Market Structure F
-
Upload
saloni-maharaj -
Category
Documents
-
view
219 -
download
0
Transcript of Market Structure F
-
8/6/2019 Market Structure F
1/108
MarketStructures
MarketStructures
-
8/6/2019 Market Structure F
2/108
The Degree of CompetitionThe Degree of Competition
Classifying markets number of firms freedom of entry to industry
nature of product nature of demand curveThe four market structures
perfect competition monopoly monopolistic competition oligopoly
Classifying markets number of firms freedom of entry to industry
nature of product nature of demand curveThe four market structures
perfect competition monopoly monopolistic competition oligopoly
-
8/6/2019 Market Structure F
3/108
Revenue ConceptsRevenue Concepts
The demand for the product in the marketreflects the revenue side of the firm.The concept of revenue is an important toprice determination & the equilibrium of Revenue TotalRevenue AverageRevenue & - MarginalRevenue
The demand for the product in the marketreflects the revenue side of the firm.The concept of revenue is an important toprice determination & the equilibrium of Revenue TotalRevenue AverageRevenue & - MarginalRevenue
-
8/6/2019 Market Structure F
4/108
Total & AverageRevenueTotal & AverageRevenue
Total income received by the seller froma given amount of the product is calledTotalRevenue.
TotalRevenue is calculated by multiplyitotal output/total sales by the price at wthe product is sold. [TR = Q x P ]
Total income received by the seller froma given amount of the product is calledTotalRevenue.
TotalRevenue is calculated by multiplyitotal output/total sales by the price at wthe product is sold. [TR = Q x P ]
-
8/6/2019 Market Structure F
5/108
AverageRevenueis revenue earned per uof output.
AverageRevenue is obtained by dividintotal revenue by the number of units[AR = TR /n]
AverageRevenueis revenue earned per uof output.
AverageRevenue is obtained by dividintotal revenue by the number of units[AR = TR /n]
-
8/6/2019 Market Structure F
6/108
MarginalRevenueMarginalRevenue
Marginal revenueis the net revenue earnedby selling an additional unit of the produ
Marginal revenue is the addition madtotal revenue by selling (n) units of a proinstead of (n-1) where n is any given nu
thus, MR = TRn T Rn-1
Marginal revenueis the net revenue earnedby selling an additional unit of the produ
Marginal revenue is the addition madtotal revenue by selling (n) units of a proinstead of (n-1) where n is any given nu
thus, MR = TRn T Rn-1
-
8/6/2019 Market Structure F
7/108
F eatures of the four market structuresF eatures of the four market structures
Type of market
Number of firms
F reedom of entry
Nature of product
Examples Implications for demand curvefaced by firm
Perfectcompetition
Verymany Unrestricted
Homogeneous(undifferentiated)
Cabbages, carrots(approximately)
Horizontal:firm is a price taker
onopolisticcompetition
any /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly F ew RestrictedUndifferentiated
or differentiated
Cement
cars, electricalappliances
Downward sloping.Relatively inelastic(shape depends onreactions of rivals)
onopoly One Restricted or completely
blocked
UniqueLocal water
company, trainoperators (over
particular routes)
Downward sloping:more inelastic thanoligopoly. F irm has
considerablecontrol over price
-
8/6/2019 Market Structure F
8/108
F eatures of the four market structuresF eatures of the four market structures
Type of market
Number of firms
F reedom of entry
Nature of product
Examples Implications for demand curvefaced by firm
Perfectcompetition
Verymany Unrestricted
Homogeneous(undifferentiated)
Cabbages, carrots(approximately)
Horizontal:firm is a price taker
onopolisticcompetition
any /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly F ew RestrictedUndifferentiated
or differentiated
Cement
cars, electricalappliances
Downward sloping.Relatively inelastic(shape depends onreactions of rivals)
onopoly One Restricted or completely
blocked
UniqueLocal water
company, trainoperators (over
particular routes)
Downward sloping:more inelastic thanoligopoly. F irm has
considerablecontrol over price
-
8/6/2019 Market Structure F
9/108
F eatures of the four market structuresF eatures of the four market structures
Type of market
Number of firms
F reedom of entry
Nature of product
Examples Implications for demand curvefaced by firm
Perfectcompetition
Verymany Unrestricted
Homogeneous(undifferentiated)
Cabbages, carrots(approximately)
Horizontal:firm is a price taker
onopolisticcompetition
any /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly F ew RestrictedUndifferentiated
or differentiated
Cement
cars, electricalappliances
Downward sloping.Relatively inelastic(shape depends onreactions of rivals)
onopoly One Restricted or completely
blocked
UniqueLocal water
company, trainoperators (over
particular routes)
Downward sloping:more inelastic thanoligopoly. F irm has
considerablecontrol over price
-
8/6/2019 Market Structure F
10/108
F eatures of the four market structuresF eatures of the four market structures
Type of market
Number of firms
F reedom of entry
Nature of product
Examples Implications for demand curvefaced by firm
Perfectcompetition
Verymany Unrestricted
Homogeneous(undifferentiated)
Cabbages, carrots(approximately)
Horizontal:firm is a price taker
onopolisticcompetition
any /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly F ew RestrictedUndifferentiated
or differentiated
Cement
cars, electricalappliances
Downward sloping.Relatively inelastic(shape depends onreactions of rivals)
