Capital-consuming technologies

Nowadays many goods are produced on the base of complicated and fun-consuming technologies. Machine-building industries, industrial equipment, automobile, marine vehicles imply large factories with many subsidiaries. Such a large investment are not up to small or medium producers.

Decreasing Costs

M onopolies can come about because there are decreasing costs (increasing returns to scale) in the long run. In such a case, the long run average cost slopes downward, as shown in the picture. In such a case, the largest producer can undersell the rest, and still make a bigger profit. Therefore, in an industry in which there are increasing returns to scale, we would not be surprised to find a monopoly, in the absence of any other causes.

Government Grants of Monopoly

Monopolies can be created by legislation. Historically, this has been an important source of monopolies as, for example, a monarch might grant a monopoly of wine to a favorite. In the modern world, governments may still encourage monopoly in many countries of the world, though this seems less common as time goes on.

2. Monopoly Demand and Marginal Revenue

The demand curve for a monopoly is different from that of a P-Competitive firm. In P-competitive industry, we have to distinguish between the industry demand and the demand for the output of an individual firm, which are quite different. As we recall, the P-competitive firm has a horizontal demand curve. More general, if there are two or more firms in an industry, we have to distinguish between the industry demand and the firm demand. But in a monopoly – an industry with only one firm – there is no such distinction. The demand curve for the monopoly is the demand curve for the industry – since the monopoly controls the output of the entire industry – and the industry demand curve is downward sloping. So the monopoly's demand curve is downward sloping. That means the monopoly can push the price up by limiting output. If the monopoly cuts back on its output, it can move up the industry demand curve to a higher price.

Figure 2 shows that the MR curve lies below the AR curve. We can conclude that if the AR curve (i.e. the demand curve) is falling steeply, the MR curve is far below the AR curve. On the other hand, if the AR curve is less steep, the vertical distance between the AR and MR curves is smaller. Figure 2 (a) shows a flatter AR curve while Figure 2(b)

shows a steeper AR curve. For the same units of the commodity, the difference between AR and MR in panel (a) is smaller than the difference in panel (b).

The MR values have a relation with the price elasticity of demand. It is sufficient to notice only one aspect – price elasticity of demand is more than 1 when the MR has a positive value, and becomes less than the unity when MR has a negative value. As the quantity of the commodity increases, MR value becomes smaller and the value of the price elasticity of demand also becomes smaller. Recall that the demand curve is called elastic at a point where price elasticity is greater than unity, inelastic at a point where the price elasticity is less than unity and unitary elastic when price elasticity is equal to 1.