1. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar1

2. 2 MONOPOLY CHARACTERISTICS (1)Single Seller It is a one firm industry. A single seller controls the whole of the supply of a product.

3. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar3 MONOPOLY (2) No close substitute The product of the firm is such that it has no good or close substitute in the market. The demand for monopolists product is, therefore, inelastic. The product of the firm is such that it has no good or close substitute in the market. The demand for monopolists product is, therefore, inelastic.

4. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar4 MONOPOLY (3) Control over price The monopolist, being the sole producer of the product has a considerable control over the price of the commodity. The monopolist, being the sole producer of the product has a considerable control over the price of the commodity.

5. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar5 MONOPOLY (4) Exclusion of Competitors In monopoly, there is exclusion of competitors which may be due to legal restrictions on production or on account of economies of scale or technological advancement of the firm. In monopoly, there is exclusion of competitors which may be due to legal restrictions on production or on account of economies of scale or technological advancement of the firm.

6. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar6 MONOPOLY (5) Publicity for sale promotion The monopolist being the sole producer of a product sparingly advertises for the sale of the products. The monopolist being the sole producer of a product sparingly advertises for the sale of the products.

7. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar7 MONOPOLY BASES OF MONOPOLY POWER The main conditions which give rise to monopoly are called collectively, “Barriers to Entry”. These barriers block the entry of new firms into industry and thus create monopoly. The main bases of monopoly are given…. The main conditions which give rise to monopoly are called collectively, “Barriers to Entry”. These barriers block the entry of new firms into industry and thus create monopoly. The main bases of monopoly are given….

8. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar8 MONOPOLY (1)Ownership of essential raw material If a firm owns or controls the entire supply of an essential raw material used in the production of a commodity, it then creates a monopoly by keeping away the competitors out of the industry If a firm owns or controls the entire supply of an essential raw material used in the production of a commodity, it then creates a monopoly by keeping away the competitors out of the industry Example: “De Beers Company” of South Africa has a monopoly over the supply of diamonds Example: “De Beers Company” of South Africa has a monopoly over the supply of diamonds

9. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar9 MONOPOLY (2) Patents and research In order to encourage research for the creation of a new product, the government gives patent and copy rights to the inventors. The exclusive rights to an inventor to produce and control a product blocks the entry of new firms producing the same commodity. The inventor thus enjoys the monopoly position for the life of the patent In order to encourage research for the creation of a new product, the government gives patent and copy rights to the inventors. The exclusive rights to an inventor to produce and control a product blocks the entry of new firms producing the same commodity. The inventor thus enjoys the monopoly position for the life of the patent

10. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar10 MONOPOLY (3) State Ownership If a government owns and operates a business, a monopoly is then established. For instance, Railways, Electricity, Postal service are controlled and operated by the Government of Pakistan. No potential firm is allowed entry in the above services. State has thus monopoly in these services. If a government owns and operates a business, a monopoly is then established. For instance, Railways, Electricity, Postal service are controlled and operated by the Government of Pakistan. No potential firm is allowed entry in the above services. State has thus monopoly in these services.

11. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar11 MONOPOLY (4) Economies of scale If a firm using modern technology and heavy investment enjoys the increasing returns to scale, it will produce goods at low unit costs. The new firms being unable to reap the economies enjoyed by the existing firm will not enter the industry. The big firm will continue controlling the entire supply of a commodity in the market. If a firm using modern technology and heavy investment enjoys the increasing returns to scale, it will produce goods at low unit costs. The new firms being unable to reap the economies enjoyed by the existing firm will not enter the industry. The big firm will continue controlling the entire supply of a commodity in the market.

12. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar12 MONOPOLY (5) Unfair competition If a firm or a few firms form a unified business organization, then they posses sufficient economic power to eliminate the entry of “would be” firms in the industry. If a firm or a few firms form a unified business organization, then they posses sufficient economic power to eliminate the entry of “would be” firms in the industry. The firm or some firms joining together adopts price cutting tactics, put pressure on resource suppliers, pay higher wages to The firm or some firms joining together adopts price cutting tactics, put pressure on resource suppliers, pay higher wages to

13. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar13 MONOPOLY skilled workers etc. and thus try to bankrupt the competitors. If they are successful in their mission, unfair competition then give rise to monopoly. skilled workers etc. and thus try to bankrupt the competitors. If they are successful in their mission, unfair competition then give rise to monopoly.

14. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar14

15. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar15 MONOPOLISTIC COMPETITION In between the two extreme market situations of perfect competition and monopoly there is a most common type of market model called monopolistic competition. In between the two extreme market situations of perfect competition and monopoly there is a most common type of market model called monopolistic competition.

16. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar16 MONOPOLISTIC COMPETITION CHARACTERISTICS (1)Multiplicity of buyers and sellers Just like perfect competition there is multiplicity of sellers in a market. The firm act independently and produce a small share of the total output. Just like perfect competition there is multiplicity of sellers in a market. The firm act independently and produce a small share of the total output.

17. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar17 MONOPOLISTIC COMPETITION (2) Product differentiation One of the important feature of monopolistic competition is that the firm produce differentiated products. The difference in the product is created by physical difference or by competitive advertisement or by show appeal, or by location or package or by service facilities, et. The firm tries to create a small island of monopoly in a sea of competition One of the important feature of monopolistic competition is that the firm produce differentiated products. The difference in the product is created by physical difference or by competitive advertisement or by show appeal, or by location or package or by service facilities, et. The firm tries to create a small island of monopoly in a sea of competition

18. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar18 MONOPOLISTIC COMPETITION (3) Control over price A firm has only a limited control over the price of its product. If the number of firms producing a similar commodity are many, the demand for the product of the firm is elastic. The firm will not be in a position to raise the price of the product even modestly. A firm has only a limited control over the price of its product. If the number of firms producing a similar commodity are many, the demand for the product of the firm is elastic. The firm will not be in a position to raise the price of the product even modestly.

19. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar19 MONOPOLISTIC COMPETITION If the degree of product differentiation is in favour of the particular firm, then it can slightly raise the price and the loyal customers will continue purchasing the product of the particular firm. If the degree of product differentiation is in favour of the particular firm, then it can slightly raise the price and the loyal customers will continue purchasing the product of the particular firm.

20. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar20 MONOPOLISTIC COMPETITION (4) Entry of new firms The entry of new firms is easy in the market. The new firm can secure its share in the market by popularising its product through radio, television, newspaper etc.. The more the consumers are convinced of the superiority of the product, the higher will be its outlay. The entry of new firms is easy in the market. The new firm can secure its share in the market by popularising its product through radio, television, newspaper etc.. The more the consumers are convinced of the superiority of the product, the higher will be its outlay.

21. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar21 MONOPOLISTIC COMPETITION (5) Stiff competition There is stiff competition among the firms for the sale of a particular brand not only in price, but also in the quality of the product. The firms lay great emphasis on “brand names” and “trade marks”. There is stiff competition among the firms for the sale of a particular brand not only in price, but also in the quality of the product. The firms lay great emphasis on “brand names” and “trade marks”.

22. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar22

23. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar23 OLIGOPOLY The fourth market model, oligopoly, is a compromise between monopoly and monopolistic competition. The basic characteristics of oligopoly are given... The fourth market model, oligopoly, is a compromise between monopoly and monopolistic competition. The basic characteristics of oligopoly are given...

24. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar24 OLIGOPOLY CHARACTERISTICS (1)A few sellers One of the important assumptions of oligopoly is the fewness. The firms which control the market are few in number. As each firm produces a large share of the market, it is therefore in a position to affect the market price on its own One of the important assumptions of oligopoly is the fewness. The firms which control the market are few in number. As each firm produces a large share of the market, it is therefore in a position to affect the market price on its own

25. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar25 OLIGOPOLY (2)Quality of the product The oligopolist may be producing identical products or differentiated product. In case the products are close substitute of one another, then the price cut by one firm will be followed by the rival firms. The oligopolist in order to avoid mutual cut throat competition often decide to divide the market. They increase or decrease the prices of the product as a group The oligopolist may be producing identical products or differentiated product. In case the products are close substitute of one another, then the price cut by one firm will be followed by the rival firms. The oligopolist in order to avoid mutual cut throat competition often decide to divide the market. They increase or decrease the prices of the product as a group

26. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar26 OLIGOPOLY (3) Entry to the market Though there are obstacles to the entry of new firms in the market, yet the entry is not completely blocked. If a firm is financially sound and can start production on a large scale, the new firm can creep into the oligopolistic industry. Though there are obstacles to the entry of new firms in the market, yet the entry is not completely blocked. If a firm is financially sound and can start production on a large scale, the new firm can creep into the oligopolistic industry.

27. M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar27 OLIGOPOLY (4) Expenses of advertisement In case, the oligopolist produces differentiated product, then heavy amount has to be channelised into advertising and other sale promotion activities. In case, the oligopolist produces differentiated product, then heavy amount has to be channelised into advertising and other sale promotion activities.