Monopoly and its Characteristics

Monopoly is a market structure in which a single firm dominates the market and controls the supply of goods or services. The following are the characteristics of a monopoly:

- Single seller or producer of a product or service
- No close substitutes for the product or service
- High barriers to entry for new firms
- Price maker, meaning it has control over the price of the product or service

AR and MR under Monopoly

Under monopoly, the demand curve faced by the firm is the market demand curve. As the only seller in the market, the firm can choose to sell any quantity at any price.

- Average Revenue (AR): AR is the revenue per unit of output sold, calculated by dividing total revenue by the quantity sold. In a monopoly, AR is downward sloping because the firm can only increase sales by lowering the price, which reduces revenue per unit.
- Marginal Revenue (MR): MR is the change in total revenue resulting from a one-unit increase in output sold. In a monopoly, MR is also downward sloping because the firm must lower the price to sell additional units of output.

Relationship between AR, MR, and Y-Axis

- AR and MR both are downward sloping: The monopolist faces a downward sloping demand curve, which means that the price it charges for its product or service must decrease as it produces more units. This leads to a downward sloping AR and MR curve.
- MR lies halfway between AR and Y-Axis: The MR curve intersects the X-axis (quantity) at a lower quantity than the AR curve. This is because the monopolist must lower the price to sell additional units of output, which reduces the revenue per unit. As a result, the MR curve lies halfway between the AR curve and the Y-axis.
- MR can be zero or even negative: The MR curve can be zero when the monopolist reaches the maximum revenue point, where any further increase in output would lead to a decrease in revenue. The MR curve can also be negative when the monopolist must lower the price so much that the revenue from selling an additional unit is less than the revenue lost from lowering the price.

Conclusion

In conclusion, under monopoly, AR and MR are both downward sloping, MR lies halfway between AR and the Y-axis, and MR can be zero or even negative. These characteristics reflect the unique market power of the monopolist, which allows it to control the price and quantity of output sold.