Market• Definition:- The term market refers not necessarily to a place but always to a commodity & buyers & sellers, who are in direct competition with other. Example:- canaught place Delhi, Parade Kanpur, etc.
FORMS OF MARKET PERFECT MONOPOLISTIC MONOPOLY OLIGOPOLYCOMPETITION COMPETITION
PERFECT COMPETITION• “Perfect competition is a market situation, where there are large number of buyers & sellers. The sellers sell identical product at a single uniform price.” Example:- Hypermarket(Giant, Carrefour, Tesco).• Features:- 1. large no. of buyers & sellers. 2. Homogeneous Product 3. Uniform Price 4. Freedom of entry or exit of firms. 5. Perfectly Elastic Demand.
Price & Output Determination Under perfect competitionShort Run Equilibrium1. Super normal profit2. Losses3. Normal profitLong Run EquilibriumNormal Profit Only
Short Run Equilibrium1. Supernormal profits• economic profits• (P > ATC) or (TR > TC) P=MR=AR2. Normal profits• Breakeven or zero profit• (P = ATC) or (TR = TC) P=MR=AR3. Subnormal profits• Economic losses• (P < ATC) or (TR < TC) P=MR=AR• continue the production if (ATC > P > AVC)• Shut down the operation if (ATC > P < AVC) 6
Supernormal Profit (Economic Profit)• Definition – Profit earned by a competitive firm when its total revenue is more than total cost (TR>TC) or price is greater than ATC (P>ATC).• Calculation: TR = 5 x 9 = 45 TC = 3 x 9 = 27 = (TR – TC) = (45 – 27) = 18 7
Supernormal Profit/ Economic Profit Economic Profit MC Cost and Revenue RM5 MR=AR=P ATC RM3 Minimum point of ATC 8 1 2 3 4 5 6 7 8 9 10
Breakeven/ Normal Profit• Definition – When total revenue is equal to total cost (TR=TC) or price equal to ATC (P=ATC), there are no profit or no losses. • Firm has only able to cover its costs.• Calculation: TR = 5 x 9 = 45 TC = 5 x 9 = 45 9 = (TR – TC) = (45 – 45) = 0
Breakeven/ Normal Profit Minimum point of ATC MC ATCCost and Revenue RM5 MR=AR 10 1 2 3 4 5 6 7 8 9 10
Economic losses/Subnormal profit• Definition – Losses incurred by a competitive firm when total revenue is less than total cost (TR < TC) or when the equilibrium price falls below ATC (P < ATC. – The firm incurs losses because would not able to cover its costs. • Calculation: TR = 5 x 6 = 30 TC = 7 x 6 = 42 = (TR – TC) = (30 – 42) = -12
Economic losses/ Subnormal profit Economic Loss MC Cost and Revenue ATC RM7 RM5 MR=AR 12 1 2 3 4 5 6 7 8 9 10
long Run EquilibriumNormal profits only• Breakeven or zero profit• (P = ATC) or (TR = TC)
Breakeven/ Normal Profit Minimum point of ATC MC ATC Cost and Revenue RM5 MR=AR 14 1 2 3 4 5 6 7 8 9 10
MONOPOLY• Monopoly is a market situation where there is only a single seller with complete control over an industry.• Features of monopoly • Single seller • Price discrimination • No close substitutes • Unique product • Entry is restricted • Price maker
Price & Output Determination Under Monopoly• Short Run Equilibrium:-• Super Normal Profit• Losses• Long Run• Abnormal profit only
Short Run Equilibrium1. Supernormal profits• economic profits• MC= MR & AR> ATC2. Normal profits• Breakeven or zero profit• (MR=MC) or (AR=ATC)3. Subnormal profits• Economic losses• (MC=MR) or (AR=ATC)• Notes:- MC curve must cutmr curve from below 17
A Monopolist Making a Profit Price MC ATC PM A Profit CM E MR D 0 QM Quantity
A Monopolist Breaking Even Price MC ATC E MR D 0 Quantity
A Monopolist Making a Loss Price MC ATC CM B Loss A PM E MR D 0 QM Quantity
long Run Equilibrium Breakeven/ Normal ProfitPrice MC ATC PM E D MR 0 QM Quantity
Price discrimination• Price discrimination is a method of pricing adopted by the monopolist in order to earn abnormal profit. It refers to the practices of charging different prices for the different prices for the different unit of the same commodity.• Examples:- The family doctor in your neighborhood charges a higher fees from a rich patient compared to the fees charged from a poor patient even though both are suffering from viral fever.
• “Monopolistic competition is a market situation where there are many sellers of a particular product, but the product of each sellers is in some way differentiated in the minds of consumers from the product of every seller.” Example:- Soap(Lux , Rexona , Cinthol , Medimix).Features:- 1. Large no. of sellers. 2. Product Differentiation. 3. Free Entry & Exit of Firms. 4. Nature of Demand curve.
Price & Output Determination Under Monopolistic competition• Short Run Equilibrium:-• Super Normal Profit• Losses• Long Run• Abnormal profit only
Short Run Equilibrium1. Supernormal profits• economic profits• MC= MR & AR> ATC2. Normal profits• Breakeven or zero profit• (MR=MC) or (AR=ATC)3. Subnormal profits• Economic losses• (MC=MR) or (AR=ATC) 25
A firm Making a Profit Price MC ATC PM A Profit CM B MR D 0 QM Quantity
A firm Breaking EvenPrice MC ATC MR D 0 Quantity
A firm Making a LossPrice MC ATC CM B Loss A PM MR D 0 QM Quantity
A firm is making a Profit Price MC ATC PM A Profit CM B MR D 0 QM Quantity
Oligopoly• Oligopoly is a situation where a few large firms compete against each other 7 there is an element of interdependence in the decision making of these firms. Example:- Cold drink Industries & automobile industries.• Features:- 1. interdependence• 2. importance of selling & advertising cost.• 3. Presence of monopoly element.• 4. kinked demand curve• 5.Small no. of large sellers.
TYPES of OLIGOPOLY• 1. Pure Oligopoly:- When a product dealt is homogeneous in nature. Ex:- Aluminum industry• 2. Differentiated Oligopoly:- It is based on product differentiation. Ex:- Talcum Powder.• 3. collusive & Competitive oligopoly:- When few firms of the oligopolistic market come to a common understanding or act in collusion with each other in fixing price & output, it is collusive oligopoly. When there is a lack of understanding between the firms & they compete with each other it is called competitive oligopoly.
Continue• 4. Partial or full Oligopoly:- oligopoly is partial when the industry is dominated by one large firm which is considered or looked upon as the leader of the group. The dominating firm will be the price leader. In full oligopoly, the market will be conspicuous by the absence of price leadership.• 5. syndicated & organized oligopoly:- syndicated oligopoly refers to that situation where the firms sell their products through a centralize syndicate. Organized oligopoly refers to the situation where the firms organize themselves into a central association for fixing prices, output, quotas, etc.
KINKED DEMAND CURVE • Increase price = elastic • Decrease price = inelasticcurve Theory• Oligopoly • If an oligopolistic lowers his price below the prevailing level its competitors will follow him & accordingly lower prices, whereas if he raises the price above the prevailing level, its competitors will not follow its increase in price .