onopoly One Restricted or completely
blocked
UniqueLocal water
company, trainoperators (over
particular routes)
Downward sloping:more inelastic thanoligopoly. F irm has
considerablecontrol over price
-
8/6/2019 Market Structure F
11/108
F eatures of the four market structuresF eatures of the four market structures
Type of market
Number of firms
F reedom of entry
Nature of product
Examples Implications for demand curvefaced by firm
Perfectcompetition
Verymany Unrestricted
Homogeneous(undifferentiated)
Cabbages, carrots(approximately)
Horizontal:firm is a price taker
onopolisticcompetition
any /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly F ew RestrictedUndifferentiated
or differentiated
Cement
cars, electricalappliances
Downward sloping.Relatively inelastic(shape depends onreactions of rivals)
onopoly One Restricted or completely
blocked
UniqueLocal water
company, trainoperators (over
particular routes)
Downward sloping:more inelastic thanoligopoly. F irm has
considerablecontrol over price
-
8/6/2019 Market Structure F
12/108
-
8/6/2019 Market Structure F
13/108
Pure & PerfectCompetitionPure & PerfectCompetition
-
8/6/2019 Market Structure F
14/108
Pure &Perfect CompetitionPure &Perfect Competition
PURE COMPE TITIONLarge No of Buyers & SellersHomogenous / IdenticalProductsFreeE ntry &Ex itIn addition to the above,PER FE CT
COMPE TITION has the following features
PURE COMPE TITIONLarge No of Buyers & SellersHomogenous / IdenticalProductsFreeE ntry &Ex itIn addition to the above,PER FE CT
COMPE TITION has the following features
-
8/6/2019 Market Structure F
15/108
Perfect CompetitionPerfect Competition
Perfect Knowledge of marketPerfect Mobility of Factors of Production
No Transport CostFirms put together form an Industry under PerfectCompetition
Perfect Knowledge of marketPerfect Mobility of Factors of Production
No Transport CostFirms put together form an Industry under PerfectCompetition
-
8/6/2019 Market Structure F
16/108
AssumptionsAssumptions
The firm operates in a perfectly competitive and hence a price taker.The firm makes the distinction between the s
long run.The firms objective is to maximize profits in the shorun, or to minimize loss.
The firm includes its opportunity cost of opeas part of its total cost.
The firm operates in a perfectly competitive and hence a price taker.The firm makes the distinction between the s
long run.The firms objective is to maximize profits in the shorun, or to minimize loss.
The firm includes its opportunity cost of opeas part of its total cost.
-
8/6/2019 Market Structure F
17/108
The consideration of opportunity cost in thestructure of the firm is vital to the decision model.
The going market price should enables it torevenue that covers not only its out-of-pockbut also the opportunity cost.
The consideration of opportunity cost in thestructure of the firm is vital to the decision model.
The going market price should enables it torevenue that covers not only its out-of-pockbut also the opportunity cost.
-
8/6/2019 Market Structure F
18/108
Statement of projected cost for first yeStatement of projected cost for first ye
Particulars Amount ($)Cost of goods sold 300,000Gen. & AdminEx p 150,000
Total Accounting Cost 450,000Foregone salary 45,000
ForegoneReturns on
Investment
5000
Total Opportunity Cost 50,000
TotalE conomic Cost 500,000
-
8/6/2019 Market Structure F
19/108
If revenue is $ 500,000 for the first year Accounting profit would be $ 50,000 (500,0450,000)E conomic profit would be zero becauserevenue= economic costAt break-even point revenue is just sufficiecover out-of-pocket cost and opportunity co
If revenue is $ 500,000 for the first year Accounting profit would be $ 50,000 (500,0450,000)E conomic profit would be zero becauserevenue= economic costAt break-even point revenue is just sufficiecover out-of-pocket cost and opportunity co
-
8/6/2019 Market Structure F
20/108
When a firm breaks-even in economic senseearning accounting profitequal to opportunity cosi.e. $ 50,000This isnormal profitIf the revenue is $ 550,000 a profit of 50,00
(500,000 550,000)This is above normal profit or economic profit
When a firm breaks-even in economic senseearning accounting profitequal to opportunity cosi.e. $ 50,000This isnormal profitIf the revenue is $ 550,000 a profit of 50,00
(500,000 550,000)This is above normal profit or economic profit
-
8/6/2019 Market Structure F
21/108
If the revenue is $ 480,000, theeconomic lossis $20,000(500,000 480,000)
The accounting profit is $30,000(480,000 450,000)The economic loss may coincide with firm eaccounting profit.
If the revenue is $ 480,000, theeconomic lossis $20,000(500,000 480,000)
The accounting profit is $30,000(480,000 450,000)The economic loss may coincide with firm eaccounting profit.
-
8/6/2019 Market Structure F
22/108
-
8/6/2019 Market Structure F
23/108
E quilibrium ConditionsE quilibrium Conditions
A Firm is said to be in equilibrium when it mximizesprofits.Profits depend on the revenue & cost structuE quilibriumPosition (Profits)= TR = TC or
AR
=
AC or MR = MC
A Firm is said to be in equilibrium when it mximizesprofits.Profits depend on the revenue & cost structuE quilibriumPosition (Profits)= TR = TC or
AR
=
AC or MR = MC
-
8/6/2019 Market Structure F
24/108
Relation between AR & MRRelation between AR & MR
Revenue Structure of a Firm U nder Perfect Competition, AR curve is
horizontal and MR curve coincides with it. HenP = AR = MR
U nder Monopoly, AR curve is a downward slopcurve and MR curve lies below AR curve.
