In the second diagram firm it is seen that there are

In the second diagram (Firm), it is seen that there are two equilibrium points-R and T,
because at these points the first condition is met. However, point T satisfies both conditions.
Hence the firm will be in equilibrium at point T and produce OM level of output at OP price. The
firm will not stop producing at point R because beyond this point AR > MC and therefore, there
is still enough scope to earn profits and maximize it. Similarly any output level greater than OM
will bring losses to the firm as MC > AR (=MR) beyond point T.
In the short run, there are three possibilities for a firm. These are – (a) when a firm makes
abnormal profits (AR > AC); (b) when it earns only normal profit (AR = AC); and (c) when it
incurs losses, but does not shut down. Firms will operate till they are able to get variable costs.
They will shut down their business when they cannot earn even average variable costs of
production.
MONOPOLY
The word ‘Monopoly’ has been derived from the two Greek words, ‘Monos’ which means single,
and ‘polus’ which means a seller, Monopoly is a market situation where there is single seller of
Price

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INTRODUCTORY ECONOMICS
a product and he has full control over the supply of that commodity. He produces such a product
which has no close substitutes.
Thus monopoly market has the following features:
1. There is a single seller of the product.
2. There are no close substitutes of the commodity produced by monopoly seller.
3. There is restriction on entry or exit of other firms.
4. There is no distinction between a firm and an industry under monopoly.
5. Seller is a price maker.
6. A monopoly firm earns abnormal profits both in short and long run.
7. Selling costs are negligible.
8. A monopolist is capable of following price discrimination, which means it can charge
different prices for its products from different buyers.
Let us now see what the causes of monopoly are:
1. Monopoly can be the result of exclusive ownership of important raw materials or
knowledge of production techniques;
2. Patent rights acquired by a firm for its product;
3. Foreign trade barriers imposed by the government, which prevents any foreign company
to enter the industry.
4. A price policy adopted by the existing firms which prevents new firms to enter.
MONOPOLISTIC COMPETITION
In a monopolistic competitive market the number of sellers is large but each seller has a product
differentiated from those of his rivals. What one firm produces is not quite like what any other
firm produces. In fact, each firm has a kind of limited monopoly of its own product and hence
the name “monopolistic competition”. The following are the main features of the monopolistic
competitive market:
1. Large number of firms: The number of firms which constitutes an industry is fairly
large.
2. Product Differentiation: Under monopolistic competition each firm produces a
differentiated product. The form or the quality of a product can be differentiated by
using different kinds of raw materials, through workmanship, colour, packing, design,