NCERT Textbook: Non competitive Markets | Indian Economy for UPSC CSE PDF Download

 Page 1


Chapter6
???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ??? ??? ??? ??? ???
We recall that perfect competition is a market structure where
both consumers and firms are price takers. The behaviour of
the firm in such circumstances was described in the Chapter 4.
We discussed that the perfect competition market structure is
approximated by a market satisfying the following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small as compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumption (ii) is dropped,
and it becomes difficult for firms to enter a market, then a market
may not have many firms. In the extreme case a market may have
only one firm. Such a market, where there is one firm and many
buyers is called a monopoly. A market that has a small number
of large firms is called an oligopoly. Notice that dropping
assumption (ii) leads to dropping assumption (i) as well. Similarly,
dropping the assumption that goods produced by a firm are
indistinguishable from those of other firms (assumption iii) implies
that goods produced by firms are close substitutes, but not perfect
substitutes for each other. Such markets, where assumptions (i)
and (ii) may hold, but (iii) does not hold are called markets with
monopolistic competition. This chapter examines the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller is called
monopoly. The conditions hidden in this single line definition,
however, need to be explicitly stated. A monopoly market structure
requires that there is a single producer of a particular commodity;
no other commodity works as a substitute for this commodity; and
2022-23
Page 2


Chapter6
???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ??? ??? ??? ??? ???
We recall that perfect competition is a market structure where
both consumers and firms are price takers. The behaviour of
the firm in such circumstances was described in the Chapter 4.
We discussed that the perfect competition market structure is
approximated by a market satisfying the following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small as compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumption (ii) is dropped,
and it becomes difficult for firms to enter a market, then a market
may not have many firms. In the extreme case a market may have
only one firm. Such a market, where there is one firm and many
buyers is called a monopoly. A market that has a small number
of large firms is called an oligopoly. Notice that dropping
assumption (ii) leads to dropping assumption (i) as well. Similarly,
dropping the assumption that goods produced by a firm are
indistinguishable from those of other firms (assumption iii) implies
that goods produced by firms are close substitutes, but not perfect
substitutes for each other. Such markets, where assumptions (i)
and (ii) may hold, but (iii) does not hold are called markets with
monopolistic competition. This chapter examines the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller is called
monopoly. The conditions hidden in this single line definition,
however, need to be explicitly stated. A monopoly market structure
requires that there is a single producer of a particular commodity;
no other commodity works as a substitute for this commodity; and
2022-23
‘I’ ‘M’ Perfect Competition
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in Figure 6.1 shows the quantities that consumers
as a whole are willing to purchase at different prices. If the market price is at  p
0
,
consumers are willing to purchase the quantity q
0
. On the other hand, if the
market price is at the lower level p
1
, consumers are willing to buy a higher quantity
q
1
. That is, price in the market affects the quantity demanded by the consumers.
This is also expressed by saying that the quantity purchased by the consumers
is a decreasing function of the price. For the monopoly firm, the above argument
expresses itself from the reverse direction. The monopoly firm’s decision to sell a
larger quantity is possible only at a lower price. Conversely, if the monopoly
firm brings a smaller quantity of the commodity into the market for sale it will
be able to sell at a higher price. Thus, for the monopoly firm, the price depends
on the quantity of the commodity sold. The same is also expressed by stating
for this situation to persist over time, sufficient restrictions are
required to be in place to prevent any other firm from entering
the market and to start selling the commodity.
In order to examine the difference in the equilibrium
resulting from a monopoly in the commodity market
as compared to other market structures, we
also need to assume that all other
markets remain perfectly competitive.
In particular, we need (i) All the
consumers are price takers; and (ii)
that the markets of the inputs used
in the production of this commodity
are perfectly competitive both from
the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
??
???????????????? ???????
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly opposite of the meaning of what is commonly understood
by competition or competitive behaviour. We see that Coke and Pepsi
compete with each other in a variety of ways to achieve a higher level of sales
or a greater share of the market. Conversely, we do not find individual farmers
competing among themselves to sell a larger amount of crop. This is because
both Coke and Pepsi possess the power to influence the market price of soft
drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. In a monopoly there is no other firm to compete
with.