Revenue Structure of a Firm U nder Perfect Competition, AR curve is
horizontal and MR curve coincides with it. HenP = AR = MR
U nder Monopoly, AR curve is a downward slopcurve and MR curve lies below AR curve.
-
8/6/2019 Market Structure F
25/108
Revenue ConceptsRevenue Concepts
Price Q ty TR AR MR
25 1 25 25 -25 2 50 25 25
25 3 75 25 25
25 4 100 25 25
Perfect Competition P = AR = MR
-
8/6/2019 Market Structure F
26/108
Revenue ConceptsRevenue Concepts
Price Q ty TR AR MR180 1 180 180 -
140 3 420 140 100160 2 320 160 140
120 4 480 120 60100 5 500 100 20
Monopoly P = AR > MR
-
8/6/2019 Market Structure F
27/108
E quilibrium ConditionE quilibrium Condition
Perfect Competition - MonopolyPerfect Competition - MonopolyPrice/Cost
P E
MC
P=AR=MR
Q Quantity
Price/Revenue/Cost
P
MC
AR MR
Q Quantity
E
P=AR > MR
-
8/6/2019 Market Structure F
28/108
Short-run ConditionsShort-run Conditions
Price is determined at industry level by suppdemand forces;E ach firm has a horizontal demand curve at
market price;Demand, average revenue and marginal revecurve are same;E quilibrium P = AR = MR = MC;Firms make supernormal profits.
Price is determined at industry level by suppdemand forces;E ach firm has a horizontal demand curve at
market price;Demand, average revenue and marginal revecurve are same;E quilibrium P = AR = MR = MC;Firms make supernormal profits.
-
8/6/2019 Market Structure F
29/108
O
( ) F irm
Q (thousands)
O
(a) I ustr
P
Q (millions)
S
D
P e
MC
AR D = AR = MR
Qe
AC
AC
Short-run equilibrium of industry and firperfect competition
Short-run equilibrium of industry and firperfect competition
-
8/6/2019 Market Structure F
30/108
Qe
P 1D1 = AR 1
= MR 1 AR 1
O O
(a) I ustr
P
Q (millions)
S
D
( ) F irm
MC AC
AC
Q (thousands)
Loss under perfect competitionLoss under perfect competition
-
8/6/2019 Market Structure F
31/108
Long-run ConditionsLong-run Conditions
E ntry takes place, shifting supply curve to and price down;
Super-normal profits are competed away, leP = AR = MR = MC= minimum LAC, OR
LRAC = AC = MC= MR = AR
E ntry takes place, shifting supply curve to and price down;
Super-normal profits are competed away, leP = AR = MR = MC= minimum LAC, OR
LRAC = AC = MC= MR = AR
-
8/6/2019 Market Structure F
32/108
O O
(a) I ustr
P
Q (millions)
S 1
D
( ) F irm
LRAC
P L
P 1
Q L
S e
AR 1 D1 AR L DL
Q (thousands)
Long-run equilibrium under perfect competLong-run equilibrium under perfect compet
New firms enterSupernormal profitsProfits return
to normal
-
8/6/2019 Market Structure F
33/108
Perfect Competition: ShortRunPerfect Competition: ShortRun
The Firm in More Detail -ProfitsThe Firm in More Detail -Profits
P = AR =MR
Q
P
( SR)MC ( SR)AC Price/Cost
QuantityCostRevenue
PROFIT
-
8/6/2019 Market Structure F
34/108
Perfect Competition: ShortRunPerfect Competition: ShortRun
The Firm in More Detail - LossesThe Firm in More Detail - Losses
P = AR =MR
Q
P
( SR)MC Price/Cost
QuantityCostRevenue
Loss
-
8/6/2019 Market Structure F
35/108
QO
( SR)AC
(LR)MC
LRAC
AR = MR
DL
LRAC = ( SR)AC = (LR)MC = MR = AR
Long-run equilibrium of the firm under perfect comLong-run equilibrium of the firm under perfect com
-
8/6/2019 Market Structure F
36/108
Shut down conditionsShut down conditions
If the firm is in a loss-making position It can continue the production process as it covers its variable cost.
If it shuts down, it has to bear fixed cost. The firm should reduce costs so as to makprofits.
If the firm is in a loss-making position It can continue the production process as it covers its variable cost.
If it shuts down, it has to bear fixed cost. The firm should reduce costs so as to makprofits.
The concept of average cost, normal profitand average variable cost can help understandthe shut-down position.
-
8/6/2019 Market Structure F
37/108
Should the firm shut down if it is makingShould the firm shut down if it is making
Shut-down conditionsShut-down conditions
E
Shut- ooi t
=A =M
S MC S AC
S AVC
AC-NP
Quantity
P =A =M
P =A =M
Price/Cost
N
Q
O
P
P 1
P 2
At market price-P: the
firm covers AVC butmakes zero normal profit.(AC-NP)
If market price fallsdown-P 1:the firm coversonly average variable cost
in the short run.The firm can remain in
the market as long as it isable to recover AVC.
At price P 1, output ON isthe maximum bearable loss
output in the short run.If market price fallsdown-P 2: the firm shouldshut down .
