Price determination under monopoly pdf. Price Determination under Monopoly 2022-10-21
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A monopoly is a market structure in which there is only one seller of a particular good or service, meaning that the firm is the only supplier in the market. This gives the monopoly firm significant market power, as it is able to set prices for its goods or services without competition. In such a market, the firm's primary goal is to maximize profits.
There are several factors that influence the price determination of a monopoly firm. One of the most important factors is the demand curve for the firm's product. The demand curve shows the relationship between the price of a product and the quantity of the product that consumers are willing to purchase. If the demand for a product is relatively elastic, it means that consumers are sensitive to changes in price and are likely to purchase less of the product if the price increases. In this case, the monopoly firm will be more inclined to set a lower price in order to increase its sales and maximize profits.
On the other hand, if the demand for a product is relatively inelastic, it means that consumers are less sensitive to changes in price and are likely to purchase the product regardless of the price. In this case, the monopoly firm has more flexibility to set a higher price, as consumers will still be willing to purchase the product even if the price increases.
Another important factor that influences price determination in a monopoly is the cost structure of the firm. If the firm has high fixed costs and low variable costs, it will be more inclined to set a higher price in order to cover its fixed costs and maximize profits. On the other hand, if the firm has low fixed costs and high variable costs, it will be more inclined to set a lower price in order to encourage more sales and increase profits.
In addition to demand and cost structure, the level of competition in the market is also a factor that can influence price determination in a monopoly. If there are no close substitutes for the monopoly firm's product, it will have more market power and will be able to set higher prices. However, if there are close substitutes available, the monopoly firm may have to lower its prices in order to remain competitive.
In conclusion, the price determination of a monopoly firm is influenced by a number of factors, including the demand curve for the firm's product, the firm's cost structure, and the level of competition in the market. By taking these factors into account, a monopoly firm can determine the optimal price for its products in order to maximize profits.
Monopoly and Determination of Price under Monopoly
Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low. This ensures that there is no rival of the monopolist. He cannot do both the things simultaneously. During this period in order to gain excess profit, he will change efficiency and capacity of his resources according to his need. This is the natural method of a monopolist to maximize profits while keeping the least amount of expenses.
The producer will continue producer as long as marginal revenue exceeds the marginal cost. See figure 1 vi In the long run, the firm is earning normal profit. Monopolies can be considered an extreme result of free-market capitalism in that absent any restriction or restraints, a single company or group becomes large enough to own all or nearly all of the market goods, supplies, commodities, infrastructure, and assets for a particular type of product or service. Despite this the fact that there is no loss for the monopoly firm since, over time, everything is reversible and is recoupable. Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low.
Determination of Value or Price under Monopoly (With Diagram)
Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue. Therefore, the fall in average revenue has relatively less slope. His aim is maximization of profits and if there are losses, then minimization of losses. In the long run, the monopolist can change the size of plant in response to a change in demand. This is because there is not so much difference under short run and long run analysis in monopoly. The distinction between firm and industry disappears under conditions of monopoly. A good may be sold in one town for Re.
The only difference is that in perfect competition the average revenue curve and marginal revenue curve are same and parallel to X-axis where as in Monopoly these curves are downwards sloping curves. The profits are maximised when marginal cost is equal to marginal revenue. Monopolies typically have an unfair advantage over their competition since they are either the only provider of a product or control most of the market share or customers for their product. . The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost. The producer will continue producer as long as marginal revenue exceeds the marginal cost.
Their curves are parallel to X-axis. However, both of them slope downward. The profits are maximized when marginal cost is equal to marginal revenue. P is the point of closure for this company. The demand curve for the company is identical to the demand curve for market services under the monopoly. If, in a short period, the cost of production of a commodity is zero, he will go on producing it to the extent or so long the marginal revenue from the sale of that commodity does not fall to zero.
In the following diagrams, the monopolist has divided his total market into two submarkets, i. In the long period, this loss will disappear, under that condition and situation, only profit will be earned. A firm under monopoly faces a downward sloping demand curve or average revenue curve. Thus, if additional units are produced, the organization will incur loss. Monopolies can buy huge quantities of inventory, for example, usually a volume discount. Therefore, in monopoly, there is no distinction between an one organization constitutes the whole industry.
Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low. There are numerous consumers on the demand side. This happens particularly when the good in question is a direct service. Thus single firm constitutes the industry. To maximize profits, firms must operate at a maximum output level at which margin revenue and marginal cost are equal.
A monopoly refers to when a company and its product offerings dominate one sector or industry. Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low. A good may be sold in one town for Re. Their curves are parallel to X-axis. See figure 1 vi In the long run, the firm is earning normal profit. Under this condition, there will be only normal profit.