Introduction to Various Conditons of Market

7/31/2019 Introduction to Various Conditons of Market

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INTRODUCTION TO VARIOUS CONDITONSOF MARKET

PERFECT COMPETITION

SHORT RUN LONG RUN

MONOPLY

SHORT RUN LONG RUN

MONOPLISTIC COMPETITION SHORT RUN LONG RUN


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It is the market situation where there islarge number of buyers and sellers of a

homogeneous product and the price ofsuch product is determined by marketforces i.e.industry.


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FEATURES OF PERFECT COMPETITION

Large no. but small size of buyers and sellers

Homogeneous products

Perfect knowledge

Free entry and exit of firms Free from checks

Perfect mobility

Same price


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Price of commodity is determined by

industry and not by any one seller or a

firm. Equilibrium price of commodity is

determined by industry at that point at

which aggregate demand for commodity is

equal to aggregate supply by the industry.


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EQUILIBRIUM OF FIRM UNDER

PERFECT COMPETITION

SHORT RUN :-

Under short run period firm may earn:-

Super normal profits (AR>AC)

Normal profits (AR=AC)

May suffer minimum losses (AR


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In the figure (15.3), outputis measured along OX axisand revenue / cost on OYaxis. We assume here thatthe market price is equal

to OP. A price taker firmhas to sell its entire outputat this prevailing marketprice i.e. OP. The firm is inequilibrium at point L.Where MC = MR. The

inter section of MC andMR determine thequantity of the good thefirm will produce.


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We assume in the figure (15.4) thatOP is the prevailing market price andPK is the average revenue, marginalrevenue curve. At point K, which isthe break even price for aCompetitive firm, the MR, MC andATC are all equal. The firm producesOM output-and sells at market priceOP. The total revenue of the firm to

equal is the area OPKM. The totalcost of producing OM output alsoequals the area OPKM. The firm isearning only normal profits. It is asituation in which the resourcesemployed by the firm are earning

just what they could-earn in someother alternative occupations.


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FIGURE EXPLANATION

In this figure (15.6) we assumethat the market price is OP. Thefirm, is in equilibrium at point Z

where MR = MC. The firmproduces OK output and sells atOP unit cost. The total revenue ofthe firm is equal to the areaOPZK. Whereas .the total costproducing OK output is OTFR.

The firm is suffering a net loss oftotal fixed cost equal to the areaPTFZ. The firm at point Z is justcovering average variable costs.

MINIMUM LOSSES


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NORMAL PROFITS

LONG RUN :-

It is that period inwhich producer getsufficient time to adjusttheir supplies acc. Tochanged conditions ofdemand. In this time

period firm will earnonly normal profits.

LMC=MR=AR=LAC

EXPLANATION FIGURE


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MONOPLY

It is that situation of market in whichthere is single seller of a product. For

e.g.-you get your electricity supply fromone agency i.e. state electricity board;youtravel by railway train owned and run bygovernment of india.


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One seller and large no. of buyers

Monoply is also an industry

Restrictions on the entry of new firms No close subsitutes

Price maker


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Two conditions must be fulfilled :-

MR=MC

MC cuts MR from below

EQUILIBRIUM UNDER SHORT RUN :-Firm may earn :

Super normal profits(AR>AC)

Normal profits(AR=AC) Minimum losses(AR


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FIGURE EXPLANATION

In this diagram, themonopoly firm is in equilibriumat point K where SMC = MR. Theshort run marginal cost (SMC)curve cuts MR from below. Atpoint K both the equilibriumconditions are fulfilled. As aresult, therefore, OE is monopolyprice and OB, the monopolyoutput. At the monopoly outputOB, the average total cost OF =BN. The profit per unit is FE.Theshort run monopoly profit isETNF, It is represented by thearea of shaded rectangle

SUPER NORMAL PROFITS


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NORMAL PROFITS

a firm is in the short runequilibrium at point K,where SMC = MR. The

price line is tangent to SACat point C. The firm chargesCB price per unit for units ofoutput OB. The totalrevenue of the firm is equalto the area OPCB. The total

cost of the firm is also equalto the area OPCB. The firmearns only normal profitsand continues operating.

