Price Determination

Price Determination nether Monopoly Monopoly is that market form in which a atomic number 53 producer controls the whole supply of a single commodity which has no close substitute. From this definition there are two points that essentialiness be noted (i) Single ProducerThere must be only one producer who may be anindividual, a confederation firm or a joint stock company. Thus single firmconstitutes the industry. The distinction between firm and industry disappearsunder conditions of monopoly. (ii) No Close interchangeThe commodity produced by the producer must have no almost competing substitutes, if he is to be called a monopolist.This ensuresthat there is no rival of the monopolist. Therefore, the amaze elasticity ofdemand between the product of the monopolist and the product of any new(prenominal)producer must be very low. PRICE-OUTPUTDETERMINATION UNDERMONOPOLY A firm under monopoly faces a downward sloping demand curve or comely revenuecurve. Further, in monopoly, sin ce average revenue falls as more units of rig are sold,the peripheral revenue is less than the average revenue. In other words, under monopolythe MR curve lies below the AR curve. The Equilibrium level in monopoly is that level of output in which bare(a) revenueequals marginal cost.The producer go forth continue producer as long as marginal revenueexceeds the marginal cost. At the point where MR is equal to MC the take in will bemaximum and beyond this point the producer will stop producing. It piece of ass be seen from the plot that up till OM output, marginal revenue is greater thanmarginal cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist will be in equilibrium at output OM where marginal revenue isequal to marginal cost and the profits are the greatest. The corresponding price in thediagram is MP or OP.It can be seen from the diagram at output OM, time MPis the average revenue, ML is the average cost, therefore, PL is the prof it per unit. Now the total profit is equal to PL (profit per unit) compute by OM (total output). In the short put to work, the monopolist has to keep an eye on the variable cost, otherwise he willstop producing. In the long run, the monopolist can change the size of plant in responseto a change in demand. In the long run, he will make adjustment in the amount of thefactors, fixed and variable, so that MR equals not only to short run MC but also long runMC