2022-23
Page 3


Chapter6
???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ??? ??? ??? ??? ???
We recall that perfect competition is a market structure where
both consumers and firms are price takers. The behaviour of
the firm in such circumstances was described in the Chapter 4.
We discussed that the perfect competition market structure is
approximated by a market satisfying the following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small as compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumption (ii) is dropped,
and it becomes difficult for firms to enter a market, then a market
may not have many firms. In the extreme case a market may have
only one firm. Such a market, where there is one firm and many
buyers is called a monopoly. A market that has a small number
of large firms is called an oligopoly. Notice that dropping
assumption (ii) leads to dropping assumption (i) as well. Similarly,
dropping the assumption that goods produced by a firm are
indistinguishable from those of other firms (assumption iii) implies
that goods produced by firms are close substitutes, but not perfect
substitutes for each other. Such markets, where assumptions (i)
and (ii) may hold, but (iii) does not hold are called markets with
monopolistic competition. This chapter examines the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller is called
monopoly. The conditions hidden in this single line definition,
however, need to be explicitly stated. A monopoly market structure
requires that there is a single producer of a particular commodity;
no other commodity works as a substitute for this commodity; and
2022-23
‘I’ ‘M’ Perfect Competition
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in Figure 6.1 shows the quantities that consumers
as a whole are willing to purchase at different prices. If the market price is at  p
0
,
consumers are willing to purchase the quantity q
0
. On the other hand, if the
market price is at the lower level p
1
, consumers are willing to buy a higher quantity
q
1
. That is, price in the market affects the quantity demanded by the consumers.
This is also expressed by saying that the quantity purchased by the consumers
is a decreasing function of the price. For the monopoly firm, the above argument
expresses itself from the reverse direction. The monopoly firm’s decision to sell a
larger quantity is possible only at a lower price. Conversely, if the monopoly
firm brings a smaller quantity of the commodity into the market for sale it will
be able to sell at a higher price. Thus, for the monopoly firm, the price depends
on the quantity of the commodity sold. The same is also expressed by stating
for this situation to persist over time, sufficient restrictions are
required to be in place to prevent any other firm from entering
the market and to start selling the commodity.
In order to examine the difference in the equilibrium
resulting from a monopoly in the commodity market
as compared to other market structures, we
also need to assume that all other
markets remain perfectly competitive.
In particular, we need (i) All the
consumers are price takers; and (ii)
that the markets of the inputs used
in the production of this commodity
are perfectly competitive both from
the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
??
???????????????? ???????
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly opposite of the meaning of what is commonly understood
by competition or competitive behaviour. We see that Coke and Pepsi
compete with each other in a variety of ways to achieve a higher level of sales
or a greater share of the market. Conversely, we do not find individual farmers
competing among themselves to sell a larger amount of crop. This is because
both Coke and Pepsi possess the power to influence the market price of soft
drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. In a monopoly there is no other firm to compete
with.
2022-23
??
????????????
??? ??????? ????
that price is a decreasing function
of the quantity sold. Thus, for the
monopoly firm, the market
demand curve expresses the price
that consumers are willing to pay
for different quantities supplied.
This idea is reflected in the
statement that the monopoly firm
faces the market demand curve,
which is downward sloping.
The above idea can be viewed
from another angle. Since the firm
is assumed to have perfect
knowledge of the market demand
curve, the monopoly firm can
decide the price at which it wishes
to sell its commodity, and
therefore, determines the quantity to be sold. For instance, examining Figure
6.1 again, since the monopoly firm is aware of the shape of the curve DD, if it
wishes to sell the commodity at the price p
0
, it can do so by producing and
selling quantity q
0
, since at the price p
0
, consumers are willing to purchase the
quantity q
0
. On the other hand, if it wants to sell q
1
, it will only be able to do so
at the price p
1
.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount received by the firm through the
sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the
price in rupees.
