Under monopoly also, selling costs are not required as there are no competitors. He is also a price-maker who can set the price to his maximum advantage. Hence, the monopoly price must also be higher. If the firm spends more on advertisement beyond this level, the addition to revenue will be less than costs. Competitive advertisement on the other hand, is meant to push the sales of the product of a particular firm as against other similar products. Monopolist can increase his output in response to increase in demand by changing his variable factors.
The discriminating monopolist finds only an inappreciable fall in demand by charging a higher price in sub-market I. A producer incurs selling costs in order to push up his sales. Profits are earned by the monopolist per unit of output. First, because it feels that the other firms will not reduce their prices; and second, it will attract some of their customers. Thus the monopolist produces at higher prices and a lower output. Any further expenditure on advertisement will lead to diminution of profits.
This happens if the market demand curve is just tangential to the average cost curve of the monopolist, as happens at p 0, q 0 in Fig. However, the firms typically have to spend a great deal in promotional activities to convince customers that the product is prestigious. On the cost side of the picture. Elasticity of demand: If demand is inelastic, the monopolist will fix high price of his product. Products are close substitutes with a high cross-elasticity and not perfect substitutes. From the expression Nike sportswear can be considered as an: 1. On the contrary, if the demand is elastic, the monopolist will fix low price per unit.
As a result cost is not affected by sales, and the marginal cost of sales is zero. The product cost per unit of toothpaste and the selling cost per unit of a packet of blades added up from the total cost per unit of toothpaste-cum-five blades. Firstly, consumers being attached to a particular brand of the product say, Brooke Bond Tea, are in the habit of buying it alone. A normal good that is price elastic. It demonstrates an untraditional possibility that an increase in supply may lead to a rise in price. This is because consumers want product differentiation and they are willing to accept increased production costs in return for choice and variety of products that are available under monopolistic competition. A normal good that is price inelastic.
This is illustrated in Fig. The price charged by monopoly firm is higher than that charged by monopolist firm and the former's output is lower than the latter. It ensures the existence of single price in the market. But under monopolistic competition the product is differentiated. We have assumed here that the producer continues to incur proportional selling costs which are unrealistic. Or, he can fix the output to be produced and leave the price to be determined by the consumer demand for his product. The monopolist is a rational being who aims at maximum gain with the minimum of costs.
The potato chip industry in the Northwest in 2007 was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return and were competing in a monopolistically competitive market structure. Competitive advertisement is, however, socially undesirable because it involves wastage of resources. Managerial Economics: Price and Output Determination Under Monopolistic Competition; Video by Edupedia World. However, under monopoly, the marginal revenue equals average cost at the optimum scale, as Fig. However, unlike perfect competition, entry of new firms into the industry is blocked under monopoly by assumption. Selling Costs Selling costs are the expenses on advertisement, salesmanship, free sampling, free service, door- to-door canvassing, and so on. .
Managerial Economics; Management; Price-Output Determination under Monopoly in the Short-Run Introduction- - Monopoly- -. This abnormal profit is measured by A, in Fig. Excess capacity is less in the monopolistic market as its demand curve is relatively elastic and it is maximum in case of monopoly market as its demand is inelastic. According to this analysis, a monopolist will be in equilibrium when 2 conditions are fulfilled, i. Perfect competition leads to maximization of social welfare as there exists efficient allocation of resources whereas in monopoly resources are misallocated causing a loss of social welfare. Theory of Excess Capacity 4.
A monopolist may also indulge in price discrimination. It is his sales curve or average revenue curve. Thus, these two factors tend to lower average selling costs per unit of product up to a point. Excess capacity is less in the monopolistic market as its demand curve is relatively elastic and it is maximum in case of monopoly market as its demand is inelastic. Further , in monopoly , since average revenue falls as more units of output are sold, the margi nal revenu e is less than the average reven ue. There is one price for the privilege of buying items and a price per item. Support your answer with a typical example.
Such a situation cannot continue in the long- run and price would have to be raised to the level of A 1 to eliminate losses. Production costs include all expenses incurred in making a particular product, and transporting it to its destination for consumers. Attracted by super-normal profits, new firms enter the group. Figure 18 B shows a short-run situation in which the monopolist earns only normal profits. The firm will be losing few customers as a result of rise in the price of its product. The monopolist maximizes his profits at the price where the difference between total revenue and total costs is the maximum.