Concept of Monopoly- Part 1

Mono literally means one and poly means seller. So monopoly means one seller.

The literal definition of monopoly: it is a market situation where there is single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist. A monopolist can be an individual, a firm, a group of firms or a government corporation. Indian railways is an example of monopoly.

SOME IMPORTANT FEATURES OF MONOPOLY:

• Single seller of the commodity:  since there is single seller of the commodity, the seller has sole control over its supply. Naturally, a monopolist can charge any price he wants. He can also charge different prices from different people according to their willingness to pay.

Therefore, a monopoly firm is a price maker and not a price taker.

• Absence of close substitute of the product: due to the absence of a close substitute of the commodity, a monopolist does not face any competition. As a result, the consumer has to buy the good at a higher price or have to do without it.
• Difficult entry of a new firm: the situation of the market is controlled by a monopolist in such a way that the entry of a new firm, which is selling the same (homogeneous) product, becomes very difficult. The barrier created can be economic, institutional or artificial in nature.

Hence, a firm practicing monopoly earns abnormal profits in long run.

• Negatively sloped demand curve: a demand curve is curve which shows a relationship between price of a commodity and its quantity demanded. The law of demand states that the price of good is inversely related to its demand, keeping all other factors constant. The demand curve facing a monopolist is negatively sloped, which indicates that more quantity can only be sold by lowering the price.

Therefore, the demand curve is said to be a constraint facing a monopoly firm.

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