The equation can be written in terms of p
as
p = 10 – 0.5q
Substituting different values of q from 0
to 13 gives us the prices from 10 to 3.5. These
are shown in the q and p columns of Table
6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
q p TR AR MR
0 10 0 ––
1 9.5 9.5 9.5 9.5
29 18 9 8.5
3 8.5 25.5 8.5 7.5
48 32 8 6.5
5 7.5 37.5 7.5 5.5
67 42 7 4.5
7 6.5 45.5 6.5 3.5
86 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
Fig. 6.1
Price
Output q
0
q
1
p
0
p
1
D
D
O
2022-23
Page 4


Chapter6
???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ??? ??? ??? ??? ???
We recall that perfect competition is a market structure where
both consumers and firms are price takers. The behaviour of
the firm in such circumstances was described in the Chapter 4.
We discussed that the perfect competition market structure is
approximated by a market satisfying the following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small as compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumption (ii) is dropped,
and it becomes difficult for firms to enter a market, then a market
may not have many firms. In the extreme case a market may have
only one firm. Such a market, where there is one firm and many
buyers is called a monopoly. A market that has a small number
of large firms is called an oligopoly. Notice that dropping
assumption (ii) leads to dropping assumption (i) as well. Similarly,
dropping the assumption that goods produced by a firm are
indistinguishable from those of other firms (assumption iii) implies
that goods produced by firms are close substitutes, but not perfect
substitutes for each other. Such markets, where assumptions (i)
and (ii) may hold, but (iii) does not hold are called markets with
monopolistic competition. This chapter examines the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller is called
monopoly. The conditions hidden in this single line definition,
however, need to be explicitly stated. A monopoly market structure
requires that there is a single producer of a particular commodity;
no other commodity works as a substitute for this commodity; and
2022-23
‘I’ ‘M’ Perfect Competition
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in Figure 6.1 shows the quantities that consumers
as a whole are willing to purchase at different prices. If the market price is at  p
0
,
consumers are willing to purchase the quantity q
0
. On the other hand, if the
market price is at the lower level p
1
, consumers are willing to buy a higher quantity
q
1
. That is, price in the market affects the quantity demanded by the consumers.
This is also expressed by saying that the quantity purchased by the consumers
is a decreasing function of the price. For the monopoly firm, the above argument
expresses itself from the reverse direction. The monopoly firm’s decision to sell a
larger quantity is possible only at a lower price. Conversely, if the monopoly
firm brings a smaller quantity of the commodity into the market for sale it will
be able to sell at a higher price. Thus, for the monopoly firm, the price depends
on the quantity of the commodity sold. The same is also expressed by stating
for this situation to persist over time, sufficient restrictions are
required to be in place to prevent any other firm from entering
the market and to start selling the commodity.
In order to examine the difference in the equilibrium
resulting from a monopoly in the commodity market
as compared to other market structures, we
also need to assume that all other
markets remain perfectly competitive.
In particular, we need (i) All the
consumers are price takers; and (ii)
that the markets of the inputs used
in the production of this commodity
are perfectly competitive both from
the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
??
???????????????? ???????
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly opposite of the meaning of what is commonly understood
by competition or competitive behaviour. We see that Coke and Pepsi
compete with each other in a variety of ways to achieve a higher level of sales
or a greater share of the market. Conversely, we do not find individual farmers
competing among themselves to sell a larger amount of crop. This is because
both Coke and Pepsi possess the power to influence the market price of soft
drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. In a monopoly there is no other firm to compete
with.
2022-23
??
????????????
??? ??????? ????
that price is a decreasing function
of the quantity sold. Thus, for the
monopoly firm, the market
demand curve expresses the price
that consumers are willing to pay
for different quantities supplied.
This idea is reflected in the
statement that the monopoly firm
faces the market demand curve,
which is downward sloping.
The above idea can be viewed
from another angle. Since the firm
is assumed to have perfect
knowledge of the market demand
curve, the monopoly firm can
decide the price at which it wishes
to sell its commodity, and
therefore, determines the quantity to be sold. For instance, examining Figure
6.1 again, since the monopoly firm is aware of the shape of the curve DD, if it
wishes to sell the commodity at the price p
0
, it can do so by producing and
selling quantity q
0
, since at the price p
0
, consumers are willing to purchase the
quantity q
0
. On the other hand, if it wants to sell q
1
, it will only be able to do so
at the price p
1
.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount received by the firm through the
sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the
price in rupees.