-
8/6/2019 Market Structure F
38/108
Shut down conditionsShut down conditions
WhenPrice/AR > AC, there are excess profits.WhenPrice/AR = AC, there are only normalprofits.WhenPrice/AR < AC, there are losses incurreby the firm.The firms in the short-run is solely influenvariable cost.The firm has to recover current business expenses.
WhenPrice/AR > AC, there are excess profits.WhenPrice/AR = AC, there are only normalprofits.WhenPrice/AR < AC, there are losses incurreby the firm.The firms in the short-run is solely influenvariable cost.The firm has to recover current business expenses.
-
8/6/2019 Market Structure F
39/108
Perfect CompetitionPerfect Competition
Incompatibility of economies of scaleperfect competition
Benefits of perfect competition price equals marginal cost
prices kept low
firms must be efficient to survive
Incompatibility of economies of scaleperfect competition
Benefits of perfect competition price equals marginal cost
prices kept low
firms must be efficient to survive
-
8/6/2019 Market Structure F
40/108
MonopolyMonopoly
-
8/6/2019 Market Structure F
41/108
MonopolyMonopolyPure Monopoly (total control) & LimitedMonopoly (possibility of remote substitute
Single Seller producing / selling product wsubstitutesNoE ntry
Monopolist can fixeither price or quantity.Firm is the same as industry. Firms demanis industrys demand curve
Pure Monopoly (total control) & LimitedMonopoly (possibility of remote substitute
Single Seller producing / selling product wsubstitutesNoE ntry
Monopolist can fixeither price or quantity.Firm is the same as industry. Firms demanis industrys demand curve
Revive S tarch
-
8/6/2019 Market Structure F
42/108
MonopolyMonopoly
Downward sloping Demand curve, Demand is reinelasticPrice= AverageRevenue > MarginalRevenue
Price > Marginal Cost :- economic inefficiency. Tdoes not necessarily use the plant which gives loSupernormal-profits are made in the short as wel
long run.
Downward sloping Demand curve, Demand is reinelasticPrice= AverageRevenue > MarginalRevenue
Price > Marginal Cost :- economic inefficiency. Tdoes not necessarily use the plant which gives loSupernormal-profits are made in the short as wel
long run.
-
8/6/2019 Market Structure F
43/108
Barriers to entryBarriers to entry
E conomies of scaleProduct differentiation and brand loyaltyLower costs for an established firm
Ownership/control of key factorsOwnership/control over outletsLegal protection
Mergers and takeoversAggressive tacticsIntimidation
E conomies of scaleProduct differentiation and brand loyaltyLower costs for an established firm
Ownership/control of key factorsOwnership/control over outletsLegal protection
Mergers and takeoversAggressive tacticsIntimidation
-
8/6/2019 Market Structure F
44/108
MonopolyMonopoly
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR
-
8/6/2019 Market Structure F
45/108
Price DeterminationPrice Determination
A monopoly firms ability to set its price by Demand curve for its product, and The price elasticity of demand for its producThe price elasticity of demand indicates much more or less people are willing to brelation to price decrease or increase.
A monopoly firms ability to set its price by Demand curve for its product, and The price elasticity of demand for its producThe price elasticity of demand indicates much more or less people are willing to brelation to price decrease or increase.
-
8/6/2019 Market Structure F
46/108
Price DeterminationPrice Determination
Assuming that a firms demand curve is thenAs the price falls, the marginal revenue rzero, and then becomes negative.Assuming the firms marginal cost is conthe short run.
The downward sloping demand curve, thR curve, and the constant MC curve can bethus,
Assuming that a firms demand curve is thenAs the price falls, the marginal revenue rzero, and then becomes negative.Assuming the firms marginal cost is conthe short run.
The downward sloping demand curve, thR curve, and the constant MC curve can bethus,
-
8/6/2019 Market Structure F
47/108
Q MR
D
Profit maximising under monopolyProfit maximising under monopoly
P *
P = AR
P 1
P 2
Marginal loss
MC = AVC
Forgone marginal profit
If the firm charges tohigh a price (i.e.P1) itsMR will exceed its MCIt will be foregoing s
amount of marginalprofit.If the firm sets its prtoo low, its MC willexceed its MRThe firm will experiencea marginal loss.
If the firm charges tohigh a price (i.e.P1) itsMR will exceed its MCIt will be foregoing s
amount of marginalprofit.If the firm sets its prtoo low, its MC willexceed its MRThe firm will experiencea marginal loss.
