Short Run Equilibrium Of The Monopoly Firm

As in the segment of perfect competition, we pursue to contemplate the monopoly enterprise as one which maximises profit. In this segment, we scrutinise this profit maximising trait to decide the amount manufactured by a monopoly enterprise and cost price at which it is sold. Let us presume that an enterprise does not maintain stocks of the amount manufactured and that the entire amount manufactured is kept up for sale.

The Simple Case of Zero Cost

Presume there exists a suburb situated adequately far away from other suburbs. In this suburb, there is exactly one pond from which water is obtainable. All residents completely rely on this pond for their water necessities. This pond is owned by one person who is able to stop others from drawing water from it except through buying the water. The person who pays for the water can draw the water out of the pond. The pond owner is hence, a monopolist enterprise which endures zero cost in manufacturing the commodity. We shall scrutinise this easy scenario of a monopolist enduring zero costs to decide the amount of water sold and the cost price at which it is being sold.

Comparison with Perfect Competition

We can now compare the above result with what would be the result when sorted under a perfectly competitive market structure. Let us presume that there is an infinite number of such ponds. Suppose a pond owner determines to charge Rs.5 per a bucket of water. Who would be willing to purchase from him? Recall that there are many pond owners. Any other pond owner can attract all the purchasers ready to buy for Rs. 5 per bucket, by offering to sell to them at a lower cost price, say, Rs. 4 per bucket.

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