The equation can be written in terms of p
as
p = 10 – 0.5q
Substituting different values of q from 0
to 13 gives us the prices from 10 to 3.5. These
are shown in the q and p columns of Table
6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
q p TR AR MR
0 10 0 ––
1 9.5 9.5 9.5 9.5
29 18 9 8.5
3 8.5 25.5 8.5 7.5
48 32 8 6.5
5 7.5 37.5 7.5 5.5
67 42 7 4.5
7 6.5 45.5 6.5 3.5
86 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
Fig. 6.1
Price
Output q
0
q
1
p
0
p
1
D
D
O
2022-23
??
???????????????? ???????
the case of the monopoly firm, the
total revenue is not a straight line.
Its shape depends on the shape
of the demand curve.
Mathematically, TR is represented
as a function of the quantity sold.
Hence, in our example
TR = p × q
= (10 – 0.5q) × q
= 10q – 0.5q
2
This is not the equation of a
straight line. It is a quadratic
equation in which the squared
term has a negative cofficient.
Such an equation represents an
inverted vertical parabola.
In Table 6.1, the TR column represents the product of the p and q columns.
It can be noticed that as the quantity increases, TR increases to Rs 50 when
output becomes 10 units, and after this level of output, total revenue starts
declining. The same is visible in Figure 6.2.
The revenue received by the firm per unit of commodity sold is called the
Average Revenue (AR). Mathematically, AR = TR/q. In Table 6.1, the AR column
provides values obtained by dividing TR values by q values. It can be seen that
the AR values turn out to be the same as the values in the p column. This is only
to be expected
AR = 
TR
q
Since TR = p × q, substituting this into the AR equation
AR = 
() pq
q
×
 = p
As seen earlier, the p values
represent the market demand
curve as shown in Figure 6.2.
The AR curve will therefore lie
exactly on the market demand
curve. This is expressed by the
statement that the market
demand curve is the average
revenue curve for the monopoly
firm.
Graphically, the value of AR
can be found from the TR curve
for any level of quantity sold
through a simple construction
given in Figure 6.3. When quantity
is 6 units, draw a vertical line
passing through the value 6 on
the horizontal axis. This line will
Relation between Average Revenue and
Total Revenue Curves. The average revenue
at any level of output is given by the slope of the
line joining the origin and the point on the total
revenue curve corresponding to the output level
under consideration.
Total, Average and Marginal Revenue Curves:
The total revenue, average revenue and the marginal
revenue curves are depicted here.
Fig. 6.2
TR,
AR,
MR
Output
O
10
MR
D = AR
TR
2022-23
Page 5


Chapter6
???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ???????????????? ???? ??? ??? ??? ??? ???
We recall that perfect competition is a market structure where
both consumers and firms are price takers. The behaviour of
the firm in such circumstances was described in the Chapter 4.
We discussed that the perfect competition market structure is
approximated by a market satisfying the following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small as compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumption (ii) is dropped,
and it becomes difficult for firms to enter a market, then a market
may not have many firms. In the extreme case a market may have
only one firm. Such a market, where there is one firm and many
buyers is called a monopoly. A market that has a small number
of large firms is called an oligopoly. Notice that dropping
assumption (ii) leads to dropping assumption (i) as well. Similarly,
dropping the assumption that goods produced by a firm are
indistinguishable from those of other firms (assumption iii) implies
that goods produced by firms are close substitutes, but not perfect
substitutes for each other. Such markets, where assumptions (i)
and (ii) may hold, but (iii) does not hold are called markets with
monopolistic competition. This chapter examines the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller is called
monopoly. The conditions hidden in this single line definition,
however, need to be explicitly stated. A monopoly market structure
requires that there is a single producer of a particular commodity;
no other commodity works as a substitute for this commodity; and
2022-23
‘I’ ‘M’ Perfect Competition
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in Figure 6.1 shows the quantities that consumers
as a whole are willing to purchase at different prices. If the market price is at  p
0
,
consumers are willing to purchase the quantity q
0
. On the other hand, if the
market price is at the lower level p
1
, consumers are willing to buy a higher quantity
q
1
. That is, price in the market affects the quantity demanded by the consumers.
