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Karnataka Class 12 Commerce Economics Monopoly Complete Notes

Karnataka Class 12 Commerce Economics Monopoly : The Bombay legislature of the erstwhile Bombay Presidency established Karnatak University through the Karnatak University Act 1949. It became a statutory University on 1st March 1950. The jurisdiction of the University covers Dharwad. Gadag, Haveri and Uttar Kannada districts. It has several Post Graduate centres. The University (888 acres) is offering courses in the faculties of Arts, Commerce, Education, Law, Management, Science and Technology and Social Sciences. Symbolic of the University’s vision and mission the emblem of the University consists of papal tree at the centre, an open book. Figures of a bull, a rising sun and the legend ‘Arive Guru’ i.e., Wisdom is Guru, implying that both wisdom and knowledge should be all pervading like the ramifying papal tree and light up the world with knowledge and eradicate illiteracy.

Karnataka Class 12 Commerce Economics Monopoly Complete Notes

Karnataka Class 12 Commerce Economics Monopoly : Economics is a social science concerned with the production, distribution and consumption of goods and services. It studies how individuals, businesses, governments and nations make choices on allocating resources to satisfy their wants and needs, and tries to determine how these groups should organize and coordinate efforts to achieve maximum output.

Economic analysis often progresses through deductive processes, much like mathematical logic, where the implications of specific human activities are considered in a “means-ends” framework.

Karnataka Class 12 Commerce Economics Monopoly Complete Notes

Karnataka Class 12 Commerce Economics Monopoly :  A monopoly (from Greek μόνος mónos [“alone” or “single”] and πωλεῖν pōleîn [“to sell”]) exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity’s control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market). Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller’s marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).

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Karnataka Class 12 Commerce Economics Monopoly : A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have market power and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market.

Karnataka Class 12 Commerce Economics Monopoly-Characteristics

  • Profit Maximizer: Maximizes profits.
  • Price Maker: Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm.
  • High Barriers: Other sellers are unable to enter the market of the monopoly.
  • Single seller: In a monopoly, there is one seller of the good, who produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.
  • Price Discrimination: A monopolist can change the price or quantity of the product. He or she sells higher quantities at a lower price in a very elastic market, and sells lower quantities at a higher price in a less elastic market.

Karnataka Class 12 Commerce Economics Monopoly-Sources of monopoly power

Karnataka Class 12 Commerce Economics Monopoly : Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly impede a potential competitor’s ability to compete in a market. There are three major types of barriers to entry: economic, legal and deliberate.

  • Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.
  • Economies of scale: Decreasing unit costs for larger volumes of production. Decreasing costs coupled with large initial costs, often due to large fixed costs, give monopolies an advantage over would-be competitors. Monopolies are often in a position to reduce prices below a new entrant’s operating costs and thereby prevent them from competing. Thus the size of the industry relative to the minimum efficient scale may limit the number of companies that can effectively compete within the industry. If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, and so cannot produce at an average cost that is competitive with the dominant company. Finally, if long-term average cost is constantly decreasing  the least cost method to provide a good or service is by a single company.
  • Capital requirements: Production processes that require large investments of capital, perhaps in the form of large research and development costs or substantial sunk costs, limit the number of companies in an industry: this is an example of economies of scale.
  • Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants either do not have the expertise or are unable to meet the large fixed costs (see above) needed for the most efficient technology. Thus one large company can often produce goods cheaper than several small companies. 
  • No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for that good relatively inelastic, enabling monopolies to extract positive profits.
  • Control of natural resources: A prime source of monopoly power is the control of resources (such as raw materials) that are critical to the production of a final good.
  • Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words, the more people who are using a product, the greater the probability that another individual will start to use the product. This reflects fads, fashion trends, social networks etc. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft office suite and operating system in personal computers.
  • Legal barriers: Legal rights can provide opportunity to monopolise the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.
  • Manipulation: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see anti-competitive practices).

Karnataka Class 12 Commerce Economics Monopoly : In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. High liquidation costs are a primary barrier to exiting.  Market exit and shutdown are sometimes separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.

Karnataka Class 12 Commerce Economics Monopoly-Monopoly versus competitive markets

Karnataka Class 12 Commerce Economics Monopoly : While monopoly and perfect competition mark the extremes of market structures there is some similarity. The cost functions are the same. Both monopolies and perfectly competitive (PC) companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows:

  • Marginal revenue and price: In a perfectly competitive market, price equals marginal cost. In a monopolistic market, however, price is set above marginal cost. 
  • Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question. A customer either buys from the monopolizing entity on its terms or does without.
  • Number of competitors: PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.
  • Barriers to Entry: Barriers to entry are factors and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, or exit competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.
  • Elasticity of Demand: The price elasticity of demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.]
  • Excess Profits: Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors, which can enter the market freely and decrease prices, eventually reducing excess profits to zero. A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.
  • Profit Maximization: A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs. The rules are not equivalent. The demand curve for a PC company is perfectly elastic – flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P.
  • P-Max quantity, price and profit: If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, and realise positive economic profits.
  • Supply Curve: in a perfectly competitive market there is a well defined supply function with a one-to-one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note, a change in demand “can lead to changes in prices with no change in output, changes in output with no change in price or both”. Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply “curve” would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply “point” would be established. The locus of these points would not be a supply curve in any conventional sense.

Karnataka Class 12 Commerce Economics Monopoly Complete Notes

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