Monopoly



 A pure monopoly exists when there is one and only supplier. In this case the firm will be the industry.    Natural monopoly occurs when there is only one firm in the industry producing at minimum efficient scale.  This situation arises when there is only source of supply or economies scale are significant and permit one firm to supply the entire market at lower price than any other number of firms. 

The characteristics or features  of monopoly are as follows. 
(1)  Being the only supplier of a good or service monopoly faces no competition from other firms. 
(2) Since there is no competition, the monopolist is able to earn very high profits known as abnormal profits. 
(3)  Monopolist produces all of a particular product for a market. So it can raise the price of its product by supplying less of it, and hence they are price makers.
(4) Although the new firms are attracted by the abnormal profit in the market, monopolists prevent the entry of new firms by creating barriers to entry.
(5) Monopolist firm may hide the price it charges to one group of consumers from another group which it charged a different. So in monopoly there will be imperfect information.
(6) Usually monopolist will produce different varieties of their products in order to make others difficult to copy them.  These types of products are called non-homogenous products.

There are many advantages of monopoly. Monopolist will be able to avail economies of scale of large scale production. They also may have natural monopolies.   Monopolist can spent on research and development for new products or production techniques without the risk of new entrants.  They can afford to sell goods at lower price than a firm in a competitive market {but normally they don’t sell].  These firms are large in size so that they can compete in the global markets.

There are many disadvantages of monopoly.  Monopolists do not worry about losing their customers to other firms so they inefficiently run and provide a poor service to their customers.   They normally produce low output so as to keep a very high price.   The monopoly firm will decide what goods and service to produce for customers and at what prices, this is known as producer’s sovereignty.  Monopolists exploit consumers by charging well above average cost.
If the monopolist seek to maximize sales revenue they produce where MR = 0, at this the total revenue is at its peak. This is to ensure the increase in salaries and make other firm more difficult to take over the company. 
When the firm seeks normal profit they produce where average cost equals average revenue.  State owned monopoly may produce at maximum profit output where marginal cost is equal to average cost, at this output the firm achieve productive efficiency or producing at optimum output.
When the firms produce socially efficient output (socially optimum output) it will be at Price (average revenue) is   equal to marginal cost.  
When the firm set Predatory price, (price with an objective of driving the competitor out of the market) they set the price above the normal profit level but below the maximum profit level. 
Sometimes monopolists engage in price discrimination (charging different prices in different market for reasons other than costs).
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