This is also expressed by saying that the quantity purchased by the consumers
is a decreasing function of the price. For the monopoly firm, the above argument
expresses itself from the reverse direction. The monopoly firm’s decision to sell a
larger quantity is possible only at a lower price. Conversely, if the monopoly
firm brings a smaller quantity of the commodity into the market for sale it will
be able to sell at a higher price. Thus, for the monopoly firm, the price depends
on the quantity of the commodity sold. The same is also expressed by stating
for this situation to persist over time, sufficient restrictions are
required to be in place to prevent any other firm from entering
the market and to start selling the commodity.
In order to examine the difference in the equilibrium
resulting from a monopoly in the commodity market
as compared to other market structures, we
also need to assume that all other
markets remain perfectly competitive.
In particular, we need (i) All the
consumers are price takers; and (ii)
that the markets of the inputs used
in the production of this commodity
are perfectly competitive both from
the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
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Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly opposite of the meaning of what is commonly understood
by competition or competitive behaviour. We see that Coke and Pepsi
compete with each other in a variety of ways to achieve a higher level of sales
or a greater share of the market. Conversely, we do not find individual farmers
competing among themselves to sell a larger amount of crop. This is because
both Coke and Pepsi possess the power to influence the market price of soft
drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. In a monopoly there is no other firm to compete
with.
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that price is a decreasing function
of the quantity sold. Thus, for the
monopoly firm, the market
demand curve expresses the price
that consumers are willing to pay
for different quantities supplied.
This idea is reflected in the
statement that the monopoly firm
faces the market demand curve,
which is downward sloping.
The above idea can be viewed
from another angle. Since the firm
is assumed to have perfect
knowledge of the market demand
curve, the monopoly firm can
decide the price at which it wishes
to sell its commodity, and
therefore, determines the quantity to be sold. For instance, examining Figure
6.1 again, since the monopoly firm is aware of the shape of the curve DD, if it
wishes to sell the commodity at the price p
0
, it can do so by producing and
selling quantity q
0
, since at the price p
0
, consumers are willing to purchase the
quantity q
0
. On the other hand, if it wants to sell q
1
, it will only be able to do so
at the price p
1
.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount received by the firm through the
sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the
price in rupees.
The equation can be written in terms of p
as
p = 10 – 0.5q
Substituting different values of q from 0
to 13 gives us the prices from 10 to 3.5. These
are shown in the q and p columns of Table
6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
q p TR AR MR
0 10 0 ––
1 9.5 9.5 9.5 9.5
29 18 9 8.5
3 8.5 25.5 8.5 7.5
48 32 8 6.5
5 7.5 37.5 7.5 5.5
67 42 7 4.5
7 6.5 45.5 6.5 3.5
86 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
Fig. 6.1
Price
Output q
0
q
1
p
0
p
1
D
D
O
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the case of the monopoly firm, the
total revenue is not a straight line.
Its shape depends on the shape
of the demand curve.
Mathematically, TR is represented
as a function of the quantity sold.
Hence, in our example
TR = p × q
= (10 – 0.5q) × q
= 10q – 0.5q
2
This is not the equation of a
straight line. It is a quadratic
equation in which the squared
term has a negative cofficient.
Such an equation represents an
inverted vertical parabola.
In Table 6.1, the TR column represents the product of the p and q columns.
It can be noticed that as the quantity increases, TR increases to Rs 50 when
output becomes 10 units, and after this level of output, total revenue starts
declining. The same is visible in Figure 6.2.
The revenue received by the firm per unit of commodity sold is called the
Average Revenue (AR). Mathematically, AR = TR/q. In Table 6.1, the AR column
provides values obtained by dividing TR values by q values. It can be seen that
the AR values turn out to be the same as the values in the p column. This is only
to be expected
AR = 
TR
q
Since TR = p × q, substituting this into the AR equation
AR = 
() pq
q
×
 = p
As seen earlier, the p values
represent the market demand
curve as shown in Figure 6.2.