-
8/6/2019 Market Structure F
48/108
Profit maximising under monopolyProfit maximising under monopoly
MR
QO
MC
Q
D
The firms ability to setprice is further limited bthe possibility of rising MC.This begins atQ
Hence the monopoly firshould not set its price athe highest possible levIt should set it at the riglevel.The right level is
MR = MC
The firms ability to setprice is further limited bthe possibility of rising MC.This begins atQ
Hence the monopoly firshould not set its price athe highest possible levIt should set it at the riglevel.The right level is
MR = MC
sing an to etermine ptima ricesing an to etermine ptima rice
-
8/6/2019 Market Structure F
49/108
Q P ($) TR MR AC TC MC T Pr 0 180 0 100 -1001 170 170 170 155.70 155.70 55.70 14.302 160 320 150 102.80 205.60 49.90 114.43 150 450 130 84.63 253.90 48.30 196.14 140 560 110 76.20 304.80 50.90 255.25 130 650 90 72.50 362.50 57.70 287.56 120 720 70 71.87 431.20 68.70 288.57 110 770 50 73.59 515.10 83.90254.90
8 100 800 30 77.30 618.40 103.30 181.69 90 810 10 82.81 745.30 126.90 64.7010 80 800 -10 90.00 900.00 154.70 -100.11 70 770 -30 98.79 1086.70 186.70 -316.12 60 720 -50 109.13 1309.60 222.90 -589
sing an to etermine ptima rice Output
sing an to etermine ptima rice Output
TR - TCTC / Q
-
8/6/2019 Market Structure F
50/108
Starting from zero output level, as the outpuincreases, the MR associated with each unit exceedsthe MC up to 6 units.Beyond this point the firm actually incurs mloss.However, beyond this point, total profit is spositive, but not maximum.Hence, by following MR=MC rule, a profitmaximizing firm would produce 6 units per tTo do so, it would have to set price of $120
Starting from zero output level, as the outpuincreases, the MR associated with each unit exceedsthe MC up to 6 units.Beyond this point the firm actually incurs mloss.However, beyond this point, total profit is spositive, but not maximum.Hence, by following MR=MC rule, a profitmaximizing firm would produce 6 units per tTo do so, it would have to set price of $120
-
8/6/2019 Market Structure F
51/108
MonopolyMonopoly
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cu
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cu
ll
-
8/6/2019 Market Structure F
52/108
MonopolyMonopoly
Let us see how MR-MC rule underlies themonopoly pricing Here the firm would selectP*because, this is the
price at which customers would byQ*
.Q* is the quantity the firm would want to prbecause here the revenue received by sellinunit is just equal to its cost, (MR=MC).The shaded area ABDC is total profit.
Let us see how MR-MC rule underlies themonopoly pricing Here the firm would selectP*because, this is the
price at which customers would byQ*
.Q* is the quantity the firm would want to prbecause here the revenue received by sellinunit is just equal to its cost, (MR=MC).The shaded area ABDC is total profit.
P fi i i i d lP fi i i i d l
-
8/6/2019 Market Structure F
53/108
QO
MC
C
Q*= 6
MR
AR
Profit maximising under monopolyProfit maximising under monopoly
A
P = AR
P* = 120
B
D
M lM l
-
8/6/2019 Market Structure F
54/108
MonopolyMonopoly
The monopolists demand curve downward sloping MRbelow AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cur
Profit Measuring profit
The monopolists demand curve downward sloping MRbelow AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cur
Profit Measuring profit
P fi i i i d lP fi i i i d l
-
8/6/2019 Market Structure F
55/108
QO
MC
AC
Q m
MR
AR
AC
Profit maximising under monopolyProfit maximising under monopoly
AR
T otal profit
M lM l
-
8/6/2019 Market Structure F
56/108
MonopolyMonopoly
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cu
Profit Measuring profit Supernormal profit can persist in long run
The monopolists demand curve downward sloping MR below AR
E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cu
Profit Measuring profit Supernormal profit can persist in long run
L E ilib i M lL E ilib i M l
-
8/6/2019 Market Structure F
57/108
Long-runE quilibrium-MonopolyLong-runE quilibrium-Monopoly
Price
Q
LMC
Demand/AR E
S PERNOR MAPRO F I S
[PR S ]
eS MC
S AC
S MCS AC
MR Quantity
P
TS
R
p
q
L AC
M lM l
-
8/6/2019 Market Structure F
58/108
MonopolyMonopoly
Disadvantages of monopoly high prices / low output: short run high prices / low output: long run
lack of incentive to innovate inefficiencyAdvantages of monopoly economies of scale profits can be used for investment high profits encourage risk taking
Disadvantages of monopoly high prices / low output: short run high prices / low output: long run
lack of incentive to innovate inefficiencyAdvantages of monopoly economies of scale profits can be used for investment high profits encourage risk taking
-
8/6/2019 Market Structure F
59/108
MonopolisticCompetitionMonopolisticCompetition
-
8/6/2019 Market Structure F
60/108
Monopolistic CompetitionMonopolistic CompetitionLarge number of Buyers & SellersDifferentiatedProduct, Differentiation either Real or Imaginary;Free entry & exit;Selling cost is an important feature - Product differentiation make selling costs nece Not necessary for homogenous products under
competition Monopolist is notorious enough
Large number of Buyers & SellersDifferentiatedProduct, Differentiation either Real or Imaginary;Free entry & exit;Selling cost is an important feature - Product differentiation make selling costs nece Not necessary for homogenous products under
competition Monopolist is notorious enough
-
8/6/2019 Market Structure F
61/108
Monopolistic CompetitionMonopolistic Competition
Downward-sloping demand-curves. Demandrelatively elastic.Firms form Groups, Groups are part of Indust [Auto Industry Small car segment, Luxury car
segment, SUV s, LCVs, etc.] [Detergents Luxury soaps, detergent bars,
detergent powders, liquid soaps, shampoos,]Firms make supernormal profit in the short ru
Downward-sloping demand-curves. Demandrelatively elastic.Firms form Groups, Groups are part of Indust [Auto Industry Small car segment, Luxury car
segment, SUV s, LCVs, etc.] [Detergents Luxury soaps, detergent bars,
detergent powders, liquid soaps, shampoos,]Firms make supernormal profit in the short ru
Short run equilibrium of the firmShort run equilibrium of the firm
-
8/6/2019 Market Structure F
62/108
QO Q s
AR ! D
MC
AC
MR
Short-run equilibrium of the firmunder monopolistic competitionShort-run equilibrium of the firmunder monopolistic competition
P s
AC s
Long run equilibrium of the firmLong run equilibrium of the firm
-
8/6/2019 Market Structure F
63/108
Long-run equilibrium of the firmunder monopolistic competitionLong-run equilibrium of the firmunder monopolistic competition
AR L ! DL
MR L
QO Q L
P L
LRAC
LRMC
-
8/6/2019 Market Structure F
64/108
Monopolistic CompetitionMonopolistic Competition
In the long-run,Price=Average Cost. Firms haveplants which are too small to take full advanscale economies.
