Monopoly market is the market structure where there is large no. of buyers and a single producer or seller of particular commodity. In this market, there is no availability of close substitutable commodity. There is total restriction to the new firm to enter in the industry. This market is dependent upon following assumptions:
- Single seller and large no. of buyers:
There is only one producer or seller or firm to produce or sell the particular commodity but no. of buyer is assumed as large.
- No close substitutable commodity:
Generally a monopolist sells a product which has no close substitute. The cross elasticity of demand between the product of monopolist and other is zero.
- Restriction of entry of the firm:
There is either natural or artificial restriction on the entry of new firms in the industry even though there is supernormal profit.
- Firm is price maker:
Under the monopoly market, a firm is a single producer of a particular commodity. So, a firm can determine price as well as quantity.
Price and output determination under monopoly market:
A monopoly firm is generally guided by its profit maximizing and sales maximizing objective. Since a monopolist is a single seller, it has sole control over the price and quantity determination. It has to face downward facing demand curve, if it sets higher price of its product its sales goes down and vice-versa. It will try to reach that level of output which gives it maximum profit i.e. it will try to obtain attain the equilibrium level of output. To attain equilibrium the firm must fulfill the two conditions:
- MC = MR
- MC must cut MR from below
By the help of given figure, we can describe the process of price and output determination under monopoly market.
On the above figure, output is measured along x-axis and P, C, R are measured on y-axis. At the point E, both conditions for the equilibrium are satisfied so that E is the equilibrium point. If we draw a straight line from point E towards x-axis we will get equilibrium output i.e. OQ. If we draw straight line from point E towards AR curve we will get AR or equilibrium price i.e. CQ or OP. While deriving the straight line from point E towards AR curve, the line cuts AC curve at point B. So, average cost of the firm to produce the output is BQ or OA. In this condition total revenue of the monopolist is OPCQ and total cost is OABQ. So, it gets super normal profit equal to area ABCP.
In the short run a monopolist may obtain supernormal profit or normal profit or loss. It depends on the condition of AR and AC curves. But in the long run always a monopolist obtains super normal profit.