Micro Economics

1. Monopoly

2. 
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Single seller has control over the entire
market supply.
No substitutes hence no alternatives for
buyers.
It is a complete negation of competition.
Price maker.
Downward sloping demand curve.
Entry barriers.
A monopolist fixes the price as well as
quantity of output to be sold in the market.

3. 1. Demand Curve
The demand curve of a monopoly firm is negatively sloped. The
demand curve also reflects the AR curve of the firm, as AR is
always equal to the price. The negative slope of demand curve
under monopoly indicates that firm must reduce the price of the
product if it wants to sell more.

4. 2. MR Curve
MR curve is also downward sloping curve under
monopoly. This curve also starts from the
same point from where AR curve of the firm
starts. However MR curve always lies below
AR curve indicating that MR is always less
than AR. Falling AR implies that MR should be
falling faster than AR.

5. 3. Relation between AR and MR
(i) Initially both curves start from the same point and are downward
sloping.
(ii) MR curve always lie below AR curve indicating that MR is always less
than AR at all levels of output.
(iii) Although MR shares its intercept with AR or say demand curve, but
its slope is double the slope of AR curve.
(iv) AR is always positive but MR may be positive, zero or negative.
In the fig below, MR is zero at OQ level of output though AR is positive
at that level. If firm produces more than OQ, MR becomes negative, but
again AR remains positive.

6. The firm obviously attempts to maximize
profits. In such a situation, the
monopolist has to make two decisions :
I) To determine the price for his product.
II) To determine the equilibrium level of
output.
Both these decisions are interdependent. If
one is decided, the other one is implied.
The monopolist chooses between the above
2 decisions. He is unable to decide on
both.

7. The monopolist, since is interested in profit
maximization, follows the behavioral rule of
MR=MC.
 The demand curve in such a case is downward
sloping.
 MR curve lies below AR and the rate of fall in MR
is twice of AR.
He produces that level of output at which :
 SMC= SMR
 SMC cuts SMR from below.
At this output level, price is set in relation to the
demand position (AR curve)
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9. At a level of output where MR=MC, the
profits of a monopoly firm depend on the
levels of AR and AC.
i) Economic profit: AR>AC
ii) Normal profit : AR=AC
iii)Losses : AR<AC
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10. 
For a monopoly, the distinction between the
long and short run is not as important
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If a monopoly is insulated from competition
by high barriers that block new entry,
economic profit can persist in the long run
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However, short-run profit is no guarantee of
long-run profit
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11. 
A monopolist that earns economic profit
in the short-run may find that profit can
be increased in the long run by adjusting
the scale of the firm
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Conversely, a monopoly that suffers a
loss in the short run may be able to
eliminate that loss in the long run by
adjusting to a more efficient size
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12. 
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Profit maximization is reached at LMR= LMC.
The firm has the flexibility to expand and to
enhance profits depending upon conditions
like:
a) Size of the market
b)Expected economic profit.
c)risk of inviting legal restrictions.

14. 
A monopolist can sometimes increase
economic profit by charging higher prices to
customers who value the product more
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The practice of charging difference prices to
different customers when the price
differences are not justified by differences in
cost is called price discrimination
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15. 
Conditions
 The
demand curve for the firm’s product must
slope downward  the firm has some market
power and control over price
 There are at least two groups of consumers for
the product, each with a different price elasticity
of demand
 The producer must be able, at little cost, to
charge each group a different price for essentially
the same product
 The producer must be able to prevent those who
pay the lower price from reselling the product to
those who pay the higher price
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16. 
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First degree where the monopolist charges
different prices to different buyers for each
different unit of the same product.
Second degree where the monopolist sells
blocks of output at different prices.
Third degree when different prices are set in
different markets having different demand
elasticities

17. 
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Market size of the product is small.
Monopolist is able to know the price each
consumer is willing to pay.
He sets the price in such a way that he is
able to extract the consumer surplus at all
levels of pricing.
The entire consumer surplus is converted
into producer surplus.

18. 
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The monopolist intends to extract major part
of consumer surplus rather than whole of it.
The number of consumers are large.
Demand curve of all consumers are identical.
The potential buyers are divided into blocks
as per their financial status.
Price rationing can be possible as in case of
utility services like telephone, electricity
etc.
A single rate is applicable for large number
of buyers.

19. Second Degree

20. 
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Most common type of monopolist price
discrimination.
Firm divides its total output into many sub
markets and sets different prices in each of
these markets basis demand elasticities.

22. 
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The practice of discriminatory monopoly
pricing in the area of foreign trade.
Implies different prices in the domestic and
foreign markets.
Depends upon demand elasticities in
different markets.