PRICE ON OUTPUT DETERMIANTION UNDER MONNOPOLOGY

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Presentation transcript:

PRICE ON OUTPUT DETERMIANTION UNDER MONNOPOLOGY PRESENTATION ON PRICE ON OUTPUT DETERMIANTION UNDER MONNOPOLOGY BY SHAHBANO PARVEEN Associate Professor in Economics, P.G. Govt. College, Sector-11,Chandigarh

WHAT IS MONOPOLY? A situation of market in which there is a single seller of a product with no close substitutes and there are barriers to entry and producer is price maker DEFINITIONS Koutsoyiannis, “Monopoly is a market situation in which there is a single seller, there are no close substitutes for commodity it produces, there are barriers to entry”. Ferguson, “A pure monopoly exists when there is only one producer in a market. There are no direct competitors”

FEATURES OF MONOPOLY One Seller and Large Number of Buyers. Monopoly is also an Industry. Restrictions on the Entry of the New Firms. No close Substitutes Price Maker

DEMAND AND REVENUE UNDER MONOPOLY Both AR & MR slopes downwards. But slope of MR is double the slope of AR. Average revenue is never zero but marginal revenue may be zero or even negative.

DETERMINATION OF PRICE AND OUTPUT UNDER MONOPOLY A monopoly is in equilibrium when the monopolist produces that amount of output which yields him maximum total profit and in short period when he incurs minimum loss. It is determined by two different approaches. Total Revenue and Marginal Cost Analysis. Marginal Revenue and Marginal Cost Analysis.

Total Revenue and Total Cost Curve Analysis Monopolist can earn maximum profit at selling that amount of output at which point difference between total revenue and total cost is maximum.

MARGINAL REVENUE AND MARGINAL COST ANALYSIS A monopolist will be in equilibrium when two conditions are fulfilled. MC = MR MC curve cuts MR curve from below. Point ‘E’ is an equilibrium point where MC=MR and MC curve cuts MR curve from below.

PRICE AND EQUILIBRIUM DETERMIANTION UNDER MONOPOLY 1. Short Period 2. Long Period Price determination under short-run equilibrium Short Run Equilibrium Super Normal Profit Normal Profit Minimum Loss

SUPER NORMAL PROFIT AR > AC MR=MC MC cuts MR from below

NORMAL PROFIT AR=AC MR=MC MC cuts MR from below

MINIMUM LOSS AR < AC MR = MC MC Cuts MR from below

DETERMINATION OF LONG RUN EQUILIBRIUM AR>LAC LMC=MR LMC Cuts MR from below

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