A monopoly is a form of market where there is a single seller of a good with no close substitutes.
Features of Monopoly
- There is a single seller and a large number of buyers of the commodity.
- There are some restrictions on the entry of new firms into the monopoly industry. Generally, there are patent rights or exclusive control over a technique or raw material.
- They produce a commodity which has no close substitutes. Hence, there will not be any shift in consumer preferences from one product to another.
- Being a single seller of the product, a monopolist has full control over its price. Hence, a monopolist is a price maker.
- A monopolist charges different prices from different buyers for the same product to maximise profits. This is called price discrimination.
- The firm does not spend much on advertisements. It incurs only nominal selling costs in the beginning just to give information to buyers about its product.
Negatively Sloped Demand Curve
Full control over the price under monopoly does not mean that the monopolist can sell any amount of goods at any price. Once the price is fixed by monopolists, consumers decide the quantum of the good to buy. The market demand curve of the monopoly firm shows that the consumer is willing to buy more at lower prices. On the other hand, when the prices are more, the consumer buys a lesser quantity. There is an inverse relationship between the price and the quantity sold by a monopoly firm. Thus, the demand curve of a monopoly firm is a downward sloping curve.
Demand Curve for a Monopoly Firm
The curve shows an inverse relationship between price and quantity. Thus, OQ1 quantity is sold when the price is OP1. When the price is reduced from OP1 to OP, the quantity sold by the monopolist rises from OQ1 to OQ.
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