A monopoly is an imperfect market form. ‘Mono’ means single and ‘poly’ means to control, implying 1 seller.
A monopoly refers to a market situation where there is a single seller, selling a product that has no close substitutes.
For example, Railways in India. In this market form, firms are price makers.
In this post, we will learn about the monopoly market in an easy way. Let’s learn.
Revenue curves under Monopoly Market
- Under this market form, Average Revenue and Marginal Revenue curves are downward sloping and inelastic because they have the power to set prices.
- AR and MR curves are steeper (inelastic) because of the absence of a substitute.
Features of Monopoly
1. Single seller and large number of buyers
Under monopoly, there is a single producer or seller of the product but there is a large number of buyers of the product.
Since there is a single seller he can have substantial influence over the market price because of his control on the market supply.
2. Absence of close substitute
As there is only 1 seller of the product, so, it has no close substitute. As there is no close substitute, a monopolist doesn’t face any competition.
For example, there is no close substitute for railways in India. However, the product may have distant substitutes.
3. Restrictions of the entry of new firms
There are legal barriers. For example, the production of defense goods is a monopoly of Government because of the country’s security reasons. Similarly, there are institutional barriers in the case of state monopoly like electricity, etc.
Natural monopoly can arise in local markets for products that have significant economies of scale. So, there are restrictions on the entry of new firms.
4. Price Discrimination
As a monopolist is a price maker as well as a price taker, he sometimes charges different prices from different consumers in the different market areas. This is known as price discrimination.
It is the practice of charging different prices from different buyers. For example, Electricity tariff is different for commercial use as compared to residential use.
5. Full Control over price
A monopolist is a price maker as he has the power to set the price of the good. A single monopolist is a single producer.
He has full control over its price. Thus, the monopolist is a price maker and he can fix whatever price they wish to charge for his product.
Price changes according to what consumers are willing to pay along the demand curve.
6. Slopes of Average and Marginal Revenue
Although the monopolist has full control over the price and supply of the product, yet it faces a negative market demand curve.
The market demand curve gives the inverse relationship between the price and demand of the commodity. So, to sell more units of a commodity, it has to reduce the price of the product.
Therefore, AR & MR curves are downward sloping and AR is greater than MR.
Tip to memorize the features of monopoly market:
Use the acronym ‘SARS DC’
S – Single Seller
A – Absence of close substitute
R – Restriction on entry and exit
S – Slope of AR & MR curve
D – Discrimination in price
C – Control over the price
You can read the related concepts:
- Perfect Competition
- The price elasticity of supply
- The supply curve
- What is the production function?
- Terms related to production concept
- Law of diminishing returns to a factor
- Total cost, Total variable cost, and total fixed cost
- The relation between TC, TVC, and TFC
- Average total cost
- The demand curve
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