Meaning of monopoly.

Perfect competition and pure monopoly are two extreme forms of market structure.They are polar opposite.In perfect competition there are large number of buyers and sellers while in monopoly the seller is only one but the buyers are many.These both forms of market can be rarely found in the real world.The monopoly is a single seller or producer of his product.Since,there is only one firm there is no difference between a firm and industry in the monopoly market.
A monopoly refers to a single firm which has control over the supply which has no close substitutes.In the worlds of C.E. Ferguson -" A pure monopoly exists when there is only one producer in the market."
According to A.Koutsoyiannis -"Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to sentry." For example a hotel or a bank in a remote village commands monopoly power.Likewise,public utilities like telecommunication,electricity supply,drinking water supply,postal service are the example of pure monopoly.This kind of monopoly has been called 'absolute monopoly' by Sraffa.In reality,pure monopoly is a myth which is found rarely in the real world.In the real world,only imperfect monopoly can be found where the monopoly has to face substitutes.For example,Nepal electricity authority may be called a imperfect monopoly since it has to face competition of distance substitutes like kerosene,petrol,gas,candle in different uses.

Pricing under perfect competition.

Equilibrium of firm and industry :The following three conditions should be fulfilled for an industry to be equilibrium :

1. The quantity demanded and supplied of the commodity produced by the industry should be equal.Because,if demand and supply are not equal,three cannot be equilibrium price.For example, if supply is higher than supply,the price tends to rise and if supply is higher than demand,price tends to fail.
2. All firms must be in equilibrium.The firm will be in equilibrium when marginal revenue equals marginal cost and the MC curve cuts the MR curve from below.
3. There should be no tendency on firms to enter or leave the industry.The tendency does not exit when all the firms are earning only normal profit.The firm earn normal profit when average revenue equals average cots.The normal profit is just sufficient to retain the firms in industry.If the firms are earning abnormal profit ,there is tendency on new firms to enter the industry.On the other hand,if the firms are increasing losses,there is tendency on firms to leave the industry.The situation of earning normal profit is called full equilibrium.

Short-run equilibrium :
The three conditions necessary for industry equilibrium mentioned above are fulfilled in the long run.The third condition need not be fulfilled in the short run.Because,in the short run there in no possibility of new firm entering the industry and exiting firm leaving the industry.
There are two approaches to show equilibrium of a firm : total revenue - total cost approach and marginal revenue - marginal cost approach.

Total revenue - Total cost approach :
The aim of the firm is to maximise profit.So the firm will be in equilibrium when it maximises profit.Profit is the difference between TR from sales and total cost of operation.Profit is maximum for the rate of output that maximises the excess of revenue over cost.

conditions of perfect competition

The following conditions are to be fulfilled for a perfect competition market :

1. Small size,large number :These should exist large number of buyers and sellers in the market.They cannot exert influence on price.The consumer taken individually is unimportant.He cannot get special facilities from the sellers,such as credit,free service,discount etc.
2. Homogeneous product : All firms product homogeneous product.Their products are identical.The products are perfect substitutes of each other.The cross elasticity between the products of the firms is infinite.Since products are homogeneous ,a single firm cannot affect price.The buyers are also indifferent as to the firm they purchase.
3. Free mobility of resources :All resources are perfectly mobile.It implies that each resources can move in and out of market readily in response to reactionary signals.The implies that the required labour skills are few,simple and easily learned.Free mobility also means that the inputs are not monopolised by a producer or an owner.
4. Free entry and exit of firms :The new firms can enter and leave the industry without any difficulty.This condition is very difficult to realise in practice.The absence of barrier in entry and exit applies only in the long run.In the short run entry and exit is not possible.
5. Perfect knowledge :The consumers,producers and resources owners must have perfect knowledge,about the market.The consumers should know the market price.If not,they might buy at higher prices even when lower prices are available.There will then not be uniform price in the market.If they have perfect knowledge about the prevailing price,the not more than the prevailing price.

The producers need to know both costs as well price in order to produce the profitable rate of output.The sellers will not charge more than prevailing price.If they charge higher price,they Will have to loss the customers.Thus,due to the complete knowledge,a price prevails in the market.
Similarly,the resources owners should have perfect knowledge of the market.For example,if labourers do not know the wags rates offered,they may not sell their labour services to the highest bidders.
Besides these factors,ti is also assumed that is the absence of transport cost.The objectives of the firm is to maximise profit and that of consumer is to maximise utility.There are no government intervention in the form of tax or subsidy.
These requirements show that no market can be perfectly competitive.Even in agriculture market,the requirement of 'perfect knowledge' cannot be fulfilled due to vagaries of whether conditions.

