Key takeaways
- A monopoly has one seller, no close substitute and barriers to entry; it is a price maker facing the market demand curve.
- For a monopolist AR = price and MR < AR; MR is positive where demand is elastic.
- Equilibrium is at MR = MC, with price from the demand curve: output is lower and price higher than in perfect competition.
- Monopolistic competition has many firms and differentiated goods; long-run profit is zero but price exceeds the competitive level.
- In oligopoly few firms are interdependent; output lies between monopoly and competition and prices tend to be rigid.
This is the final chapter in the Introductory Microeconomics chapter list for Class 12 Economics. It contrasts the markets of Chapter 5 with markets where firms have price-making power.
Competitive Markets Revisited
Perfect competition rests on four conditions: very many firms and buyers, free entry and exit, identical products, and full information. Dropping the first two gives monopoly and oligopoly; dropping the third gives monopolistic competition. This chapter studies those three structures, in which firms have some power over price.
The theory of perfect competition assumed (i) a very large number of firms and consumers, each too small to affect the market, (ii) freedom to start or stop production, (iii) products that cannot be told apart, and (iv) perfect knowledge of outputs, inputs and prices. Real markets often break at least one of these. If (i) and (ii) fail, we get monopoly or oligopoly. If (iii) fails, we get monopolistic competition.
6.1Simple Monopoly in the Commodity Market
A monopoly is a market with a single seller of a product that has no close substitute, and where other firms are kept out. Since the firm is the whole market, it faces the market demand curve and can choose its price. It is a price maker, unlike the price-taking firm of perfect competition.
Three conditions define a monopoly: one producer, no close substitute, and barriers to entry strong enough to keep other firms out. We also assume that buyers are price takers and that input markets are competitive.
A note on words: in everyday speech a Coke–Pepsi rivalry is “competition”. In economics the two firms behave competitively because each has market power. A wheat farmer, who cannot affect price, does not bother to compete with his neighbour. So competitive behaviour and a competitive market structure are inversely related, with pure monopoly the main exception.
6.1.1 The market demand curve is the average revenue curve
The market demand curve shows the quantity consumers buy at each price, so a larger quantity sells only at a lower price. For the monopolist, this means price depends on how much it sells: it faces the whole market demand curve. It can pick a price and the demand curve tells it the quantity, or pick a quantity and the curve tells it the price. This is why a monopolist is called a price maker.
6.1.2 Total, average and marginal revenue
Take the demand curve p = 20 − 2q. Then total revenue is TR = pq = 20q − 2q², a quadratic with a negative squared term, so the TR curve is an inverted parabola. Average revenue AR = TR ÷ q = p, so AR is the demand curve itself.
| Quantity (q) | Price = AR (₹) | Total revenue | Marginal revenue (change in TR) |
|---|---|---|---|
| 1 | 18 | 18 | 18 |
| 2 | 16 | 32 | 14 |
| 3 | 14 | 42 | 10 |
| 4 | 12 | 48 | 6 |
| 5 | 10 | 50 | 2 |
| 6 | 8 | 48 | −2 |
Marginal revenue is the change in TR from selling one more unit. Because the extra unit can only be sold by cutting the price on all units, MR is always below AR. Where TR is rising, MR is positive; at the peak of TR (here 5 units), MR is about zero; where TR is falling, MR is negative. The steeper the demand curve, the further MR lies below it. For a straight-line demand curve p = 20 − 2q, the smooth MR curve is 20 − 4q, twice as steep.
6.1.3 Marginal revenue and price elasticity of demand
Demand is elastic (|e| > 1) where MR is positive, unit elastic where MR is zero, and inelastic where MR is negative. In the example, elasticity is 1.5 at q = 4 (p = 12), exactly 1 at q = 5 (p = 10), and 0.67 at q = 6 (p = 8). A monopolist therefore never chooses to produce on the inelastic part of demand.
6.1.4 Short-run equilibrium of the monopoly firm
Zero cost. If the seller bears no cost, profit is TR, so she maximises TR: 5 units at ₹10, for revenue ₹50. If many sellers competed, price would be pushed down to zero and 10 units would be sold, so competition gives a larger quantity at a lower price.
Positive cost. Profit is TR − TC. If the firm produces where MR > MC, one more unit adds to profit; if MR < MC, one fewer unit does. So the monopolist's equilibrium is at MR = MC with MC rising (or at least cutting MR from below). The price is then read off the demand curve, since that is what buyers will pay for that quantity.
So under monopoly, output is lower, the price is higher and profit is larger than in perfect competition. In the long run, competitive profit is competed away by entry. A monopoly's profit lasts, because entry is blocked.
