/seller of a product in the market and it has absolute control over the market price of the 
commodity it produce. However, like perfect competition the number of buyers in the monopoly 
market is large. Thus, a monopolist may sell its product to N-numbers of consumers in the market. 
Anybody who is willing to purchase commodity at the price set by the monopolist can buy the 
commodity. Owing to the monopoly power, a monopolist may discriminate price among different 
consumers taking into account the market demand condition of the product. 
ii) Restriction to New Firms to Enter into the Industry:  In monopoly market there is barrier to entry for 
the new firms. The barrier may be technological, legal or natural. 
iii) No Distinction between Firm and Industry: Since under monopoly there is one producer or seller of a 
product in the market, the firm producing the product is itself is the industry. Thus, the difference 
between firm and industry disappears in the monopoly market. 
iv)Monopolist is the Price Maker: A monopoly firm decides price of its 
product. Given the price, output to be produced by the monopolist is 
automatically determined in the market through market demand. 
Monopolist is the price maker because it sells its product to a large 
number of small buyers who have no capacity to influence the market 
price. 
v)Unique Product: The product produced by the monopolist is unique as 
no close substitute products are available in the market. Because of 
unavailability of close substitutes, the monopolist is able to decide the 
price of its product. This feature of non-availability of substitutes makes 
this market an impractical market. 
vi)Price Discrimination: A monopolist can practice the policy of price discrimination that is, it can sale its 
product at different prices to different buyers. 
Features of Monopoly Market 
 
i) One seller and large number of 
buyers in the market. 
ii) Restriction to new firm to enter 
into the industry. 
iii) There is no distinction between 
firms and industry. 
iv) Monopoly is the price maker. 
v) Product produced by the 
monopolist has no close 
substitutes. 
vi) A Monopolist can discriminate 
price. 
vii) Supply curve is indeterminate.  
Page 5


Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Price and Output Determination Under Monopoly 
Lesson Developer: Bidhadhar Majhi 
College/Department:Shyamlal College, University of Delhi 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
 
Contents 
1. Learning Outcomes 
2. Introduction 
3. Forms of Monopoly  
4. Features of Monopoly 
5. Nature of Demand and Cost Curves under Monopoly 
6. Monopoly Equilibrium – Price and Output Determination 
 6.1 Total Revenue (TR) and Total Cost (TC) Approach 
 6.2 Marginal Revenue (MR) and Marginal Cost (MC) Approach 
7. Price Discrimination or Discriminating Monopoly 
8.Inefficiency and Loss of Social Welfare under Monopoly 
9. Regulation of  Monopoly and  Anti-trust Law 
10. Perfect Competition and Monopoly – A Comparison  
11. Review Points 
12. Questions for Practice 
13. Suggested Readings 
 
1. Learning Outcomes 
 
The objective of the present chapter is to acquaint the readers about:  
 
? Definition of monopoly and distinction between monopoly and other market forms. 
? Types of monopoly 
? Characteristics of monopoly 
? Behaviour of demand and cost curves under monopoly 
? Monopoly equilibrium in the short run and long run 
? Discriminating monopoly 
? Possibility and Profitability of price discrimination 
? Dumping – a special case of price discrimination 
? Inefficiency and loss of social welfare under monopoly 
? Regulation of monopoly and anti-trust law 
? Monopoly and perfect competition comparison 
 
 
2. Introduction 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
Market may be broadly classified as perfect competition and imperfect competition. Various aspects of 
perfect competition have been discussed in the previous lesson. In the present and in subsequent few 
lessons we shall focus on various forms of imperfect competition. Based on 
the degree of imperfection (due to market power), markets are classified as 
monopoly, monopolistic competition, oligopoly, and duopoly. The present 
chapter deals with various aspects of monopoly market.  
 
Monopoly is an extreme form of imperfect competition where a single firm 
of a product in the market decides what price it charge from the consumers 
for its product and how much it sell in the market, of course not both. A monopoly may be an individual 
ownership firm or a single partnership firm or a joint stock company. It is a market structure which said 
to be exit when a single firm produces a commodity in the market which has no close substitutes. Since 
there is single producer/seller of a product in the market, there is no distinction between firm and 
industry under monopoly. Firm is the price maker in such market structure. The consumers have no role 
to play in deciding the price. They are in a situation of ‘take or leave it’ in the market. Though 
monopolist is the price maker and has complete control over the market price of the commodity 
produced by it, it does not mean that the monopolist can set both price as well as volume of output. A 
monopolist can set either of the two i.e. price or output. It may be noted that though a monopoly firm 
decides the price of its products, its pricing decision is not independent of the elasticity of demand of 
the product in the market. 
 
3. Forms of Monopoly  
 
Based on the various causes of occurrence, different terminology may be prefixed before the word 
monopoly to signify a different connotation of it. A firm may enjoy monopoly power in a market owing 
to ownership of raw materials, exclusive knowledge, exclusive techniques of production, legal sanction, 
imposition of barriers, limited size of the market, etc. Accordingly, there may be different forms of 
monopoly. Following are their brief explanation: 
i) Pure/Perfect Monopoly: In pure monopoly there is absolutely only one seller of a product in the 
market and no other products are available in the market which can be remotely used as its 
substitutes. The level of competition in a pure monopoly market is absolutely zero.  
ii) Imperfect Monopoly: Contrary to pure monopoly there are some areas of production where 
monopoly power can be exercised to a limited extent because of availability of some products in the 
market which can be used as substitute to a limited extent. However, such products can neither be 
termed as close substitutes or perfect substitutes of the product produced by the monopolist. We 
may call such market as imperfect monopoly market. For example; for a single cell phone producing 
firm landline telephone producers may pose a competitive threat, even though both products are 
not close substitute to each other. Here, the cell phone producing firm cannot said to be enjoying 
absolute or perfect monopoly power rather, imperfect monopoly power in the market.   
What is Monopoly? 
 