when new firms enter, they take customerproportions from all old firms
all firms have same cost and demand curvproducing different products
will new firms not imitate successful old o
In the long-run,Price=Average Cost. Firms haveplants which are too small to take full advanscale economies.
when new firms enter, they take customerproportions from all old firms
all firms have same cost and demand curvproducing different products
will new firms not imitate successful old o
-
8/6/2019 Market Structure F
65/108
PriceDiscriminationPriceDiscrimination
-
8/6/2019 Market Structure F
66/108
-
8/6/2019 Market Structure F
67/108
Price discrimination means one of the followProducts with identical costs are sold in diffmarkets at different prices
The ratio of price to marginal cost differs frproducts.
Price discrimination means one of the followProducts with identical costs are sold in diffmarkets at different prices
The ratio of price to marginal cost differs frproducts.
Two conditions for price discriminTwo conditions for price discrimin
-
8/6/2019 Market Structure F
68/108
Two conditions for price discriminTwo conditions for price discrimin
Price discrimination ispossiblewhen,the two or more markets in which the product
must be capable of being separated, andPrice discrimination isprofitablewhen,The product in question hasdifferent elasticitiesin thetwo markets.
Price discrimination ispossiblewhen,the two or more markets in which the product
must be capable of being separated, andPrice discrimination isprofitablewhen,The product in question hasdifferent elasticitiesin thetwo markets.
Types of DiscriminationTypes of Discrimination
-
8/6/2019 Market Structure F
69/108
Types of DiscriminationTypes of DiscriminationPersonal-based on income of the consumer (e g doctors, lawyers, etc)
Nature of the product
(e.g branded and un-branded products, economy andcinema halls, consumer notions, state v/s private univAge, sexand status of the customer
(e.g. insurance,Railway travel, air travel, cinemas &entertainment )
Personal-based on income of the consumer (e g doctors, lawyers, etc)
Nature of the product
(e.g branded and un-branded products, economy andcinema halls, consumer notions, state v/s private univAge, sexand status of the customer
(e.g. insurance,Railway travel, air travel, cinemas &entertainment )
Types of DiscriminationTypes of Discrimination
-
8/6/2019 Market Structure F
70/108
Types of DiscriminationTypes of Discrimination
Time of service(e.g. matinee shows, auto rickshaws, celcos,days and week ends, prime time)
Geographical factors(e.g. liquor, legal sanctions, prevention of reexchange)U se of the product(e.g. electricity, domestic and export market, )
Time of service(e.g. matinee shows, auto rickshaws, celcos,days and week ends, prime time)
Geographical factors(e.g. liquor, legal sanctions, prevention of reexchange)U se of the product(e.g. electricity, domestic and export market, )
Recent examples ofPDRecent examples ofPD
-
8/6/2019 Market Structure F
71/108
Recent examples of PDRecent examples of PD
Advance reservation and advance purchaseRate differentiated on the basis of days in athe reservation is madeFlexibility to change arrangementsRefundability
Tie-up arrangements
Advance reservation and advance purchaseRate differentiated on the basis of days in athe reservation is madeFlexibility to change arrangementsRefundability
Tie-up arrangements
Conditions for DiscriminationConditions for Discrimination
-
8/6/2019 Market Structure F
72/108
Conditions for DiscriminationConditions for Discrimination
Market imperfectionsAgreement between rival sellers (direct servGeographical / tariff barriers
Differentiated productsIgnorance of buyersArtificial difference between goodsE lasticity of Demand
Market imperfectionsAgreement between rival sellers (direct servGeographical / tariff barriers
Differentiated productsIgnorance of buyersArtificial difference between goodsE lasticity of Demand
Price DiscriminationPrice Discrimination
-
8/6/2019 Market Structure F
73/108
Price DiscriminationPrice Discrimination
Meaning of price discrimination First degree (rare / infrequent) Second degree (frequent) Third degree (the most common form)
Meaning of price discrimination First degree (rare / infrequent) Second degree (frequent) Third degree (the most common form)
-
8/6/2019 Market Structure F
74/108
Second degreeSecond degree
-
8/6/2019 Market Structure F
75/108
Second degreeSecond degree
A monopolist divides the whole market for hproduction into severalsub-marketsand each submarket is charged adifferent price.
The price in each case is decided according tthemarginal buyersof the market are prepared topay.
A monopolist divides the whole market for hproduction into severalsub-marketsand each submarket is charged adifferent price.
The price in each case is decided according tthemarginal buyersof the market are prepared topay.
Second degreeSecond degree
-
8/6/2019 Market Structure F
76/108
Second degreeSecond degree
The degree of the lowest price would be diffeach class of market.
