Class 11 Micro Economics Notes · CBSE
Monopoly
Monopoly — understanding the single-seller market with no close substitutes, its features, price discrimination, emergence and long-run abnormal profits. CBSE Class 11 Microeconomics notes with graphs.
Last updated: 15 Sep 2026
Notes
Meaning and Example
Monopoly is strictly opposite to perfect competition: perfect competition has a very large number of small firms; monopoly has a single seller.
'Monopoly' is derived from two Greek words: 'Monos' meaning single and 'polus' meaning a seller.
Features of Monopoly
Under monopoly, there is a single seller selling the product. As a result, the monopoly firm and industry are one and the same thing and the monopolist has full control over the supply and price of the product. However, there are a large number of buyers of the monopoly product and no single buyer can influence the market price.
The product produced by a monopolist has no close substitutes. So, the monopoly firm has no fear of competition from new or existing products. For example, there is no close substitute for electricity services provided by TPDDL in some parts of Delhi. However, the product may have distant substitutes like inverters and generators.
There exist strong barriers to entry of new firms and exit of existing firms. As a result, a monopoly firm can earn abnormal profits and losses in the long run. These barriers may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in the form of a cartel.
A monopolist may charge different prices for his product from different sets of consumers at the same time. It is known as 'Price Discrimination'.
In the case of a monopoly, a firm and industry are one and the same thing. So, the firm has complete control over the industry output. As a result, the monopolist is a price-maker and fixes its own price. It can influence the market price by changing the supply of the product.
Price Discrimination
(a) Personal Price Discrimination
In this, the same product is sold at different prices to different kinds of buyers.
A Railway ticket is cheaper for senior citizens as compared to young citizens.
(b) Place Price Discrimination
Under this, the same product is sold at different prices at different places.
Electricity charges are lower for rural areas as compared to urban areas.
(c) Use Price Discrimination
In this type, the same product is sold at different prices based on different uses.
Electricity charges are lower for residential use as compared to commercial use.
Reasons for the Emergence of Monopoly
A firm enjoys a monopoly when it is the sole seller of its product and the product has no close substitutes.
The fundamental cause of monopoly is the barrier to entry.
It means that before a firm can enter an industry, it needs to take permission from the government. Licensing is used to ensure minimum standards of competency. By not granting licenses to new firms, the government aims to assure that only one firm operates in the market.
Example: Think of radio broadcasting licences — only firms holding a government licence can broadcast, keeping the number of players fixed.
Certain big private companies are engaged in research and development activities. At times, they come up with new products or new technologies. As a reward for their risk and investment in research, the government grants them patent rights. The period for which patent rights are granted is known as patent life. Patent is an exclusive right granted to a firm to manufacture, use or sell an invention for a certain number of years.
Example: For your Reference: 'Xerox 914' was the first marketable automatic and plain-paper copier. So, it was granted 15-year exclusive patent rights to xerography (a dry photocopying technique).
Under a cartel, some firms retain their individual identities but coordinate their output and pricing policies in order to act as a monopoly. The firms agree among themselves to restrict their total output to the level that maximizes their joint profits.
Example: The most famous example of a Cartel is the 'Organization of Petroleum Exporting Countries (OPEC)' formed in 1960, that led to a virtual monopoly in the world market for oil.
Monopoly also arises due to sole ownership or control of certain essential raw materials needed in a particular industry.
Example: For example, De Beers Company of South Africa controls about 80 percent of the world's production of diamonds. Although, the share is not 100 percent, still it is large enough to exert substantial influence over the market.
Demand Curve under Monopoly and MR < AR
A monopoly firm is like an industry as the single seller constitutes the entire market for the product, which has no close substitutes. So, a monopolist has full freedom and power to fix a price for the product.
However, demand for the product is not in the control of the monopoly firm. In order to increase the output to be sold, the monopolist will have to reduce the price. Therefore, the monopoly firm faces a downward-sloping demand curve.
In Fig 10.3, output is measured along the X-axis and price and revenue along the Y-axis. At price OP, a seller can sell OQ quantity. Demand rises to OQ₁ if the price is reduced to OP₁. So, the demand curve under monopoly is negatively sloped as more quantity can be sold only at a lower price.
Fig 10.3 — Demand Curve of a Firm under Monopoly
A monopoly firm faces a downward-sloping demand curve as more output can be sold only by reducing the price.
As a result, revenue generated from every additional unit (known as MR) is less than the price (AR) of the product. Due to this reason, MR is less than AR.
Under Monopoly
Cartel Created by OPEC — Case Study
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Long-run Equilibrium under Monopoly
A monopolist is able to earn abnormal profits in the long run due to restriction on entry and exit.
The firm's demand curve (AR curve) slopes downwards as more output can be sold only by reducing the price. Due to this reason, the MR curve is also negatively sloped (see Fig 10.7).
In the figure, LAC and LMC are, respectively, the long-run average cost and long-run marginal cost curves.
The conditions for equilibrium — 'MR is equal to LMC' and 'LMC curve cuts the MR curve from below' — are satisfied at the output level of OQ.
If the output is priced (AR) at OP₁ and LAC is OP, then the monopolist will earn abnormal profits of P₁ABP as shown by the shaded area.
Fig 10.7 — Long-run Equilibrium under Monopoly
Key Takeaways
Key Takeaways
- Monopoly = single seller + product with no close substitutes; the firm and the industry are one and the same. ⭐
- Five features: single seller, no close substitutes, restricted entry and exit, price discrimination, price maker. ⭐
- Price discrimination has three types: personal, place and use. ⭐
- Monopoly emerges from government licensing, patent rights, cartels and control over raw materials — all barriers to entry. ⭐
- The monopolist faces a downward-sloping demand curve with MR < AR — he can sell more only by cutting price. ⭐
- Barriers to entry let the monopolist earn abnormal profits even in the long run. ⭐
- OPEC (Baghdad Conference, September 10–14, 1960; five founding members: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela) quadrupled world oil prices from about $3 to nearly $12 a barrel within a year. ⭐