Price Determination

Price Determination under Monopoly Monopoly is that market form in which a bingle producer controls the whole supply of a single commodity which has no close substitute. From this definition there are devil points that must be noted (i) Single ProducerThere must be only one producer who may be anindividual, a partnership planetary house or a joint stock comp whatsoever. thereof single firmconstitutes the industry. The distinction between firm and industry disappearsunder conditions of monopoly. (ii) No neighboring 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 adversary 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 UNDERMONOPOLY A firm under monopoly faces a downward sloping demand curve or average revenue enhancementcurve. Further, in monopoly, since average revenue falls as more than units of product are sold,the fringy revenue is less than the average revenue. In other words, under monopolythe MR curve lies below the AR curve. The Equilibrium direct in monopoly is that level of output in which marginal revenueequals marginal cost.The producer bequeath continue producer as long as marginal revenueexceeds the marginal cost. At the point where MR is equal to MC the profit leave behind 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, however beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist will be in equilibrium 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 profit is equal to PL (profit per unit) multiply by OM (total output). In the oblivious run, the monopolist has to keep an substance on the variable cost, otherwise he willstop producing. In the long run, the monopolist can commute the size of plant in responseto a change in demand. In the long run, he will make modification in the amount of thefactors, fixed and variable, so that MR equals not only to short run MC but also long runMC