Some critical views
Economists disagree on how harmful monopoly is. First, nearly all goods are substitutes in the sense that they compete for the consumer's income, so a pure monopoly may not exist. Second, new products and technology keep creating close substitutes, so a monopolist faces competition in the long run. Third, large profits can finance research and cheaper technology, which can even push monopoly output above the competitive level.
6.2Other Non-Perfectly Competitive Markets
Monopolistic competition has many firms, free entry and exit, and differentiated products. Each firm faces a downward-sloping demand curve, so it produces less and charges more than a competitive firm, and earns zero profit in the long run. Oligopoly has few sellers whose decisions depend on one another.
6.2.1 Monopolistic competition
Here there are many firms and free entry and exit, but the goods are differentiated by brand, packaging or taste. Biscuits are an everyday example. A buyer loyal to one brand will not switch for a small price difference but will for a large one. So the demand for one firm's brand slopes downward, and is more elastic than monopoly demand but not perfectly elastic. MR is a little below AR.
The firm sets MR = MC. Because MR is below price, this occurs at lower output than under perfect competition, and the price is higher. In the short run firms may earn profit or loss. Profit attracts entry and loss causes exit, until profit is zero, which is the long-run equilibrium. Even then, output is lower and price higher than in perfect competition.
6.2.2 How do firms behave in oligopoly?
An oligopoly has a few sellers; duopoly has exactly two. Each firm's output changes the market price and hence the others' revenues, so they react to each other. The book describes three possible patterns.
- Collusion: the firms agree not to compete and maximise joint profit, behaving like one monopoly with two plants.
- Quantity setting: each firm picks the profit-maximising output assuming the other's output stays fixed. After many rounds of move and counter-move the outputs settle at a stable point.
- Price rigidity: if one firm raises price and others do not follow, it loses many customers, so no firm raises price. If one firm cuts price, rivals match it, so the cutter gains few extra customers and loses revenue. Prices therefore stay put.
To see the second pattern, take demand p = 15 − 0.5q and zero cost. At zero price 30 units could be sold, so a monopoly would sell 15 units at ₹7.50 and perfect competition 30 units at price zero. Let firm A and firm B move in turn, each supplying half of what the other has left of the 30 units.
| Move | Firm | Output | Working |
|---|---|---|---|
| 1 | B | 0 | starting point |
| 2 | A | 15 | ½ of 30 |
| 3 | B | 7.5 | ½ of (30 − 15) |
| 4 | A | 11.25 | ½ of (30 − 7.5) |
| 5 | B | 9.375 | ½ of (30 − 11.25) |
| 6 | A | 10.31 | ½ of (30 − 9.375) |
Thus oligopoly output lies between monopoly and perfect competition, and so does the price.
Worked Examples
Example 1: Revenue and monopoly equilibrium
- Given
- Demand p = 20 − 2q and TC = 4q (so MC = 4).
- Formula
- TR = pq; MR = 20 − 4q; equilibrium at MR = MC; profit = TR − TC
- Steps
- MR = MC gives 20 − 4q = 4, so q = 4. Price = 20 − 8 = 12. TR = 48; TC = 16; profit = 32. In a competitive market, p = MC gives 20 − 2q = 4, so q = 8 and price 4; profit is 0.
- Answer
- Monopoly: 4 units at ₹12, profit ₹32. Competition: 8 units at ₹4, profit zero.
Example 2: Oligopoly firms moving in turn
- Given
- Demand p = 15 − 0.5q with zero cost; maximum demand 30 units. Firm B starts at zero.
- Formula
- Each firm supplies half of (30 − the other firm's output)
- Steps
- A: ½ × 30 = 15. B: ½ × 15 = 7.5. A: ½ × 22.5 = 11.25. B: ½ × 18.75 = 9.375. The outputs approach x where x = ½(30 − x), so x = 10. Total = 20, price = 15 − 10 = 5.
- Answer
- Each firm supplies 10 units; total 20; price ₹5, compared with 15 units at ₹7.50 under monopoly and 30 units at zero under competition.
Example 3: Why oligopoly prices stay rigid
- Given
- A firm sells 1,000 units at ₹100. If it raises price 10% and rivals do not follow, sales fall 30%. If it cuts price 10% and rivals match, sales rise 5%.
- Formula
- Revenue = price × quantity
- Steps
- Now: 100 × 1,000 = 1,00,000. After a rise: 110 × 700 = 77,000. After a matched cut: 90 × 1,050 = 94,500.
- Answer
- Revenue falls in both cases (by ₹23,000 and ₹5,500), so the firm leaves price unchanged.
Common Mistakes
- Equating a monopolist's marginal revenue with its price. MR is below price because the price cut applies to every unit sold.
- Reading the equilibrium price off the MC curve. After finding q from MR = MC, the price comes from the demand curve.
