Question

What is Monopoly and Pricing & Advertising in Economics? Please feel free to draw any graphs or give examples to substantiate your points.

How does it affect the economy and what can one do to overcome it?

Answer 1

What is monopoly?

Monopoly is a market structure where there exist only one seller who sales differentiated product for which no close substitutes are available. So in that case the firm (having monopoly power) will be able to make profit as it has no competator. The buyers do not have options because no other firm produces any close substitutes to the monopoly product. The demand curve for the buyers are inelastic in nature. So, when the monopoly firm raises its price , its total revenue increases. Because it lose very less amount of buyers because of the fact that it has no substitutes.

For example, suppose the state electricity board produces electricity and distributes it. Then in this case no user has any substitute to the electricity distributes by the electricity board. So, the buyers has no option and they are to buy from this electricity board. Now, say the electricity board has increased its price of providing the electricity. They people will not stop consuming electicity, rather they will reduce the consumption to some amount. And, that will cause the total revenue of the firm to go up.

Equilibrium price and quantity is fixed on the basis of where the Marginal revenue and marginal costs equal. Again at that quantity the corresponding average revenue is seen as price. The price is higher than the marginal revenue.

Advertising in economics:

Advertising is mostly used in the monopolistic competiton, where there exist a large number of firms and large number of buyers but firms sell diffrentiated products. For example, the industry of soap, a learge nuber of seller and buyers are there but the firms sold differentiated products. So, each firm has some amount of monopoly power since their product is different to some extent from others. So they also face a downward sloppin demand curve but it is relatively elastic. Increase in price will cause the consumer to purchase soap from other firms.

To show the product of own firm different and to make the consumers aware about their own products a firm advertise. Through advertise they highlight the unique features of their product and make the consumers believe that their products are different from their rival.

Control of monopoly:

Monopoly is generally controlled by the government. Government often provide subsidy the monopolists so as to producesocially desirable level of output this will raise the production and reduce the level of price. Sometimes government imposes per unit tax on the output to control their profit level. Some antitrust laws are also there to control the natural monopoly. These laws are different from countries to countries.

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