Managerial Economics Market Structures PPT
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Transcript of Managerial Economics Market Structures PPT
The term market is derived fromthe latin word “Marcatus”
which means merchandise or trade
Market is a place where buyers and sellers meet together for
the exchange of title of goods
Definition:“Market is a area or atmosphere of petential exchange”
------ Phillip Kotler
“Market is not a geographical meeting place but as any
getting together of buyers and sellers,in person, by mail,
telephone, telegraph and inter net or any other means of
communication”
------ Prof. Mitchel
Price Demand Supply
50 100 200
40 120 180
30 150 150
20 200 110
10 300 50
A laarge number of buyers & sellers
Homogeneous product
Free entry and Exit
Perfect Knowledge
Indifference
Non Existence of Transport costs
Perfect mobility of resources.
Equilibrium of a firm under perfect competitionIt is a position where thefirm has no incentives either to
expand or contrast its output.
There are two condition for attaining euqlibrium by a firm.
1. Marginal cost must be equal to marginal revenue
(MC=MR)
2. Marginal Cost curve should cut the marginal curve from the
below
Marginal cost is the additional cost incurred for producing a
additional product
Marginal revenue is the addtional revenue when it sell one
additional unit of output
When a firm increases its output so long as its marginal cost
become equal to marginal revenue
When marginal cost is greater than marginal revenue the firm
reduces its production.
It is only point at the where MC=MR, the firm attains
equlibrium
Secondly marginal cost curve should cut the marginal curve
from the below. If marginal curve cut the marginal curve from
the above the firm is having scope to increase the output as the
marginal cost curve slope downwards
It is only with the upwards slopping maraginal curve, the firm
attains equilibrium.
The reason is that marginal cost curve when raisingcuts the
marginal revenue curvefrom the below
PL and MC represents Price level and Marginal Cost
PL also represents marginal revenue, Average revenue and
demand
As marginal revenue, Average revenue and demand all are same
in perfect competition to price level
MC curve is U shapes curve cutting MR at R and T
At point R MC curve cut the MR curve from the below. So it is
not equilibrium.
The downward slopping of MC curve indicates that the firm can
reduces its cost of production by increasing output
As the firm increases its output it will reach equilibrium at T.
Here two conditions are satisfied.
If the firm increases it output beyound this stage the MC is
excess the MR. So losses occurs. So producer is not ready to
increase the output after this point. So it is called equilirium point.
In the short period the attains equilibrium with abnormal profits
or minimum losses
When marginal cost and average cost is less than the price the
firm will get abnormal profits
In the following diagram SRAC & SRMC are the short run
average cost and marginal cost.
PL is the initial price line
At the point I the firm earns normal profits as its MC, MR, AC
and AR are equal.
When price increases to P1 L1 the firm attain equilibrium at point
Q1R1.Then total profit is P1 Q1R1S1 .
When firms attain abnormal profits new firms enter in to the
industry. Out come increases and price line come down to normal
position.
Similarly at the point R2 the average cost is more than the average
revenue
The firm incur losses per unit euqal to Q2R2 The total loss is
equal to the area P2Q2R2S2This will lead to exclusion of some of firms from the industry
thus supply will come down and the industry equilibrium
In the long run the firm attains equilibrium when long run
average cost and marginal costs are equal to the long run average
revenue and marginal revenue.
The firm and the industry enjoy only normal profits
The reason is that sufficient time available for adjusting the
supply according to the supply
The condition is AC=MC=AR=AC
Under perfect market there are large number of buyers and sellers
with homogenous products
No single seller can fix price and no buyer can influence the price
An individual seller is only price maker not price maker.
In perfect market the problem is only one thing i.e price making.
No one can fix price the seller should adjust the output
Marshall classified the time four kinds
Very short period
Short period
Long period
Very long period or secular period
The price determination in the short period called market price
Market price is the determination by equilibrium between
demand and supply
Under this period goods are classified into
1. perishable products
2. non perishable products
1. perishable products
Perishable products like Milk, Flowers, Vegetables etc
These products supply will not increase in short span of time. And
cannot be decreased also
2. Non-perishable products
Non-perishable products like Cloths, pens, watches
In very short period the supplt of non-perishable products cannot
increased. Bur price decreases, their supply can decrease by
preserving some stock
If price falls too much the whole stock will be held back from the
market and carried over to next market period
The price below which the seller will refuse to sell is called
reserve price
Non-perishable products
Short period is a period which supply can be increased by
alterning variable factors
In this period fixed cost is constant
The supply is increased when price raises and vice versa so
the supply curve slopes upwards from left to right
In a given diagram MPS is a market period supply curve
DD is the initial demand curve. It interesect MPS curve at E
The price is OP and output is OM
In the very short period supply remains fixed at OM
Suppose demand increases the demand curve shift upwards
and becomes D1D1The price will rise from OP to OP1 d,the firm will expand its
output
The firm can vary some variables because of excess profit
This result in new supply curve SPS
It interesect D1D1 curve at E4, then the price will fall from
OP1 to OP4.
