Depending on the context of the analysis, the cost curves may refer to either (1) the long run, when a firm can vary all relevant factors of production, including the number and sizes of its plants, or (2) a short run, when certain components of the firm’s plant and equipment are temporarily fixed (giving rise to the distinction between fixed and variable costs). Its significantly downward slope, the hallmark of the seller’s monopoly power, is in contrast to the essentially horizontal demand that would apply to the individual seller in pure competition. The AR schedule reflects the demand confronting the seller, since it shows the quantities that customers are willing to buy from him at various alternative prices. If the monopolist’s total revenue and total cost are designated by R and C, respectively, the corresponding average magnitudes are defined as AR = R/q = p and AC = C/q = c. The nature of these data can be briefly explained. With the monopolist’s product quantity, q, measured on the horizontal axis and such magnitudes as his price, p, and his unit cost, c, on the vertical axis, the diagram depicts illustrative revenue and cost schedules, both average and marginal. The elementary static theory of the profit-maximizing equilibrium of a simple monopolist may be illustrated by Figure 1. Finally, even when the behavior of individual sellers is purely competitive, any artificial restriction on their number or on the quantities that they are permitted to sell may also be classified as monopolistic. Furthermore, monopoly and competition are not mutually exclusive elements but may both be present in any given market. In this sense, at least some degree of monopoly power is both widespread and practically unavoidable. Since the price confronting the individual seller in pure competition, as determined by demand and supply in the market as a whole, is essentially independent of the quantity that he chooses to sell, monopoly in the broad sense characterizes the market position of any seller who has a significant degree of discretion about his price and whose quantity sold varies inversely with the price selected. The term is also applied more broadly, however, to any market in which the behavior of sellers is other than purely competitive. In accordance with its etymological meaning of “one seller,” the term “monopoly” in a strict sense refers to a situation in which a seller is the sole source of supply for an economic good that has no significant substitutes.
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