Managerial Economics Market Structures PPT

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Transcript of Managerial Economics Market Structures PPT

Page 1: Managerial Economics Market Structures PPT
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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

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Price Demand Supply

50 100 200

40 120 180

30 150 150

20 200 110

10 300 50

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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Non-perishable products

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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

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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

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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.

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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

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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

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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

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Constant returns and Constant

costs

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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.

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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

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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

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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.

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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.

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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

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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

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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

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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

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