1. 1. Unit-4
2. 2. Market General meaning: A market is any place where the sellers of a particular good or service can meet with the buyers of that goods and service and where there is a potential for a transaction to take place. The buyers must have something they can offer in exchange for there to be a potential transaction.
3. 3. Market in Economics Economists understand by the term Market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly---A. Cournot The term market refers not to a place but to a commodity or commodities the buyers and sellers of which are competition with each other
4. 4. Features: 1. a commodity or a set of commodities that can be bought or sold. 2. buyers and sellers of commodities. 3. price determination by means of bargaining 4. a region or regions whereby the commodity will be traded. In economics market is the trading of a commodity or commodities at a particular price reached at after bargaining between buyer and seller.
5. 5. Classification of market 1.On the basis of area or scope: a. Local market: a market of commodities which is confined to a particular region Example: Fish , Vegetables ,Milk. b. National market: a market of commodities that covers a whole country. Example: Cosmetics , Cloths. c. International market: a market of commodities which is not confined to the geographical boundary of a country. Example: Tea , Jute, Cotton, Gold.
6. 6. On the basis of time: Very short period market: a market that lasts few hours or few days Example: fish , vegetables , milk Short period market: a market whereby supply can be changed to a limited extent in response to the change in demand. Example : cloths Long period market: a market whereby supply can be fully adjusted to the changes in demand. A firm can change its production capacity Very long period market: a market whereby the tastes, habits of buyers can be changed and the supplier is in a position to change his production s and procedures to
7. 7. Market on the basis of competition 1.Perfect competitive market 2.Imperfect competitive market a. Monopoly b. Duopoly c. Oligopoly d. Monoposony e. Monopolistic competition
8. 8. Perfect competitive market: Perfect competitive market is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.
9. 9. Characteristics of perfect competition Large Number of Small Firms A perfectly competitive market or industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that no single firm can exert market control over price or quantity. Identical Goods Each firm in a perfectly competitive market sells an identical product, which is also commonly termed "homogeneous goods." The essential feature of this characteristic is not so much that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern any difference.
10. 10. Perfect Resource Mobility Perfectly competitive firms are free to enter and exit an industry. They are not restricted by government rules and regulations, start-up cost, or other barriers to entry. While some firms incur high start-up cost or need government permits to enter an industry, this is not the case for perfectly competitive firms. Perfect Knowledge In perfect competition, buyers are completely aware of sellers' prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price.
11. 11. Marginal Cost Equals Marginal Revenue The marginal cost of a product is the cost of producing one extra unit of that product. Similarly, the marginal revenue of a product is the revenue generated from selling one extra unit. Marginal cost tends to increase as production increases, while marginal revenue decreases as production increases. Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market. Profit maximization - Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated. Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry. Property rights - Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer. Rational buyers - buyers capable of making rational purchases based on information given
12. 12. Imperfect competitive market a. Monopoly: when there is only one buyer in a market it is called monopoly. A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry.
13. 13. Characteristics of monopoly Single Supplier The essence of a monopoly is a market controlled by a single seller. The "mono" part of monopoly means single. The single seller, of course, is a direct contrast to perfect competition, which has a large number of sellers. In fact, perfect competition could be renamed multipoly or manypoly, to contrast it with monopoly. Unique Product To be the only seller of a product, however, a monopoly must have a unique product.
14. 14. Barriers to Entry and Exit A monopoly is generally assured of being the ONLY firm in a market because of assorted barriers to entry. Some of the key barriers to entry are: (1) government license or franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and (5) decreasing average total cost. Specialized Information Monopoly is commonly characterized by control of information or production technology not available to others. This specialized information often comes in the form of legally-established patents, copyrights.
15. 15. Other characteristics: There are many buyers in the market. The firm enjoys abnormal profits. The seller controls the prices in that particular product or service and is the price maker. The product does not have close substitutes.
16. 16. Why might Monopolies arise? 1. State monopoly: A government may create a statutory or legal monopoly giving a certain body the sole right to supply a particular good or provide a certain service. The Act which creates the monopoly places a legal restriction on competition. 2. Control of critical resources: A particular firm may have exclusive access to the only source of supply of the raw materials necessary for the production of a certain commodity. Mining firms would be examples of this type of monopoly.