- Saying a monopolist can choose any price and any quantity. It can choose only one, and the demand curve fixes the other.
- Thinking a monopoly produces on the inelastic part of the demand curve. There MR is negative, which cannot be profit-maximising.
- Confusing monopolistic competition (many firms, differentiated goods) with monopoly (one firm).
10 Important Questions for Class 12 Board and School Examinations
Questions are written in original words. Marks are shown beside each question.
Q1The demand curve facing a monopoly firm is: (A) perfectly elastic (B) the market demand curve (C) vertical (D) the marginal cost curve 1 mark · MCQ
(B) The market demand curve.
The monopolist is the only seller, so it faces all market demand.
Q2Assertion (A): For a monopolist, marginal revenue is less than average revenue. Reason (R): To sell an additional unit the firm must lower the price on all units. Choose: (a) both true, R explains A; (b) both true, R does not explain A; (c) A true, R false; (d) A false, R true. 1 mark · Assertion-reason
(a) Both are true and R correctly explains A.
The price cut on earlier units reduces the revenue gained from the extra unit.
Q3State three features of a monopoly. 3 marks
A monopoly has a single seller, no close substitute and barriers to entry.
- Only one producer of the product.
- No close substitute for the product.
- Other firms are prevented from entering the market.
Example: a government-owned water supply system.
These features give the firm control over price. Barriers may be legal, such as patents and licences, or economic, such as very large fixed costs.
Q4What is monopolistic competition? Give an example. 3 marks
Monopolistic competition is a market with many firms and free entry and exit, selling differentiated products.
- Brands differ in name, packaging or taste.
- Each firm faces a downward-sloping demand curve.
- Entry and exit end super-normal profit in the long run.
Example: biscuits from different brands.
Each firm has some control over price because of product differences, but competition from close substitutes limits it. Firms also spend on advertising to build brand loyalty, which is a feature of this market.
Q5What is oligopoly? What is a duopoly? 3 marks
An oligopoly is a market with a few sellers; a duopoly is an oligopoly with exactly two sellers.
- Each firm's output affects the market price.
- So each firm's decisions affect the others and invite reactions.
- Firms may collude or compete.
Example: two firms supplying a product to a small town.
In a duopoly, each firm closely watches the other’s price and output.
Q6Why is the market demand curve the average revenue curve for a monopoly firm? How is marginal revenue related to elasticity? 4 marks
Because average revenue is price, and the monopolist's price is read from the market demand curve.
- AR = TR ÷ q = pq ÷ q = p.
- The price at each quantity is given by market demand, so AR coincides with it.
- Where MR > 0, demand is elastic.
- Where MR < 0, demand is inelastic.
Example: for p = 20 − 2q, MR is zero at q = 5, where elasticity is 1.
A monopolist can raise price only by selling less, so it operates where demand is elastic.
Q7Compare the output and price under monopoly with those under perfect competition. 4 marks
Compared with perfect competition, a monopoly produces less and charges more.
- Competition: p = MC.
- Monopoly: MR = MC, with MR below price.
- Result: a smaller output and a higher price under monopoly.
- Profit: monopoly profit persists in the long run because entry is blocked.
Example: monopoly 4 units at ₹12; competition 8 units at ₹4.
The monopolist restricts output because selling more requires lowering price on all units, and entry barriers keep rivals out. The loss to consumers is called the deadweight loss, and it is why governments regulate monopolies or use competition law.
Q8Explain the short-run equilibrium of a monopoly firm using the marginal revenue and marginal cost curves. 6 marks
A monopoly firm maximises profit at the output where marginal revenue equals marginal cost, and charges the price on the demand curve for that output.
- If MR > MC at some output, one more unit adds to profit, so output rises.
- If MR < MC, one fewer unit adds to profit, so output falls.
- So equilibrium is at MR = MC with MC cutting MR from below.
- The price is the height of the demand curve at that output.
- Profit = (p − AC) × q, the area between price and average cost.
- Since AR exceeds MC at that output, price is above marginal cost.
Hence the monopolist earns super-normal profit.
With demand p = 20 − 2q and constant marginal cost of ₹4, MR = 20 − 4q; setting MR = MC gives q = 4, price ₹12 and profit of ₹32.
Q9Explain how firms behave in an oligopoly market. 6 marks
Oligopoly firms are interdependent, so each tries to predict and respond to the others.
- Collusion: firms act together to maximise joint profit, like a monopoly.
- Independent quantity decisions: each maximises profit assuming the other's output is fixed; repeated moves lead to a stable outcome.
- Outcome: total output is more than monopoly and less than competition; price lies between.
- Price rigidity: a price rise is not followed and loses sales; a price cut is matched and gains little.