Significance of the law

Despite the weakness,the law of variable proportion in universal in application.Marshall and his followers believed that the law of increasing returns is applicable in manufacturing industries while the law of diminishing returns is applicable in agriculture.But this is not true.When a factor is increased keeping constant the other factors,the level of technology being held constant the product definitely decrease both in agriculture and industry.
This law has proved to be true empirical evidence.As opined by Fritz Machlup - "That people do not grow all the crops they want in just a few little flower pots is sufficient proof for the existence of diminishing returns."According to R.C. Lipsey -"Indeed,were the hypothesis of diminishing returns incorrect,there would need it a food crisis."The improvement in technology can postpone the operation of this law for the time being but cannot completely check the operation of this law.
It is be noted that although this is applicable equally in both agriculture and manufacturing,the operation of the law of diminishing returns can be postponed in manufacturing due to rapid development technology.But,the law operates due to the predominance of nature.
The law of diminishing returns operates in industry in a country like Nepal due to the non-development or slow development of technology.It some of the developing countries cost is decreasing and out put is increasing due to the development of technology.But the operation of this law is inevitable if 'technology remains constant' as assumed by this theory.Hence,the increase in production is necessary to meet the demand of growing population.
The law of variable proportion is of special significance in economic theory.Because some of the laws of economics are based directly on this law.For example,the Ricardian theory of rent and the Malthusian theory of population are based on this law.According to Ricardo since the law of diminishing returns operates in agriculture,even inferior land should be cultivated.On account of this superior by the growing population cannot be met due to the operation of the law of diminishing returns in agriculture.He has thus pointed out the need to check population by various methods.

Law of variable proportions

The law of variable proportions is one of the important laws of economics.It is new name for the law of diminishing returns.The economists like Marshall,Benham,Samuelson,Mrs.Joan Robinson have contributed to the development of this law.This law shows the short run input relation.The gist of this law is that if the quantity of factors is increased keeping constant the quantity of other factors,eventually the marginal and average product decline.
According to C.E. Ferguson -"As the amount of variable input is increase,the amount of other inputs held constant,a point is reached beyond which marginal product declines."
Likewise,in the worlds of W.J. Baumol -"As more and more of some input is employed,all other input quantities being held constant,eventually a point will be reached where additional quantities of input will yield diminishing marginal contribution to total product."
The clear example of this law can be found in agriculture production.In agriculture,if we keep the quantity of land fixed and go on increasing the quantity of labour,eventually the marginal product decline.

Production functiion

Production function shows technological or engineering relationship between output of a commodity and its input.In traditional economic theory,it is stated that are four of production.But technology also contributes to the increase in output.Hence,technology may be taken as an additional department of output.Thus,output is a function of land,labour,capital,organisation and technology.
In the worlds of Stigler -"the production function is the name given to the relationship between the rates of outputs of productive services and the rate of output of the product."
Similarly,in the words of Pappas Brigham-"Production function specifies the maximum possible output that can be produced for a given of outputs or,alternatively,the maximum quality of inputs necessary to produce a given level of output."
The production can be expressed symbolically as .

x=f (ld,l,k,m,t)
The above function shows the general production function.In specific situation,one or other of these factor may not be important.The relative importance of factors of production varies from one type of product to another.For example,land is more important in agriculture but not in manufacturing.Similarly,management and technology are more important in industrial production than in agriculture production.For example analysis of production decision problems,it is convenient to assume only two inputs for an output.If labour and capital are only two inputs,the production function is,
X=f (l,k)
This function has three variable i.e. necessary out put of X and units are labour and capital.
Both labour and capital are necessary for production and they are substitutes of each other.The entrepreneur will have to use both of them but would have an option to employ any one combinations of factors out of several possible combinations.The alternative combinations of factors for a given output level be such that if the use one input is increased,that of other will decrease and vice versa.
The alternative combinations of labour and capital for making 10 TV sets per day are illustrated below.

Labour Capital
5 20
6 17
7 15
8 13
9 11
10 10
The table shows that to produce 10 units of TV sets,either 5L and 20 K OR 6L and 7L and 15K etc,can be combined.

Derivation of total product,average product,marginal product curves.

The total product,average product and marginal product curves can be derived from the table.Suppose that wheat is grown on 10 ropani of land.The fixed input is land,the variable input is labour,and the out put is in quintal.The total product,average product and marginal product are as shown in the table.

Units of labour Total product Average product Marginal product
1 10 10.0 -
2 24 12.0 14
3 39 13.0 15
4 52 13.0 13
5 61 12.2 9
6 66 11.0 5
7 66 9.4 0
8 64 8.0 -2
The table shows the behaviour of total,average and marginal product of labour.The total product first increase,reaches maximum when 7th units of labour is used and then declines.The average and marginal product both increase in the beginning,reach maximum and decline.The marginal product is equal to average product,when average product is maximum.When marginal product is zero,total product is maximum.