Price discrimination isfeasiblewhen the total markeis very wide withlarge no. of buyershaving different
taste, different incomes and different conditiE
.g. public utilities transport, telecos, etc.
The degree of the lowest price would be diffeach class of market.
Price discrimination isfeasiblewhen the total markeis very wide withlarge no. of buyershaving different
taste, different incomes and different conditiE
.g. public utilities transport, telecos, etc.
Third degreeThird degree
-
8/6/2019 Market Structure F
77/108
Third degreeThird degree
Most frequently encountered.
The monopolist divides the total market into
sub-marketsand setsdifferent pricesfor its productsin each market in a separate manner.
Most frequently encountered.
The monopolist divides the total market into
sub-marketsand setsdifferent pricesfor its productsin each market in a separate manner.
Third degreeThird degree
-
8/6/2019 Market Structure F
78/108
Third degreeThird degree
Insecond degreeprice discrimination the price tto be theminimumas per the marginal utility of thmarginal buyer,
whereas, in third degree price discriminationdepends on the allocation of output and the dconditions in each market.
This is the most practical method.
Insecond degreeprice discrimination the price tto be theminimumas per the marginal utility of thmarginal buyer,
whereas, in third degree price discriminationdepends on the allocation of output and the dconditions in each market.
This is the most practical method.
Third-degree price discriminationThird-degree price discrimination
-
8/6/2019 Market Structure F
79/108
g pg pP
QO
P 1
D
200
Revenue froma single price
Third-degree price discriminationThird-degree price discrimination
-
8/6/2019 Market Structure F
80/108
O
P 1
D
200
P 2
150
P
Q
I ncreased revenuefrom price
discriminationA higher discriminatoryprice is now introduced
g pg p
Profit maximising output underProfit maximising output under
-
8/6/2019 Market Structure F
81/108
O O OMR X
(a) Market X
DX
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
Profit maximising output underProfit maximising output under
-
8/6/2019 Market Structure F
82/108
O O O
DY
MR X
MR Y
(a) Market X (b) Market Y
DX
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
Profit maximising output underProfit maximising output under
-
8/6/2019 Market Structure F
83/108
O O OMR X
MR Y MR T
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
Profit maximising output underProfit maximising output under
-
8/6/2019 Market Structure F
84/108
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
O O OMR X
MR Y MR T
MC
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
DY
Profit maximising output underProfit maximising output under
-
8/6/2019 Market Structure F
85/108
O O OMR X
MR Y MR T
MC
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
3000
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
Profit-maximising output underProfit-maximising output under
-
8/6/2019 Market Structure F
86/108
O O O
DX
MR X
MR Y MR T
MC
5
(a) Market X (b) Market Y (c) Total(markets X + Y)
3000
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
Profit-maximising output underProfit-maximising output under
-
8/6/2019 Market Structure F
87/108
O O OMR X
MR Y MR T
MC
5
1000
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
3000
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
Profit-maximising output underProfit-maximising output under
-
8/6/2019 Market Structure F
88/108
O O OMR X
MR Y MR T
MC
5
1000 2000
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
3000
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
Profit-maximising output underProfit-maximising output under
-
8/6/2019 Market Structure F
89/108
O O OMR X
MR Y MR T
MC
5
9
1000 2000
(a) Market X (b) Market Y (c) Total(markets X + Y)
DX
3000
Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination
DY
-
8/6/2019 Market Structure F
90/108
-
8/6/2019 Market Structure F
91/108
OligopolyOligopoly
OligopolyOligopoly
-
8/6/2019 Market Structure F
92/108
OligopolyOligopoly
Competition amongst Few (4-5Producers/Sellers) Key feature mutualinterdependencewith bulkproduction of the market output.
Rivalry- one firm depends not only on the reacticonsumers but also the reaction of rival firms Homogenous or DifferentiatedProducts.Product
Differentiation may varyPriceRigidity
Competition amongst Few (4-5Producers/Sellers) Key feature mutualinterdependencewith bulkproduction of the market output.
Rivalry- one firm depends not only on the reacticonsumers but also the reaction of rival firms Homogenous or DifferentiatedProducts.Product
Differentiation may varyPriceRigidity
OligopolyOligopoly
-
8/6/2019 Market Structure F
93/108
OligopolyOligopoly
Decision-making is a complicated phenomenOne firm cannot take any decision without takconsideration theprobable reactionof therival firms.
Difficulty for new firms to enter the market.E ntry barriers areindirectin the forms of mergers,ownership & control of key factors, advantageestablished firms, economies of scale, etc.
Decision-making is a complicated phenomenOne firm cannot take any decision without takconsideration theprobable reactionof therival firms.
Difficulty for new firms to enter the market.E ntry barriers areindirectin the forms of mergers,ownership & control of key factors, advantageestablished firms, economies of scale, etc.
