Page 267 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 13.8

Y
A

Revenue/Cost P N

MC = MR AR
0 X
Q MR
Output

13.15 Is Monopoly Price Always Higher than the Perfectly
Competitive Price?

Normally, comparison to competition the price is high under the condition of monopolist. This is
because monopolist has the power of determining the price of goods, whereas under competition the
price determination is dominated by the total demand and total supply available in market. It does
not mean that monopolist price will always or necessarily be more. Some conditions are there which
restricts the price to become high. In many cases, monopolist price is lower even to the price determined
by perfect competition firm, for example.
(1) Monopolist can produce on large scale, that is why monopolist can earn the surplus of large scale
and profit in opposite small competition firm cannot earn the profit of surplus of large scale.
(2) Monopolist can do production with capability and courage and can get enough amount of money
at low interest for monopolist; risk on his investment is also less.
(3) Sometime, monopolist proposes goods at low price taking public interest into consideration.
Monopolist is desirous to get respect in society, and monopolist keeps himself away the work which
is wrong as per social duty.
(4) Monopolist remains in constant fear that even a competitor might not evolve. This fear restricts him
from proposing high price.
In brief normally, monopolist price is higher than complete competition, but in many situations the
price may be less.

13.16 Multi-plant Monopoly

A monopolist can produce upto that level in a definite size a plant at which marginal cost is equal to
marginal revenue. But if the monopolist is running more than one plant then how will he distribute his
total production?
Allocative principle says that marginal cost of production of different plants should be the same. This is
explained with the help of an example.
Suppose there are two plants–A and B. Plant A produces 150 units per month at marginal cost of 25,
whereas plant B produces 100 units per month at marginal cost of 20. Will the monopolist be satisfied
this situation? Definitely not. Because if he reduces the production of plant A then he will save 25

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