Market Morphology
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Transcript of Market Morphology
MARKET MORPHOLOGY
WHAT ALL IS THERE IN A MARKET ?
POSSIBILITIES
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Features of Perfect Competition
Very large number of sellers Very large number of buyers Homogeneous product No barrier to entry or exit Complete knowledge No interference by government No transport cost/ No selling
cost
Price and output determination in SR
All firms are price-takers; not price makers
Price is determined in the industry by market forces
Firms follow marginal equivalency rule
Firms can earn abnormal, normal profit or incur loss
Price and output determination LR
In long run; firms have freedom of entry and exit.
Hence , no possibility of abnormal profit or loss; only one possibility i.e. NORMAL PROFIT
P = AR = MR = AC = MC
OPTIMUM OUTPUT Vs. EQUILIBRIUM OUTPUT
A firm’s optimum output is that output where its per unit cost is the lowest. Such firm is called technically efficient.
A firm’s equilibrium output is that output where it maximizes profit. Such firm is called economically efficient
In PC in LR, optimum Q = equm. Q PC ensures best utilization of
resources
MONOPOLISTIC COMPETITION
Large number of sellers; large number of buyers
Product differentiation Freedom of entry and exit Selling cost Excess capacity
Price and Output determination
In Short Run – what are possibilities ?
In long run - what happens?
SELLING COSTS
Total cost = Production cost + Selling cost
How much should a firm spend on advertisement?
Why is selling cost considered a waste of monopolistic competition?
MONOPOLY One seller; many buyers Unique product No freedom of entry and exit Firm is the industry Monopolist is a price-maker in a
limited sense AR and MR curves are downward
sloping P = AR > MR
HOW ARE MONOPOLIES FORMED?
Possible reasons
Government action
Control over ‘vital’ raw material
Unique technology
Driving competitors out by efficiency
Price and output determination in simple monopoly
In short run, a monopolist may earn abnormal profit, or normal profit or incur loss; but in reality, the most likely case would be that a monopolist earns abnormal profit.
In long run, a monopolist always earns abnormal profit.
Comparing monopoly with perfect competition
Given same costs, a monopolist will charge a higher price than a perfectly competitive firm; and sell a smaller output than perfectly competitive firm
Pm > Pc Qm < Qc
OLIGOPOLY
Few discernable sellers; many buyers
Homogeneous or heterogeneous product
Restricted entry/exit Interdependence Indeterminate Solution
OLIGOPOLY MODELS
COLLUSIVE
NON- COLLUSIVE
COLLUSIVE MODELS
CARTELS
PRICE LEADERSHIP
NON COLLUSIVE MODELS
PRICE RIGIDITY MODEL
COURNOT MODEL
CHAMBERLIN MODEL
Market No. of sellers Entry barrier to
sellers
Nature of product
Perfect competition
Many, small, independent
None Homogeneous
Monopoly One Huge Unique
Monopolistic competition
Many; virtually
independent
None Differentiated
Oligopoly Few; interdependent
Substantial Either
EXAMPLESPC MC Oligopoly Monopoly
1. Agri-goods
2. Street food
1. Ready-made knitwear
2. Pens3. Soap
1. Automobile2. Soft drinks
1. Windows operating system
2. Public utilities