FIGURE EXPLANATION


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FIGURE EXPLANATION

the best short run level of output isOB units which is given by the pointL where MC = MR. A monopolistsells OB units of output at price CB.The total revenue of the firm is equalto OBCF. The total cost of producingOB units is OBHE. The monopolyfirm suffers a net loss equal to thearea FCHE. If the firm ceasesproduction, it then has to bear tototal fixed cost equal to GKHE. The

firm in the short run prefers tooperate and reduces its losses toFCHE only. In the long, if the losscontinues, the firm shall have toclose down.


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LONG RUN EQUILIBRIUM

The monoplist will be in equilibrium at a point wherehis LMC=MR. Monoply will fix price in such a way asto earn super-normal profit refers to situation where

AR>LAC.


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FIGURE EXPLANATION

In the long run, all the factors ofproduction including the size ofthe plant are variable. Amonopoly firm will maximizeprofit at that level of output forwhich long run marginal cost(MC) is equal to marginalrevenue (MR) and the LMC curve

intersects the MR curve frombelow. In the figure, themonopoly firm is in equilibriumat point E where LMC = MR andLMC cuts MR curve from below.QP is the equilibrium price andOQ is the equilibrium output.


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It is that situation of market where there aremany sellers of a commodity,but the product ofeach seller is different from the product of

other sellers in one way or other,there isproduct differentiation may be in form ofdifference in brand name,trade mark. For e.g.-lipton,tata tea,brook bond.


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EQUILIBRIUM UNDER IMPERFECT COMPETITION

To be in equilibrium, two conditions must befulfilled :-

MR=MC

MC curve cuts MR Curve from its below

EQUILIBRIUM IN:-

SHORT RUN:-

Super normal profits

Minimum losses LONG RUN:-

Earns only normal profit


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FIGURE EXPLANATION

In the figure (17.1), the downward slopingdemand curve (AR curve) is quite elastic.The MR curve lies below-the averagecurve except at point N. The SMC curve

which includes advertising and salespromotional costs is drawn in the usualfashion. The SMC curve cuts the MR curvefrom below at point Z. The firm producesand sells an output OK, as at this level ofoutput MR = MC. The firm sells outputOK at OE/KM per unit price. The totalrevenue of the firm is equal to the area

OEMK, whereas the total cost ofproducing output OK is OFLK. The totalprofits of the firm are equal to the shadedrectangle FEML. The firm earns abnormalprofits in the short run.

SUPERNORMAL PROFIT


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FIGUR

E

EXPLANATION

In the Figure (17.2), marginal cost (SMC)

equates marginal revenue MR curve from

below at point Z. The firm produces output OK

and sells at OF/KT per unit-price. The total

receipt of the firm is OFTK. The total cost of

producing output OK is equal to OEMK. The

firm suffers a net loss equal to the area FEMT

on the sale of OK output.


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LONG RUN PERIOD

Firm get only normal profits because if firm earnssuper normal profits,several firms will beattracted,total supply will increasewhich will lowerthe profits to normal profit


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FIGURE EXPLANATION

the figure (17.3), the highershifted long-run marginal costcurve intersects the higher shiftedmarginal revenue curve at point M.The firm at this raised equilibriumpoint, produces the reduced levelof output OK. It sells this output atprice TK as at point T, LAC is atangent to the demand or averagerevenue curve at its minimumpoint. The total revenue of thefirm is equal to the area OETK. Thetotal costs of the firm are alsoequal to the area OETK. The firm isearning only zero or normaleconomic profits. As the

monopolistically competitive firmsets a price higher thanthat minimum average cost in thelong-run, the firm thereforeproduces a smaller output.


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Under perfect competition,price is equal to marginaland average cost.

Under monoply,price is greater than both marginaland average cost

Under monoplistic competition,price is equal toaverage cost but greater than marginal cost.

Introduction to Various Conditons of Market

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