Monopoly

Monopoly exists where there is a single seller in a market.A monopolist is a price taker.The monopolist faces a downward sloping demand and can set a price or the output but not both.If the monopolist sets a price it must accept the quantity that is demanded at this price;if it sets the output it must accept the price it can get for this quantity.
In monopoly situation we assume that the firm is faced with a downward slopping demand curve and must lower the price to sell an additional unit.
In the situation of a single price monopolist,only one price can be charged for all the goods,so if the price is lowered on the last unit it must also be lowered on the ones before.
For example,the firm was selling one unit for 10 pounds.To sell another unit, the price must be lowered to 9 pounds.The firm`s revenue for two units is 18 pounds compared to 10 pounds for one.Its marginal revenue is therefore 8 pounds (18-10).So,the firm gained 9 pounds on the second unit which was not sold before but lost 1 pound on the fist unit which was previously sold for 10 pounds.
Similarly,if the price of two units is 9 pounds each,the firm may have to lower the price to 8 pounds to sell three units.
I n each case the firm is gaining revenue from the sale of the extra unit but losing revenue on the ones before,where the price have been lowered.


The marginal revenue is below the average revenue (or price) line and gets further away from it as more units are sold.This is because the price is continually being reduced an all the units before.
BARRIERS TO ENTRY-these prevent firms entering an industry in the long run.
*fear of reaction of existing firms.It means that other firms may not entry if they think this will trigger a price war.
*control over outlets so competitors can not get their products to the market.
*product differentiation-by making their product seem very different from the competition through their marketing and branding a firm can establish a monopoly position.
*Legislation.The government may restrict the ability of firms to compete in a market.
*Patents and trademarks-this provide firms with legal protection for their ideas or design.
*Control over supplies-if the firm has a monopoly control of the supplies in an industry, other firms will not be able to enter.
*a cost advantage-if a firm has a major cost advantage,because of the economy of scale,other firms will not be able to compete.
(Economies of scale-reduction in cost per unit resulting from increased production, realized through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls.)