Monopolist Essay

3. Characteristics of Monopoly

a. There is one producer or seller of a particular product and the firm itself is an industry.

b. There are different types of monopoly: natural, legal, private, or public (government)

c. A monopolist has full control of the supply of the product, hence the elasticity of demand for a monopolist product is zero.

d. There is no close substitute of a monopolist’s product in the market, thus, the cross elasticity of demand for a monopoly product with some weak substitutes is very low.

e. There are restrictions or barriers on the entry of other firms in the area of monopoly product.

f. A monopolist can influence the price of the product. He is a price maker.

g. Monopolist cannot determine both the price and quantity

There maybe or no non-price competition like advertising, sales promotions and other market strategies, because the monopolist is the only source of the product.

4. Price and Output Determination under Monopoly

Monopolist’s demand curve slopes downwards to the right. This means that he can increase his sales only by decreasing the price of his product and maximize his profit. The marginal revenue curve of a monopolist is below the average revenue curve and the MR curve falls faster than the AR curve, because he has to decrease the price of his product to sell an additional unit.

The price elasticity of demand acts as a constraint on the pricing-power of the monopolist

Assuming that the monopolist aims to maximize profits (where MR=MC), we establish a short run price and output equilibrium as shown in the diagram

Eventually, all super-normal profits are eroded away.

Monopolistic competition in the long run

Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. New entrants continue until only normal profit is available. At this point, firms have reached their long run equilibrium. The firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation.

3. Advantages of monopolistic competition

The existence of monopolistic competition partly explains the survival of small firms in modern economies. The majority of small firms in the real world operate in markets that could be said to be monopolistically competitive Monopolistic competition can bring the following advantages:

• There are no significant barriers to entry; therefore markets are open to interested new entrants

• Differentiation creates diversity, choice and utility to the benefit of consumers.

• The market is more efficient than monopoly but less efficient than perfect competition - less allocatively and less productively