Price Determination

Price Determination under Monopoly Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitute. From this definition there are two points that must be noted (i) Single ProducerThere must be only if one producer who may be anindividual, a partnership firm or a joint stock company. Thus single firmconstitutes the industry. The distinction surrounded by firm and industry disappearsunder conditions of monopoly. (ii) No Close SubstituteThe commodity produced by the producer must have no closely competing substitutes, if he is to be called a monopolist.This ensuresthat there is no rival of the monopolist. Therefore, the cross elasticity ofdemand between the product of the monopolist and the product of any otherproducer must be very low. PRICE-OUTPUTDETERMINATION chthonianMONOPOLY A firm under monopoly faces a downward sloping demand curve or average revenuecurve. Further, in monopoly, since average revenue falls as more units of output are sold,the bare(a) revenue is less than the average revenue. In other words, under monopolythe MR curve lies below the AR curve. The Equilibrium aim in monopoly is that level of output in which marginal revenue refers marginal cost.The producer will continue producer as keen-sighted as marginal revenueexceeds the marginal cost. At the point where MR is equal to MC the profit will bemaximum and beyond this point the producer will stop producing. It can be seen from the diagram that up till OM output, marginal revenue is greater thanmarginal cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist will be in correspondence at output OM where marginal revenue isequal to marginal cost and the profits are the greatest. The corresponding price in thediagram is MP or OP.It can be seen from the diagram at output OM, while MPis the average revenue, ML is the average cost, therefore, PL is the profit per unit. Now the total p rofit is equal to PL (profit per unit) multiply by OM (total output). In the short run, the monopolist has to keep an eye on the variable cost, otherwise he willstop producing. In the long run, the monopolist can change the size of plant in responseto a change in demand. In the long run, he will make leeway in the amount of thefactors, fixed and variable, so that MR equals not only to short run MC but also long runMC