What is monopoly? How the price and output is determined under it?

A monopoly is a market structure with a single seller and many buyers, selling a product that has no close substitutes, so the monopolist controls the whole supply and is a price maker; in Nepal, the sole right of the Nepal Oil Corporation to import and distribute petroleum is a common example.

Characteristics of monopoly:

1. Single seller, many buyers: one firm constitutes the entire industry and faces the whole market.
2. No close substitutes: buyers have no real alternative product to switch to.
3. Barriers to entry: patents, control of raw materials, legal rights or economies of scale block new firms.
4. Price maker: with full control over supply, the firm sets its own price.
5. Downward-sloping demand curve: to sell more the monopolist must lower price, so MR lies below AR.

Price and output determination:

6. Goal: the monopolist maximises profit, where π = TR − TC.
7. Revenue curves: because demand slopes downward, the AR and MR curves both fall, with MR below AR throughout.
8. Equilibrium condition (necessary): the firm produces where MC = MR.
9. Equilibrium condition (sufficient): MC must cut MR from below for a true profit maximum.
10. Output determination: equilibrium output is fixed at the quantity where MC intersects MR at point E.
11. Price determination: the price is read off the demand (AR) curve vertically above that output, and it exceeds MR.
12. Supernormal profit: if AR > AC, the monopolist earns excess profit equal to (AR − AC) × output.
13. Normal profit: if AR = AC, the monopolist earns only normal profit.
14. Loss (minimised) and shut-down: if AR < AC but price covers AVC, it produces at a minimum loss; if price falls below AVC, it shuts down.
15. Long-run note: since barriers keep rivals out, the monopolist can sustain supernormal profit in the long run as long as price covers long-run average cost.

Thus, a monopoly is a single-seller market with no close substitutes, and the monopolist determines its equilibrium by producing where MC = MR and charging the price shown on the demand curve above that output — earning supernormal profit, normal profit or a minimised loss according to cost conditions.