Monopoly Market and Price and Output Determination under it

 

It is the market structure in which there is a single producer, no close substitutes of the product and there is restriction in the entry of new firms. In other words, it refers to the single firm which has control over the supply of the commodity which has no close substitutes.

Features of Monopoly Market:

a.      There is single seller and large number of buyers.

b.     There is no close substitutes of the products.

c.      There is restriction in the entry of new firms.

d.     Since the firm has the full control over the supply of commodities, it is the price maker.

e.      It consists of single firm which is an industry in itself.

Price and Output Determination Under Monopoly

a.      Short-Run Equilibrium

Monopolist is a price maker. His/her price and output decision is motivated by profit maximization. Monopolist will adjust the output and price in such a way that the marginal cost and the marginal revenue are equal where monopolist achieves maximum profit. In short-run equilibrium, whether the firm makes abnormal profit, normal profit or loss, it depends upon the level of AC and AR which can be shown in the following ways:

1.     If AR>AC, the firm receives super normal profit.

2.     If AR=AC, the firm receives normal profit.

3.     If AR<AC, the firm bears loss.

Conditions for Equilibrium:

1.     MR=MC

2.     MC must intersect MR from below.

b.     Long-Run Equilibrium

In long-run, the monopolist has enough time to adjust the size of the plant at the certain level of output to maximize its profit. In the monopoly, the entry of new firms being ruled out, the abnormal profit is possible even in the long-run.

Conditions for the Equilibrium:

1.     MR=MC

2.     LMC must intersect MR from below.