OligopolyOligopoly
-
8/6/2019 Market Structure F
94/108
g p yg p y
Ex cessive expenditure on AdvertisementPossible outcomes include:
co-operation andcollusion- the monopoly price price war - the perfectly competitive price
Ex cessive expenditure on AdvertisementPossible outcomes include:
co-operation andcollusion- the monopoly price price war - the perfectly competitive price
Classification of OligopolyClassification of Oligopoly
-
8/6/2019 Market Structure F
95/108
Classification of OligopolyClassification of Oligopoly
On the basis of product differentiation Pure[OPE C] or Differentiated[Two-wheeler/4-wheeler marke
India in the 80s]On the basis of entry of firms Open(free to enter) or Closed(barrier to entry)
On the basis of product differentiation Pure[OPE C] or Differentiated[Two-wheeler/4-wheeler marke
India in the 80s]On the basis of entry of firms Open(free to enter) or Closed(barrier to entry)
Classification of OligopolyClassification of Oligopoly
-
8/6/2019 Market Structure F
96/108
Classification of OligopolyClassification of Oligopoly
On the basis of presence/absence of price lead Partial(follow the leader)Ex . SBI as leader andPublic Sector banks as followers pre-90 or
Full(No leader-no follower)
On the basis of presence/absence of price lead Partial(follow the leader)Ex . SBI as leader andPublic Sector banks as followers pre-90 or
Full(No leader-no follower)
Classification of OligopolyClassification of Oligopoly
-
8/6/2019 Market Structure F
97/108
g p yg p y
On the basis of deliberate agreement Collusive(one common uniform price policy
monopoly) or Non-collusive (E ach firm takes its own decisi
On the basis of deliberate agreement Collusive(one common uniform price policy
monopoly) or Non-collusive (E ach firm takes its own decisi
The Kinked Demand Curve under OligoThe Kinked Demand Curve under Oligo
-
8/6/2019 Market Structure F
98/108
The Kinked Demand Curve under OligoThe Kinked Demand Curve under Oligo
P rice
Qua titQ
K
R elati elE lasticema
R elati el
I elasticema
P
D
D
OligopolyOligopoly
-
8/6/2019 Market Structure F
99/108
OligopolyOligopolyKinked Demand CurveKinked Demand Curve Point D-K shows relatively
elastic demand, the firm raisthe price of its product, rivaldo not raise their prices; thedemand for the firms produfalls considerable. This is fo
demand curve DK above theoriginal price OP.Point K-D shows relativelyinelastic demand, the firmlowers the price of its produrivals too will lower their prthe demand for the firmsproduct will not show anysizeable increase. This is fothe demand curve KD belowthe original price OP.
Point D-K shows relativelyelastic demand, the firm raisthe price of its product, rivaldo not raise their prices; thedemand for the firms produfalls considerable. This is fo
demand curve DK above theoriginal price OP.Point K-D shows relativelyinelastic demand, the firmlowers the price of its produrivals too will lower their prthe demand for the firmsproduct will not show anysizeable increase. This is fothe demand curve KD belowthe original price OP.
P rice
Qua tit
D
D
K
O Q
P
OligopolyOligopoly
-
8/6/2019 Market Structure F
100/108
OligopolyOligopolyKinked Demand CurveKinked Demand Curve There is a sudden bend in th
slope of the demand curve othe average revenue curve othe firm at point K. Thissudden bend is called theKINK. So, the oligopolistfaces a kinked demand curvRivals immediately and quic
match price reductions but ohesitantly and incompletelyfollow price increase, this leto the kinked demand curve
There is a sudden bend in thslope of the demand curve othe average revenue curve othe firm at point K. Thissudden bend is called theKINK. So, the oligopolistfaces a kinked demand curvRivals immediately and quic
match price reductions but ohesitantly and incompletelyfollow price increase, this leto the kinked demand curve
P rice
Qua tit
D
D
K
O Q
P
AR & MR curves under OligopolyAR & MR curves under Oligopoly
-
8/6/2019 Market Structure F
101/108
A & M curves under OligopolyA & M curves under Oligopoly
AR curve is a kinked curve and MR curve isdiscontinuousDiscontinuity depend on Number of rivals Size of rivals Differentiation of products
Ex tent of collusion.
AR curve is a kinked curve and MR curve isdiscontinuousDiscontinuity depend on Number of rivals Size of rivals Differentiation of products
Ex tent of collusion.
Kinked demand for a firm under oligopolKinked demand for a firm under oligopol
-
8/6/2019 Market Structure F
102/108
QO
P 1
Q1
Current priceand quantity
give one pointon demand curve
Kinked demand for a firm under oligopolKinked demand for a firm under oligopol
-
8/6/2019 Market Structure F
103/108
QO
P 1
Q 1
D
D
Stable price under conditions of a kinked demand Stable price under conditions of a kinked demand
-
8/6/2019 Market Structure F
104/108
QO
P 1
Q 1
MC 2
MC 1
MR
a
bD ! AR
Stable price under conditions of a kinked demand Stable price under conditions of a kinked demand
-
8/6/2019 Market Structure F
105/108
QO
P 1
Q 1
MC 2
MC 1
a
b
D ! AR
MR
K
Price Determination at KPrice Determination at K
-
8/6/2019 Market Structure F
106/108
How the price is determined at pointKinvolves theconcept of an industryprice leader .This is the firm that dares to break out of thewithout fearing the consequences.If the firm decides to raise its price, it assumwill follow.If the firm decides to lower its price, it assumother may follow, but will not go lower.That would trigger a price war hurting the enindustry.
How the price is determined at pointKinvolves theconcept of an industryprice leader .This is the firm that dares to break out of thewithout fearing the consequences.If the firm decides to raise its price, it assumwill follow.If the firm decides to lower its price, it assumother may follow, but will not go lower.That would trigger a price war hurting the enindustry.
-
8/6/2019 Market Structure F
107/108
-
8/6/2019 Market Structure F
108/108