17. 17. 3. Capital intensive monopoly: Certain industries require such a large investment of capital in plant and equipment that any form of competition from potential rivals is completely discouraged e.g. aircraft manufacturing, ship-building, steel firms etc. 4. Legal restriction: A firm which develops or invents a new product or process can use the law of patents, franchise, copyright etc. to obtain the sole right of manufacture of the product or use of the process. In our country production of arms and ammunitions is done only by BOF(Bangladesh ordnance factory) 5. Trade Agreements: All the firms within a certain industry, may by agreement, adopt completely uniform policies on price and output. This type of agreement effectively creates a monopoly. (OPEC on Oil production).
18. 18. Duopoly: a market controlled by only two sellers. A true duopoly is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market. A situation in which two companies own all or nearly all of the market for a given product or service. A duopoly is the most basic form of oligopoly, a market dominated by a small number of companies. A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output.
19. 19. Oligopoly: In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 computers. Company X produces 50 computers and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the computers at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.
20. 20. Monoposony When there is only one buyer in a market it is termed as monoposony. A market similar to a monopoly except that a large buyer not seller controls a large proportion of the market and drives the prices down. Sometimes referred to as the buyer's monopoly. Dictionary meaning: The market condition that exists when only one buyer will purchase the products of a number of sellers. A situation in which the entire market demand for a product or service consists of only one buyer
21. 21. Monopolistic competition Monopolistic competition is a type of imperfect competition whereby many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms
22. 22. Definition of 'Monopolistic Competition' A type of competition within an industry where: 1. All firms produce similar yet not perfectly substitutable products. 2. All firms are able to enter the industry if the profits are attractive. 3. All firms are profit maximizers. 4. All firms have some market power, which means none are price takers.
23. 23. Monopolistic competitive market is a form of imperfect competitive market where many competing producers sell products that are differentiated from one another (that is, the products are substitutes, but, with differences such as branding, are not exactly alike). In monopolistic competition firms can behave like monopolies in the short-run, including using market power to generate profit. In the long-run, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like perfect competition where firms cannot gain economic profit
24. 24. Quick Reference to Basic Market Structures Market Structure Seller Entry Barriers Seller Number Buyer Entry Barriers Buyer Number Perfect Competition No Many No Many Monopolistic competition No Many No Many Oligopoly Yes Few No Many Oligopoly No Many Yes Few Monopoly Yes One No Many Monoposony No Many Yes One
25. 25. Profit maximization Profit is the excess of revenue over expenses. An assumption in classical economics is firms seek to maximize profits. Profit = total revenue total costs therefore, profit maximization occurs at the biggest gap between total revenue and total costs. A Firm can maximize profits if it produces at an output where marginal revenue (MR) = marginal cost (MC)
26. 26. Diagram of Profit Maximization
27. 27. To understand this principle look at the above diagram. If the firm produces less than Q1, MR is greater than MC. Therefore, for this extra output, the firm is gaining more revenue than it is paying in costs. Total revenue will increase. Close to Q1, MR is only just greater than MC, therefore, there is only a small increase in profit. But, profit is still rising. However, after Q1, the marginal cost of the output is greater than the marginal revenue. This means the firm will see a fall in its profit level.
28. 28. Profit in monopoly
29. 29. In this diagram, the monopoly maximises profit where MR=MC at y*. This enables the firm to make supernormal profits (Blue area). Note, the firm could produce more and still make normal profit. But, to maximize profit, it involves setting higher price and lower quantity than a competitive market. Therefore, for a firm profit maximization involves selling a lower quantity and at a higher price.
30. 30. Profit in perfect competition In perfect competition, the same rule for profit maximization still applies. The firm maximizes profit where MR=MC. Here the firm earns supernormal profit.
31. 31. Equilibrium of a firm in perfect competition Equilibrium refers to a production level where the profit is maximum. In perfect competition a firm takes a price which was fixed earlier. So in perfect competition a firm only determines the amount of output and it has no bearing in price. In perfect competition a firm can attain equilibrium under following conditions- a.MC=MR b. Slope of MC curve > slope of MR curve Equilibrium can be a. Short-run equilibrium b. Long-run equilibrium
32. 32. Short run equilibrium Short run does not indicate any time duration. Short-run Economists define the short run as situation when factors of production can not be changed completely fixed. For example, for a particular company this might mean that they have reached full capacity in a warehouse or at a factory site. These short-run costs consist of both fixed and variable costs. In short run a firm can face three situations A firm can earn - 1.super normal profit 2.Normal profit 3.or can attain equilibrium at loss.
