Monopoly

MONOPOLY

Monopoly is a market situation in which an individual or firm controls the total output or supply of a good or service which has no close substitutes.

FEATURES OF MONOPOLISTIC MARKET

1. There is only one seller or a combination of firms under one management. The single seller has no rivals
2. The monopolist has the ability to control either price or output, but not both at the same time
3. Entry is restricted or barred in monopolistic markets
4. There is no prefect substitute for the products of the monopolist
5. There is an imperfect knowledge of market transactions

TYPES OR CAUSES OF MONOPOLY

1. Natural monopoly: Nature does not distribute its resources evenly over the earth
2. Social or government monopoly
3. Legal monopoly: Monopoly may be created by law
4. Voluntary monopoly: This type of monopoly is formed when firms willingly merge or combine
5. Technological monopoly: This is a monopoly which arises as a result of technological development
6. Patent law: This law confers on a firm special privilege to protect its new invention and it tends to scare away other competitors.

ADVANTAGES OF MONOPOLY

1. Economies of scale due to greater efficient and full utilization of productive resources
2. Reduced risk of over-production
3. Avoids duplication or wastage
4. Greater efficiency in organisation
5. Centralized management
6. Product standardization

                                  DISADVANTAGES OF MONOPOLY

1. Profiteering and exploitation of consumers
2. Restriction of output, and scarcity of product
3. Restriction of consumers” choice
4. A lack of enterprise and insufficiency
5. Resource misallocation

CONTROL OF MONOPOLY

1. Provision of substitute products
2. Privitisation
3. Stoppage of issuance of patent law
4. Discouraging merging of firms
5. Reduction of tariff

Equilibrium of the Monopolist

Price and output determination: A monopolist cannot fix price and output at the same time. He has two options;

1. To fix price and leave the output to be determined by the demand
2. To fix output to be produced and allow the price to be determined by the demand

The demand curve facing the monopolist is downward sloping because the firm is also the industry. The most profitable output is where MC=MR. The monopolist can earn abnormal profit, both in the short run and long run. In the short run, a monopolist will be at equilibrium if the following conditions are fulfilled.

1. The marginal cost is equal to marginal (MC=MR).
2. Marginal cost cuts marginal revenue from below. The slope of MC is greater than the slope of MR at the point of intersection. In figure below, the monopolist is at equilibrium at point S where MC=MR and MC cut MR from below. At the point of equilibrium quantity produced is OQ1 which the price is OP. He is able to cover both the average cost and marginal cost. The monopolist realizes excess profit which is equal to the shaded portion PBCD.

MONOPOLIST EARNING NORMAL PROFIT

A monopolist can also make normal profit. The equality of marginal cost and marginal revenue at point b determines the quality Q1 which is sold at price A. The monopolist earns normal profit when average cost curve is tangential to the average revenue at this level of output.

MONOPOLIST EARNING LOSS

In a monopoly market, loss can be made if the variable cost is outside the revenue area. The equilibrium position is that MC=MR. The price of the monopolist as fixed by the demand does not cover the average cost.  Therefore, there can be loss. This will be illustrated below.

Total Revenue = bdoQ1

Total Cost       = aocQ1

Loss                = abcd

The loss is represented by rectangle abcd. The average cost is above the average revenue. It simply means that the monopolist cannot cover its lost

QUESTIONS (Use the comment box below to post your answer for discussion and evaluation)

1. Output any two differences between monopoly and perfect competition
2. Explain the following,
3. Monopolistic competitive market
4. Oligopoly
5. Oligosony.