Monopoly is an extreme 
form of imperfect 
competition where a single 
producer/seller produces or 
sales a product which has no 
close substitutes available in 
the market. 
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
iii) Natural Monopoly: Monopoly may also occur due to exclusive ownership raw materials of strategic 
importance from the production point of view or exclusive techniques of production in the market. 
Such type of monopoly is known as natural monopoly. Example: Indian Railways, electricity 
distribution companies in India, natural gas exploration and distribution companies in India, etc. 
Natural monopoly may also emerge due to availability of specific natural advantages to a firm in the 
form of good location, mineral resources, etc.  
iv) Legal Monopoly: Sometimes a firm enjoys monopoly power due to legal sanction or policy decision 
of the government. In such scenario, government through various policy measures and legislation 
prohibits other players to enter into the market. For example; in many states in India private bus 
operators are not allowed to operate by the government leading to monopoly power of the state 
run road transport corporations.  
 
4. Features of Monopoly 
 
Following are the features/characteristics of monopoly market: 
 
i) One Producer/Seller and Large Number of Buyers:  The word monopoly is derived from the Greek 
word ‘monos polein’ meaning single seller. Accordingly, monopoly is a market where there is only one 
producer/seller of a product in the market and it has absolute control over the market price of the 
commodity it produce. However, like perfect competition the number of buyers in the monopoly 
market is large. Thus, a monopolist may sell its product to N-numbers of consumers in the market. 
Anybody who is willing to purchase commodity at the price set by the monopolist can buy the 
commodity. Owing to the monopoly power, a monopolist may discriminate price among different 
consumers taking into account the market demand condition of the product. 
ii) Restriction to New Firms to Enter into the Industry:  In monopoly market there is barrier to entry for 
the new firms. The barrier may be technological, legal or natural. 
iii) No Distinction between Firm and Industry: Since under monopoly there is one producer or seller of a 
product in the market, the firm producing the product is itself is the industry. Thus, the difference 
between firm and industry disappears in the monopoly market. 
iv)Monopolist is the Price Maker: A monopoly firm decides price of its 
product. Given the price, output to be produced by the monopolist is 
automatically determined in the market through market demand. 
Monopolist is the price maker because it sells its product to a large 
number of small buyers who have no capacity to influence the market 
price. 
v)Unique Product: The product produced by the monopolist is unique as 
no close substitute products are available in the market. Because of 
unavailability of close substitutes, the monopolist is able to decide the 
price of its product. This feature of non-availability of substitutes makes 
this market an impractical market. 
vi)Price Discrimination: A monopolist can practice the policy of price discrimination that is, it can sale its 
product at different prices to different buyers. 
Features of Monopoly Market 
 
i) One seller and large number of 
buyers in the market. 
ii) Restriction to new firm to enter 
into the industry. 
iii) There is no distinction between 
firms and industry. 
iv) Monopoly is the price maker. 
v) Product produced by the 
monopolist has no close 
substitutes. 
vi) A Monopolist can discriminate 
price. 
vii) Supply curve is indeterminate.  
Price and Output Determination Under Monopoly  
 
Institute of Lifelong Learning, University of Delhi 
vii)Indeterminate Supply Curve: A monopolist decides the price of its product but the quantity supplied 
is not in its control. How much output a monopoly would supply in the market at given price cannot be 
ascertained. Once the price has been fixed by the monopolist then supply become indeterminate. Thus, 
there can’t be any specify relationship between supply and price under monopoly. Implying, the 
monopoly supply curve is indeterminate. 
 
5. Nature of Demand and Cost Curves under Monopoly 
 
 Under monopoly the average revenue (AR) curve i.e., demand curve is downward sloping indicating 
inverse relationship between price and quantity demand. That is, a monopolist may sell more output at 
lower price and less at higher Price. The marginal revenue (MR) curve is also downward sloping 
indicating additional revenue receives from the sale of an additional unit of output goes on declining 
subsequently. The usual relationship between AR and MR curve i.e. MR is the halfway between AR and 
Y-axis is also satisfied under monopoly. Following figure 1 shows the nature of AR and MR curve under 
monopoly. 
AR and MR Curve under Monopoly 
MR
AR
Y
O
X
QUANTITY OF OUTPUT
REVENUE
Fig -1
 
Cost curves under monopoly takes usual shape. Average cost (AC) curve, average variable cost (AVC) 
curve and marginal cost (MC) curve are U-shaped and average fixed cost (AFC) curve is rectangular 
hyperbola shaped.   Following figure 2 shows the nature of cost curves under monopoly. 
 
Cost Curves under Monopoly 
Fig -2
MC
AFC
Y
O
X
QUANTITY OF OUTPUT
COST 
AC AVC