The AR curve will therefore lie
exactly on the market demand
curve. This is expressed by the
statement that the market
demand curve is the average
revenue curve for the monopoly
firm.
Graphically, the value of AR
can be found from the TR curve
for any level of quantity sold
through a simple construction
given in Figure 6.3. When quantity
is 6 units, draw a vertical line
passing through the value 6 on
the horizontal axis. This line will
Relation between Average Revenue and
Total Revenue Curves. The average revenue
at any level of output is given by the slope of the
line joining the origin and the point on the total
revenue curve corresponding to the output level
under consideration.
Total, Average and Marginal Revenue Curves:
The total revenue, average revenue and the marginal
revenue curves are depicted here.
Fig. 6.2
TR,
AR,
MR
Output
O
10
MR
D = AR
TR
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cut the TR curve at the point marked ‘a’ at a height equal to 42. Draw a straight
line joining the origin O and point ‘a’. The slope of this ray from the origin to a
point on the TR provides the value of AR. The slope of this ray is equal to 7.
Therefore, AR has the value 7. The same can be verified from Table 6.1.
6.1.2 Total, Average and Marginal Revenues
A more careful glance at Table 6.1 reveals that TR does not increase by the
same amount for every unit increase in quantity. Sale of the first unit leads to
a change in TR from Rs 0 when quantity is of 0 unit to Rs 9.5 0 when quantity
is 1 unit, i.e., a rise of Rs 9.50. As the quantity increases further, the rise in TR
is smaller. For example, for the 5
th
 unit of the commodity, the rise in TR is
Rs 5.50 (Rs 37.50 for 5 units minus Rs 32 for 4 units). As mentioned earlier,
after 10 units of output, TR starts declining. This implies that bringing more
than 10 units for sale leads to a level of TR less than Rs 50. Thus, the rise in TR
due to the 12th unit is: 48 – 49.50 = –1.5, ie a fall of Rs 1.50.
This change in TR due to the sale of an additional unit is termed Marginal
Revenue (MR). In Table 6.1, this is depicted in the last column. Observe that the
MR at any quantity is the difference between the TR at that quantity and the TR
at the previous quantity. For
example, when q = 3, MR = (25.5
– 18) = 7.5
In the last paragraph, it was
shown that TR increases more
slowly as quantity sold increases
and falls after quantity reaches
10 units. The same can be
viewed through the MR values
which fall as q increases. After
the quantity reaches 10 units,
MR has negative values. In
Figure 6.2, MR is depicted by
the dotted line.
Graphically, the values of
the MR curve are given by the
slope of the TR curve. The slope
of any smooth curve is defined
as the slope of the tangent to the
curve at that point. This is depicted in Figure 6.4. At point ‘a’ on the TR curve,
the value of MR is given by the slope of the line L
1
, and at point ‘b’ by the line
L
2
. It can be seen that both lines have positive slope, but the line L
2
 is flatter
than line L
1
, ie its slope is lesser. When 10 units of the commodity are sold, the
tangent to the TR is horizontal, ie its slope is zero.
1
 The value of the MR for the
same quantity is zero. At point ‘d’ on the TR curve, where the tangent is
negatively sloped, the MR takes a negative value.
We can now conclude that when total revenue is rising, marginal revenue
is positive, and when total revenue shows a fall, marginal revenue is negative.
Another relation can be seen between the AR and the MR curves. Figure
Relation between Marginal Revenue and Total
Revenue Curves. The marginal revenue at any level
of output is given by the slope of the total revenue
curve at that level of output.
Fig. 6.4
TR,
MR
Output
TR
b
a
L
1
L
2
c
d
O
10
MR
1
Question: Why is the MR not equal to zero at q=10 in table 6.1? This is because we are
measuring MR ‘discretely’, i.e, by jumping from 9 units to 10 units. If you recalculate the TR for
values of q closer to 10 e.g., 9.5, 9.75 or 9.9, the TR will get closer to 50, Eg: at q=9.9, TR will be
49.995.
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