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MONOPOLY GROUP 1 – Jubal, Jobi, Madhuri, Santosh, Vinayak, Devendra, Noel, Owais, Masroor 1.

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Presentation on theme: "MONOPOLY GROUP 1 – Jubal, Jobi, Madhuri, Santosh, Vinayak, Devendra, Noel, Owais, Masroor 1."— Presentation transcript:

1 MONOPOLY GROUP 1 – Jubal, Jobi, Madhuri, Santosh, Vinayak, Devendra, Noel, Owais, Masroor 1

2 MONOPOLY The Word Monopoly is a Latin Term. ‘Mono’ means Single and ‘Poly’ means Seller. Monopoly is a form of Market Organization in which there is only One Seller of the Commodity. There are No Close Substitutes for the Commodity sold by the Seller. 2

3 Features Of Monopoly 1. Single Person or a Firm. 2. No Close Substitutes. 3. Large Number of Buyers. 4. Price Maker. 5. Downward Sloping Demand Curve. 3

4 Types Of Monopoly Practices Perfect Monopoly: It is also called as absolute monopoly. There is only a single seller of product having no close substitute; not even remote one. There is absolutely zero level of competition. Such monopoly is practically very rare. Ex: Bill Gates played Perfect Monopoly in US for MS Word. Imperfect Monopoly: It is also called as relative monopoly. It refers to a single seller market having no close substitute. It means in this market, a product may have a remote substitute. So, there is fear of competition to some extent. e.g. Vodafone is having competition from fixed landline phone service industry BSNL. 4

5 Types Of Monopoly Practices Private Monopoly: When production is owned, controlled & managed by the individual, private body or private organization, it is called private monopoly. e.g. Tata, Reliance, Bajaj groups in India. Public Monopoly: A Government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law. It is a Monopoly created by the Government. The Indian Railways is entirely government run 5

6 Types Of Monopoly Practices Simple Monopoly: It is also called Single-Price Monopoly. Simple monopoly firm charges a uniform price or single price to all the customers. He operates in a single market. Discriminating Monopoly: Such a monopoly firm charges different price to different customers for the same product. It prevails in more than one market. An example is an airline monopoly which sell various seats at various prices based on demand. 6

7 Types Of Monopoly Practices Legal Monopoly: It is a monopoly that is protected by law from competition. A government-regulated firm that is legally entitled to be the only company offering a particular service in a particular area. For example, AT&T operated as a legal monopoly until 1982 because it was supposed to have cheap and reliable service for everyone. Natural Monopoly: A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Government often regulate certain natural monopolies to ensure that consumers get a fair deal. The utilities industry is a good example of a natural monopoly—Gas, Water, Power. 7

8 Types Of Monopoly Practices Technological Monopoly: It emerges as a result of economies of large scale production, use of capital goods, new production methods, etc. E.g. engineering goods industry, automobile industry, software industry, etc. Internet Explorer was the only browser available to browse the web between Pure Monopoly: A pure monopoly thus is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits. 8

9 Barriers to Entry Things that prevent new firms from entering and competing in imperfectly competitive industries include: Government franchises, or firms that become monopolies by virtue of a government directive. Government franchises, or firms that become monopolies by virtue of a government directive. Patents or barriers that grant the exclusive use of the patented product or process to the inventor. Patents or barriers that grant the exclusive use of the patented product or process to the inventor. Economies of scale and other cost advantages enjoyed by industries that have large capital requirements. A large initial investment, or the need to embark in an expensive advertising campaign, deter would- be entrants to the industry. Economies of scale and other cost advantages enjoyed by industries that have large capital requirements. A large initial investment, or the need to embark in an expensive advertising campaign, deter would- be entrants to the industry. Ownership of a scarce factor of production: If production requires a particular input, and one firm owns the entire supply of that input, that firm will control the industry. Ownership of a scarce factor of production: If production requires a particular input, and one firm owns the entire supply of that input, that firm will control the industry. 9

10 Price: The Fourth Decision Variable Firms with market power must decide: 1.how much to produce, 2.how to produce it, 3.how much to demand in each input market, and 4.what price to charge for their output. 10

11 Price and Output Decisions in Pure Monopoly Markets To analyze monopoly behavior we assume that: – Entry to the market is blocked – Firms act to maximize profit – The pure monopolist buys in competitive input markets – The monopolistic firm cannot price discriminate – The monopoly faces a known demand curve 11

12 Price and Output Decisions in Pure Monopoly Markets With one firm in a monopoly market, there is no distinction between the firm and the industry. In a monopoly, the firm is the industry. The market demand curve is the demand curve facing the firm, and total quantity supplied in the market is what the firm decides to produce. 12

13 Price and Output Decisions in Pure Monopoly Markets The demand curve facing a perfectly competitive firm is perfectly elastic; in a monopoly, the market demand curve is the demand curve facing the firm. 13

14 Price and Output Choice for a Profit- Maximizing Monopolist A profit-maximizing monopolist will raise output as long as marginal revenue exceeds marginal cost (like any other firm). The profit-maximizing level of output is the one at which MR = MC. 14

15 The Absence of a Supply Curve in Monopoly A monopoly firm has no supply curve that is independent of the demand curve for its product. – A monopolist sets both price and quantity, and the amount of output supplied depends on both its marginal cost curve and the demand curve that it faces. 15

16 Price and Output Choices for a Monopolist Suffering Losses in the Short-Run It is possible for a profit-maximizing monopolist to suffer short-run losses. If the firm cannot generate enough revenue to cover total costs, it will go out of business in the long-run. 16

17 Perfect Competition and Monopoly Compared In a perfectly competitive industry in the long-run, price will be equal to long-run average cost. The market supply is the sum of all the short-run marginal cost curves of the firms in the industry. 17

18 Perfect Competition and Monopoly Compared Relative to a competitively organized industry, a monopolist restricts output, charges higher prices, and earns positive profits. 18

19 PRICE DISCRIMINATION Price discrimination is the business practice of selling the same good at different prices to different customers, even though the cost of production is the same for all customers. Price discrimination is not possible in a competitive market In order to price discriminate, the firm must have some market power. It increases the monopolist’s profits. It reduces the consumer surplus. 19

20 CONCLUSION We have seen that monopoly is inefficient. But how widespread is monopoly? How worried should we be? – Monopolies are common. Most firms have some control over their prices because of differentiated products. ButFirms with substantial monopoly power are rare. 20

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