33. 33. Equilibrium with super normal profit In short run a firm can earn super normal profit. A firm can reduce average cost (AC) by using its experience , efficiency or any location benefits. Those can make a firm able to earn super normal profit. Conditions : P=AR=MR=SMC>SAC
34. 34. OX axis shows quantity of out put and OY axis shows revenue and cost. AR = MR curve shows the average and marginal revenue of the firm. SAC and SMC curve denotes short run average cost and marginal cost. At the point a SMC curve intersects MR line from below. So point a is the equilibrium point. Here , equilibrium output is OM and equilibrium price is OP. As per diagram total revenue of the firm is OPAM and total cost is OP1BM. Total profit is PABP1. Here the firm attains equilibrium with super normal profit. Super normal profit as per diagram is PABP1.It is also known as economic profit.
35. 35. Equilibrium with normal profit In short run a firm can attain equilibrium with normal profit Normal profit is the profit that inspires a firm to carry on its business. Condition: SMC=MR=AR=SAC
36. 36. Equilibrium with losses In short run a firm can attain equilibrium while it is incurring losses. In this situation average cost is higher than average revenue. Condition: SMC=MR=AR>SAC.
37. 37. Long run equilibrium of a firm Long-run In contrast, economists define the long-run as being the time period when all the factors of production can be changed. So in the example above, the company can now look to expand its warehouse or factory capacity without any problems.
38. 38. Equilibrium of a monopoly firm A monopoly firm can control price and supply. So here equilibrium means determining the price and quantity. Equilibrium in monopoly can be classified into two types a. Short run equilibrium b. Long run equilibrium In short run a firm can attain equilibrium in three situation- a. Equilibrium with super normal profit b. Equilibrium with normal profit c. Equilibrium with loss
39. 39. In long run a firm can attain equilibrium in two situation- a. Equilibrium with super normal profit b. Equilibrium with normal profit To attain equilibrium in monopoly following two conditions are to be fulfilled- a.MC=MR b.MC curve intersects MR curve from below.
40. 40. Short run equilibrium in monopoly Equilibrium with super normal profit: in short run a firm can earn super normal profit. Here the condition of equilibrium is SMC=MRSAC which means average revenue or price will be higher than the average revenue.
41. 41. In above diagram OX(land) axis shows quantity of supply and OY(vertical) axis shows price , revenue and expense. AR and MR curves show average revenue and marginal revenue. SAC curve denotes short run average cost .and SMC curve denotes short run marginal cost. as per diagram, the firm attains equilibrium at the point a where SMC=MR. here equilibrium production is OM and equilibrium price is OP. at this price total revenue=OPCM Total cost =OP1BM So super normal profit is PP1BC.
42. 42. Equilibrium with normal profit or zero profit In monopoly a firm can attain equilibrium with normal profit. Condition: SMC=MR
43. 43. Equilibrium of a firm with loss In short run a firm can carry on its production while it is making loss. Because in short run a firm is to bear fixed cost. In this situation if the firm sees that it can recover a portion of fixed cost if it keeps its production going, the firm will continue its production on loss. Condition: a. SMC=MR
44. 44. Long run equilibrium in monopoly In long run a firm will not continue its production while it is making loss. In long run a firm can earn super normal profit due to its nature. In monopoly only one firm produces so there is no close substitute of the product. No new firm can enter the market. So in monopoly the only firm can exercise sole control over market supply. So it can fix any price for the product as it wishes. Thus it can earn super normal profit.
45. 45. Though the sole firm can earn super normal profit in long run but a logical and deliberate monopolist can earn nor mal profit in long run. The reasons are as follows 1.New competitor firm can appear in the market seeing the super normal profit. 2.Customers may be dissatisfied on super normal profit. 3. The government can impose restrictions.
46. 46. Normal profit in long run
47. 47. Super normal profit in long run