How is price and output determined under monopoly?


-Monopoly consists of only one producer who has no direct rivals whatsoever, an extreme just as perfect competition.

-Because there is only one firm, the monopolist cannot be deprived of customers because no one else offers a similar product at a lower price.  Moreover, in such a market where the monopolist is the sole producer of a product for which there is no close substitute, entry barriers also exist.

-Because monopoly is a market served by one producer, the demand curve for the monopolist, by definition is the industry’s demand curve.  This demand curve is downward sloping since price must be reduced to sell additional output to consumers and the monopolist MR curve is less than the price charged to consumers at every level of output.

-Monopolists are called price setters because they select their own price and supply the entire quantity demanded. For a monopolist to have effective control over the pricing of a product, the product should have no close substitutes (other wise consumers may switch when P rises).

-In order for a monopolist to persist, there must be barriers to entry.

-We should note that monopoly does not necessary imply that there is a single producer always but there can be many producers that supply the product to the monopolist.  The essence of monopoly is that there is a single seller (or a group of sellers) that sets the price e.g. OPEC, KPLC

-A monopolist setting prices may set a single price for all customers or may practice price discrimination, that is set, different prices for different customers for the same product.

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