Lecture Notes: Microeconomics Monopoly

Monopoly (Word Monopoly is derived from Monospoliene which

means “Alone to sell”)

The term “monopoly” is amalgam of two words:

MONO means “SOLE or SINGLE” and

POLY means “SELLER”

Key Features

 No Close Substitute
 Entry Barriers
o Legal Barriers (Create Legal Monopoly)
 Patents
 Franchise
 License
 Copyrights
o Natural Barriers (Create Natural Monopoly)

Monopoly’s Demand: is downward sloping as if firm wants to increase quantity sold it

has to reduce price

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Lecture Notes: Microeconomics Monopoly

Profit Maximization Condition

Slope of TR = Slope of TC
∆ TR ∆ TC
∆Q
= ∆Q

MR = MC

Marginal Revenue Curve

Marginal Revenue lies below the average revenue curve

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Lecture Notes: Microeconomics Monopoly

FIRM’S EQUILIBRIUM UNDER MONOPOLY

WHY MARGINAL REVENUE LIES BELOW AVERAGE REVENUE

How we define Marginal Revenue?

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com
Lecture Notes: Microeconomics Monopoly

Marginal Revenue is the gain in revenues by the sale of an additional unit

Total Revenue = TR1 = P1 * Q1

= 16 * 2

TR1 = 32

Total Revenue = TR2 = P2 * Q2

= 14 * 3

TR1 = 42

∆ TR TR1−TR 2
MR =
∆Q
= Q1−Q2

42−32
¿
2−1

MR = 10

When Price is 14 per unit

Average Revenue is equal to 14 which is equal to the Revenue Gain. If Marginal Revenue is Gain
in Revenues then it should be equal to the Average Revenue but it is less than average revenue.
Because when firm wants to sale an additional unit it has to reduce the price therefore when
there is revenue gain (because of increase in quantity sold) at the same time there is a revenue
loss (because of decrease in price)

Revenue Gain = 14

Revenue Loss = -4

Net Gain in Revenues = 10

Therefore, Marginal Revenue is not gain in revenues, it is net gain in revenues.

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Lecture Notes: Microeconomics Monopoly

MONOPOLISTIC COMPETITION or

IMPERFECT COMPETITION

ASSUMPTIONS

 Large number of Sellers and Buyers

 Close Substitute goods (But Differentiated)
 Free Entry or Exit of the firm
 Advertisement

Short Run Equilibrium of the Firm

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Lecture Notes: Microeconomics Monopoly

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Microeconomics Monopoly

Lux

Capri

Rexona

Tibbet

Lifebuoy

Sufi

Imperial Leather

Safeguard

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Lecture Notes: Microeconomics Monopoly

OLIGOPOLY
There are few firms in the market, selling close substitute of the other firm’s output and price
and output decision of the firm is directly depends on the price and output decision of the
other firm.

 Traditional Models
o Kink Demand Model
o Dominant Firm Model
 Game Theory

Kink Demand Model

Assumption

1. If firm rises the price of its output, the other firms will not follow
2. If firm cuts the price of its output, the other firms will follow

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Lecture Notes: Microeconomics Monopoly

Dominant Firm Model

Total 11 firms are operating in the market. One firm is dominant and captures the major share
of the market. Dominant firm will set the price and other firms will follow the same price and
behave like a price taker

Lux

Capri

Rexona

Tibbet

Imperial Leather

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Lecture Notes: Microeconomics Monopoly

Lifebouy

Detol

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