Monopoly

From Hobson's Choice

A condition in which there is only one seller for a particular item. Pure monopoly is an exotic condition, since there is frequently at least some prospect of substitution. The "severity" of monopoly may be expressed by the slope of the demand curve; if demand is not very elastic with respect to price, then the slope of the demand curve will be steep, reflecting little reduction in the quantity demanded for any unit increase in price.

As a representation of the social consequences of monopoly, the slope of the demand curve is probably inadequate since it does not capture declines caused by insufficient income. Hence, a monopoly in (say) rice will represent a reduction in quantity demanded with an increase in price, but the reduction will be caused by insufficient income (and possible famine).

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Economic Properties of Monopoly

The chart below illustrates the extreme case of a monopoly:

Click for larger image

The shaded rust-colored area represents the rents captured by the monopolist from the consumer

This is an extreme case, but the difference between the extreme of a monopoly and more common cases of oligopoly (such as price leadership) is not immense. Notice the demand curve for the product is the same as the demand curve for the firm. The curved red line is the marginal cost (MC) curve. The dashed blue line is the marginal revenue (MR) curve; it represents the additional revenue brought in by increasing sales by one more unit.

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