Monopolies Essay Example | Topics and Well Written Essays - 500 words

Monopolies - Essay Example The demand curve of a monopolistic seller is the same as that of market demand, as the firm forms the entire industry. In the picture below (fig 1), the D represents the market demand for the product which is the same as the monopolistic seller’s demand curve. In a perfect competition, a particular seller takes up the price set by the market. Hence the demand is horizontal, in the case of this purely competitive seller. However, this line is determined by the market demand and supply curves. This difference in the demand curves of the two types of market structures is very significant. From fig. 1, it is clear that when the monopolistic seller raises the price of the product, the seller may lose some of its buyers. However, the firm will not lose its revenue. In the case of a purely competitive seller, the price is set by the market and hence any price above this will result in buyers switching to other sellers who offer the same product at the market price. All firms in any market maximise their profits when their marginal cost equals the marginal revenue (MR = MC). In the case of a purely competitive seller, the marginal revenue is the same as that of the firm’s demand curve. However, in the case of a monopoly, the marginal revenue curve falls twice as that of the firm’s demand curve (starting form the same point). Hence the marginal cost intersects the marginal curve at a very low value in the case of monopoly. Hence the monopolists maximise their profits by producing lower quantities at higher prices. The main phenomenon to be noted in the case of monopolistic demand curve is that, it is not typically purely inelastic. In the case of a purely inelastic demand, the demand for a product is not affected by the price changes at all. However in the case of a pure monopolistic seller, as said earlier, when the price is raised, the firm loses some of its buyers. The buyers generally buy a