- So: prices change less often than in competition.
Example: duopoly outputs converge to 10 each in the worked example.
Where the number of firms is small, strategy matters as much as cost. Prices may stay stable for long periods because each firm fears starting a price war, and non-price competition, such as advertising, becomes important.
Q10A monopolist faces the demand p = 24 − q and has constant marginal cost of ₹6. Find the profit-maximising output, price and profit, and the output under perfect competition. 4 marks · Numerical
The monopolist produces 9 units at ₹15 and earns a profit of ₹81; a competitive market would produce 18 units.
Given: p = 24 − q; MC = 6 (so TC = 6q).
Formula: TR = 24q − q², MR = 24 − 2q; set MR = MC; competition sets p = MC.
Steps: 24 − 2q = 6 gives q = 9; p = 24 − 9 = 15; TR = 135; TC = 54; profit = 81. Competition: 24 − q = 6 gives q = 18.
Final answer: monopoly q = 9, p = ₹15, profit = ₹81; competition q = 18.
10 Points for State PSC and UPSC Aspirants
- The Competition Act, 2002 replaced the MRTP Act, 1969; the Competition Commission of India was constituted in 2003 and became fully functional in 2009.Why it matters: India's central market-power law.Source: India Code; Competition Commission of India
- Section 3 of the Act bars anti-competitive agreements including cartels; Section 4 bars abuse of dominant position; Sections 5–6 regulate mergers (combinations).Why it matters: the three pillars of competition law.Source: India Code; Competition Commission of India
- The Competition (Amendment) Act, 2023 added a deal value threshold for mergers and provisions for settlements and commitments.Why it matters: a recent reform to track.Source: Competition Commission of India; PIB
- The CCI has penalised large digital firms for abuse of dominance, including Google in 2022.Why it matters: applies monopoly theory to current affairs.Source: Competition Commission of India
- A patent is a legal monopoly, with a term of 20 years in India; product patents for pharmaceuticals were reintroduced by the Patents (Amendment) Act, 2005.Why it matters: legal barrier to entry, linked to TRIPS.Source: India Code
- Natural monopolies such as electricity distribution are regulated: state electricity regulatory commissions fix tariffs under the Electricity Act, 2003.Why it matters: regulation as the answer to monopoly power.Source: India Code
- India's mobile market is an oligopoly of a few large operators; TRAI (set up 1997) regulates tariffs and quality.Why it matters: a live example of oligopoly in India.Source: Telecom Regulatory Authority of India
- OPEC (founded 1960) is the most familiar international cartel, an example of collusive oligopoly.Why it matters: a standard example for oligopoly questions.Source: NCERT Introductory Microeconomics
- The kinked demand curve was proposed by Paul Sweezy (1939) to explain price rigidity in oligopoly.Why it matters: static theory fact.Source: NCERT Introductory Microeconomics
- Since the 1991 reforms the list of industries reserved for the public sector has shrunk to a few areas such as atomic energy and railway operations, easing the old barriers to entry.Why it matters: links monopoly to reform history.Source: Economic Survey, Ministry of Finance
These are revision notes, not official predictions of exam content.
Quick Revision
- Monopoly: one seller, no close substitute, barriers to entry.
- Monopolist is a price maker; D = AR.
- MR < AR; MR > 0 where demand is elastic.
- Equilibrium: MR = MC; price from the demand curve.
- Monopoly: lower output, higher price, lasting profit than competition.
- Monopolistic competition: many firms, differentiated goods, zero long-run profit.
- Oligopoly: few firms, interdependent; collusion or rigid prices.
- Oligopoly output lies between monopoly and competition.
Related Glossary Terms and Chapters
Glossary:
MonopolyMarginal costPerfect competitionPrice elasticity of demandOligopoly
Related chapters: The Theory of the Firm under Perfect Competition, the benchmark for comparison; Theory of Consumer Behaviour, for elasticity of demand; Market Equilibrium. From Class 11: Liberalisation, Privatisation and Globalisation.
Sources
- NCERT textbooks: Introductory Microeconomics, Class 12, National Council of Educational Research and Training. Syllabus reference. Accessed 23 October 2026.
- India Code: Central Acts, Legislative Department, Government of India. Accessed 23 October 2026.
- Competition Commission of India. Orders and advocacy material. Accessed 23 October 2026.
- Telecom Regulatory Authority of India. Accessed 23 October 2026.
- Economic Survey, Ministry of Finance, Government of India. Accessed 23 October 2026.
About this page
Drafted with AI assistance from the NCERT chapter structure, in original words. Content is checked and approved by Dr. Anamika Shrivastava, PhD Economics, before publication. Read how this site works or send a correction.
Syllabus year 2026-27 · Last updated