If demand decreases DD curve shifts downwards and
becomes D2D2d. It intersects MPS curve at E2. The price will
fall to OP2. This what will happend in the market period
But in the short period the supplt curve is SPS. D2D2 curve
intersects SPS curve at E3. The equilibrium price becomes
OP3. The short period price is higher than market period price.
In the long period all costs are variable. So supply will be
increased only when price is equal to average cost.
In the long run normal price is euqal to minimum average
cost of the industry
The long run price will be based on the three stages
Increasing returns and decreasing costs
Constant costs and constant returns
Diminishing returns and increasing cost
Increasing returns and decreasing
costs
At this stage, average cost falls
due to an increase in the output
So the supply curve at this stage
will slope downwards from left to
right
In the diagram , MPS represents
market period supply curve.
DD is demand curve
DD cuts LPS, SPS and MPS at
point E
At point E the supply is OM and the price is OP. If demand
increases from DD to D1D1 market price increases to OP1. in the
short period it is OP2. in the long period supply increases
considerably to OM3. so price hjas fallen to OP3 which less than
the price of market period
Constant returns and Constant
costs
At this stage, average cost does not
change eventhough the out increases.
Hence long period supply curve is
horizontal to X axis.
LPS is horizontal to X axis
MPS represents market period
supply curve, and SPS representas
short period supply curve.
At point E the output is OM and price is OP. If demand
increases from DD to D1D1 market price increses to OP1. In short
period supply increases and hence the price will be OP2.In the long
period supply is adjusted fully to meet increased demand. The
price remains constant at OP because costs are constant at OP
market is a perfect market
Constant returns and Constant
costs
Decreasing returns and Increasing
costs
If the industry is subject to
increasing costs the supply curve
slopes upwards from left to right
like an ordinary supply curve.
The determination of long period
normal price in increasing cost
industry can be explained with the
help of following daigram.
In the diagram LPS represents long period market supply curve.
The industry is subject to diminishing returns or increasing
costs. So, LPS slopes upwards from left to right, SPS is short period
supplt curve and MPS is Market period supply curve.
DD is demand curve. It cuts all the supplt curve at E.
Decreasing returns and Increasing
costs
Here the price is OP and output is OM. If demand increases
from DD to D1D1, in the market period supply will not change but
price increases to OP1. in the short period, price increases to OP2as the supply increased from OM to OM2. in the long period
supply increases to OM3 and price increases to OP3. but this
increase in price is less than the price increase in a market period
or short period
The word monopoly is made up of two syallables, MONO and
POLY. Mono means single and Poly means Seller
Single person or a firm
No close substitute
Large number of buyers
Price Maker
Supply and Price
Downward slopping
Types of Monopoly
Legal Monopoly
Private Monopoly
Government Monopoly
Voluntary Monopoly
Limited Monopoly
Unlimited Monopoly
Single Price Monopoly
Discriminating Monopoly
Natural Monopoly
Monopoly refers to a market situation where there is only one
seller. He has complete control over the supply of a
commodity. He is therefore in a position to fix any price.
Undere monopoly there is no difference between firm and
industry
This is becuase the entire industry consists of a single firm
The monopoly can fix the price or supply any one but he
cannot fix both
If he fixes the price, his output will be determined by the
market demand for his commodity. If he fixes the output to be
sold, the price for the commodity will be determined by its
market.
The market demand curve of monopist is downward
slopping.
Its corresponsing marginal revenue curve is also downward
slopping
But the MR curve always lies below the average revenue
curve.
The monopolist firm attains equilibrium when its marginal
cost becomes equal to the marginal revenue. The always
desiress to make maximum profits.
He makes maximum profit when MC=MR
He goes on increasing his output if his revenue exceeds his
costs.
But when the costs exceed the revenue, the monopolist firm
incur losses.
Hence the monopolist curtails his production.
He produces up to that point where additional cost is equal to
the additional revenue.The point is called equilibrium
The monopolists firm attains
equilibrium when its marginal cost
becomes equal to the marginal
revenue.
In the diagram quantity is on X
axis and cost and revenue on Y axis.
AC and MC are the avg cost and
marginal cost curves and AR and
MR are Avg revenue and Marginal
revenue.
AC and MC are U shaped curves. It attains equilibrium when its
MC=MR. Under monopoly two conditions are satisfied at point E.
At point E, MC=MR. The firm is in equilibrium. The
equilibrium output is OM
In the diagram
Avg Revenue=MQ or OP
Average Cost =MR
Profit per unit=AR-AC (MQ-MR)=QR
Total Profit=QR X OM Profit per unit X Quantity
QR X SR= PQRS
But it is not always possible for a
monopolist to earn super normal
profits.
If the demand and cost situations
are not favourable, the monopolist
may realise short run losses
Through the monopolist is a price
maker, due to wead demand and
high costs, he suffers a loss equal to
PABC
If AR>AC (Abnormal Profits)
If AR=AC (Normal Profits)
If AR < AC (Loss)
In the long run the firm has time to adjust his plant size or to use
existing plants so as to maximise profits