Question

What are the assumptions of monopoly? What happens if the entry
restriction is eliminated? (400-500 words w diagram for better understanding)

Answer 1

Assumptions of monopoly

1) One seller and many buyers- In monopoly, in market there is only one seller who sales the goods and services to the consumers and buyers are unlimited.

2) Restriction on entry - No new firm can enter in the market. There is monopoly of only one firm, who will sale goods and services in the economy.

3) Price discrimination - It is another important aspect of monopoly . In monopoly due to single seller, different prices are charged from different consumers for the same product.

4) No close substitutes- In monopoly ,,there is no close substitutes of the goods sold by the monopolistic.

5) Price maker- In monopoly firm is price maker not price taker. Industry charge price as per the elasticity of demand. In case of elastic demand ,industry charge less price and in case of inelastic demand , industry charge high price.

6 ) Super normal profit in the long run- In monopoly , supernormal profits are got under the long term . The reason is that no new firm can enter and compete with the existing industry. In long term AR.> LAC

B) Condition if the entry restriction is removed- Monopoly means single seller without entry of new firms in the market due to restriction upon entry. If entry restriction is removed then monopoly will lose its status. Initially firm cannot get maximum profits from the consumers. There will be competition between the firms and low price will be decide to sale the maximum goods to the consumers. It will lead towards increase in consumer surplus. In the long run, only normal profits will be earned because at super normal profit new firms will enter and prices will fall and supernormal profit will turn in normal profit. If restriction from entry is removed monopoly will convert in to oligopoly.