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Price and output determination under Monopoly Market

A monopolist firm itself determines price under a Monopoly market. A Monopolist has sole control oversupply of its product. In this sense, the monopolist firm is a price maker, not a price taker. A Monopolist firm can control either the price or output, but not both. However, the firm cannot make decisions on the price and quantity of output to be supplied at the same time. His price and output decisions are motivated by profit maximization.

price determination in monopoly

Conditions for equilibrium:

The profit-maximizing Monopolist will determine the price and quantity of the output at a point where the following two conditions are satisfied:
a. Necessary condition:MC = MR
b. Sufficient condition: MC most cut MR from below

Poet of equilibrium: determination of equilibrium price and output

The aim of the monopolist is to maximize profit, therefore; he will produce that level of output in charge of that price that gives him the maximum profits. A monopolist determines the price and output at a point when he is in equilibrium. He will be in equilibrium at that price and output at his profit are the maximum.

In the above figure, the output is taken along the x-axis, and price, revenue, cost are along the y-axis. Here we observe the firm's equilibrium condition at point E. This is because at point e the firm's equilibrium conditions are satisfied.

It can be seen from the diagram that till OQ output, marginal revenue is greater than marginal cost, but beyond OQ marginal revenue is less than marginal cost. At point E, both conditions for equilibrium are fulfilled. Therefore the monopolist will be in equilibrium at output OQ where marginal revenue is equal to marginal cost and the profit are the greatest. The corresponding price in the diagram is OP or AQ. It can be seen from the diagram that 'AQ' is the average revenue, BQ is the average cost, and AB is the profit per unit. Now the total profit is equal to the shaded area PABC.

Is monopoly price always higher?

It is generally assumed that price under Monopoly is higher and output less than that of perfect competition. A monopoly price is supposed to be higher than the price under perfect competition. But it is not that Monopoly price is always higher.
A price is note necessary eye due to the following reasons:

1. Under Monopoly a firm is the sole producer. Monopolist reaps Economics of scale. If the output is produced in large quantity, the price can be reduced.

2. Advertisement is not necessary for the product produced by the monopolist. So due to internal economies price can be reduced.

3. Due to investment in research and experience a monopolist can implement new strategies to create demand with lower prices.

4. Monopolists knowingly or International fix a low price not to attract government attention by charging exploitative prices.

5. A monopolist is afraid of losing goodwill by charging a high price.

6. There can be a government intervention if the price is fixed high. A monopolist loathes government intervention.

7. Charging high prices Can attract new firms into the industry. This would mean losing Monopoly power.

8. A monopolist usually practices limit entry pricing to block out potential entrants into the industry.

Price discrimination

Price discrimination is the charging of different prices for the same commodity. Price discrimination occurs in the Monopoly market. Manipur list charges different prices for the same community on the basis of price electricity of demand.
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