The term monopoly means a single seller. In economics, this term refers to a firm the product of which has no close substitute in the market. It is, in that sense, a single-firm industry. Moreover, irrespective of the profit income of the existing producer firm, new firms cannot enter the industry. Hurdles to their entry may be on account of various reasons. There may be legal barriers, or the producer may own a technology or a naturally occurring substance which others cannot avail of. It is also possible that the size of the market may be too small and no new firm may find it economically worthwhile to enter it.
In the absence of a substitute product, the monopolist is free to fix a price of his choice. He can refuse to sell his product for a price below the one decided by him.
However, he cannot determine the demand for his product. He cannot force the buyers to buy his product at a price of his choice. A buyer will buy it only if its price does not exceed its marginal utility to him. Therefore, if the monopolist wants to increase his sales, he has to reduce the price of his product so as to induce
- Existing buyers to buy more and
- New buyers to enter the market.
Therefore, the demand conditions for his product are not the ones, which are associated with a firm under competitive conditions. Instead, the demand conditions faced by him are similar to the ones, which are faced by the industry as a whole. In other words, the monopolist faces a negatively sloped demand curve for his product. In the long run, the demand curve can shift both in its slope and location. However, there is no theoretical basis for determining the direction and extent of this shift.
As regards his cost of production, it may be assumed that the monopolist faces a given technology. Moreover, the monopolist faces conditions similar to those faced by a single firm under competitive conditions. He is not the sole buyer of the inputs used by his firm but only in the entire market. He has no control over the prices of the inputs used by him.