Monopoly – Features & Price Output Decisions
Monopoly is an important form of imperfect competition where a single firm dominates the market.
1. Meaning and Features of Monopoly
Monopoly is a market structure in which there is single seller selling a product with no close substitutes, and there are strong barriers to entry.
Features:
- Single seller, many buyers.
- Product has no close substitutes.
- Restrictions on entry of new firms (legal, natural, technical).
- Firm is price maker.
- Downward sloping demand curve for product.
Exam Tip
Always mention: single seller + no close substitute + barriers to entry + price maker.
2. Demand and Revenue under Monopoly
- Monopolist faces the market demand curve.
- Demand curve is downward sloping.
- Average Revenue (AR) curve is same as demand curve.
- Marginal Revenue (MR) lies below AR.
3. Price–Output Determination (MC = MR)
A monopolist also uses MC = MR rule for profit maximisation.
Steps:
- Find output where MC = MR and MC is rising.
- From this output, go up to demand (AR) curve to find price.
Step 1"Draw downward AR and MR curves"
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Step 2"Draw MC and AC curves"
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Step 3"Equilibrium where MC = MR → output Q*"
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Step 4"At Q*, move up to AR to get price P*"
Profit (per unit) = P* − AC at Q*.
4. Comparison: Monopoly vs Perfect Competition
Monopoly
- Single seller
- Downward sloping demand
- Price maker
- Can earn super-normal profits in long run
VS
Perfect Competition
- Many sellers
- Perfectly elastic demand for firm
- Price taker
- Only normal profit in long run
5. Quick Revision Points
- Monopoly: one seller, no close substitute, entry barriers.
- Monopolist is price maker, faces whole market demand.
- Uses MC = MR to choose output, price from demand curve.
6. Quiz Time 🎯
Test Your Knowledge
Question 1 of 5
1. A pure monopolist is: