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Economics > Non-Competitive Market > Simple Monopoly and Commodity Market
Non-Competitive Market

Simple Monopoly and Commodity Market

Go back a few years, before the economic reforms of 1991. The market was not open to foreign markets. This resulted in a lot of products having a monopoly in India. The lack of choices left the public with only one product to buy. The examples included everything from Colgate (toothpaste) and Modern Bread to Ambassador cars. Let us take a look at the concept of Simple Monopoly.

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Simple Monopoly

A monopoly market is a situation when a service or a product may be brought only from a single supplier. This situation is the defining characteristic of a specific market. A monopoly situation usually arises in cases when there is an absence of economic competition. This absence of competitors to manufacture the product or service needed by the consumers is a simple monopoly. It is also a requirement that the product or service is unsubstitutable or irreplaceable in nature.

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Features of a Monopoly

A simple monopoly in the field of classical economics has certain features:

  • Profit maximization: This is the basic reason for the existence of any firm in the market. The firm tries to ensure that it not just generates maximum revenue but also makes maximum profits.  The firm maximizes its production level. It also tries to maximize use of resources and produce goods at optimized output levels. The production is at the intersection levels of the marginal cost curve and the marginal revenue curve.
  • Price setter: The leader in market share gives monopoly players the power to set and determine the price of commodities. The absence of competitors and substitutes is a major factor that helps in price setting. The price is modulation is determined on the basis of demand and supply factors playing in the market.
  • High barriers to entry: A monopoly often involves high barriers to entry of other market players. Often the high level of barriers makes it practically impossible for other payers to make profits. This is another reason why the monopoly becomes a deadlock until there is an innovation or disruption in the market.

Commodity Market

Simple Monopoly and Commodity Market(Source: Livemint)

A commodity market is another kind of market to trade in goods. These are special goods called commodities. It is generally a virtual or an actual or physical marketplace. This marketplace exists for the purpose of trading in raw materials or primary products. Trading in these markets involves buying as well as selling of these raw materials and primary products.

Such markets have exchanges to inform people of ongoing rates of various commodities. Currently, there exist about fifty major controlling commodity markets around the globe. These markets help monitor the global prices of these commodities. These markets help and facilitate the trade or investment in the commodities.

Types of Commodities

Commodities in the commodity markets are broadly split and presented as two types:

  • Hard Commodities: Commodities that need to be mined or extracted naturally are generally hard commodities. Example: Gold, Oil and so on.
  • Soft Commodities: These commodities constitute products that are generally agricultural products or animal livestock. Example: Wheat, Sugar, Soybeans, Maize and so on.

India has six commodity exchanges namely:

  • Multi Commodity Exchange (MCX)
  • National Commodities and Derivatives Exchange (NCDEX)
  • National Multi Commodity Exchange
  • Indian Commodity Exchange
  • ACE Derivatives Exchange
  • Universal Commodity Exchange

They can also be traded on these exchanges using future contracts. Apart from exchanges, the commodities are also traded over the counter. These transactions, however, are not regulated when they are over the counter and cannot be legally binding in nature.

Solved Question for You

Q: The monopoly firm may charge from the customers

  1. A Single Unifrom price
  2. Different prices
  3. Discriminating prices
  4. Either a uniform price. or discriminate and different prices

Ans: The correct answer is option “D”. The monopoly firm is a price setter. Due to the lack of competition, it has the power to determine the prices of the commodity. So they can set their prices according to supply and demand only. So the price they set can either be a uniform price or discriminate and different prices.

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