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# Markets me vi unit

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### Markets me vi unit

1. 1. Markets & Pricing
2. 2. Revenue Concepts• Total Revenue (TR) is defined as the total amount of money received by a firm from goods sold or services rendered during a certain time period.• Equation: Output price X Quantity PXQ• Average revenue (AR) is the revenue earned per unit of output sold.• Equation: Total revenue / Quantity TR/Q = P• Marginal Revenue(MR) is revenue a firm gains in producing one additional unit of commodity.• Equation: Change in total revenue/Change in ∆TR/∆Q output. A3 - 2
3. 3. Equilibrium• Market demand is equal to market supplyFor a firm• The price at which the quantity demanded of the product equals its quantity supplied is called its equilibrium price and the corresponding quantity is its equilibrium quantity and the firm is said to be in equilibrium. A3 - 3
4. 4. Rule for Equilibrium• If the production and sale of an additional unit of product adds more to revenue than to costs, profit is increased and thus that unit should be produced and sold. MR>MC• If the additional unit of output involves larger costs than revenue, it should not be produced. MR<MC• The firm is in equilibrium when MR =MC A3 - 4
5. 5. Market‘Market means the general field within which the forces determine the price of a particular commodity operate’ – ElyA market is a body of persons in such commercial relations that each can easily acquaint himself with the rates at which certain kinds of exchanges of goods or services are from time to time made by the others - Sidgwick A3 - 5
6. 6. Characteristics• Consumers• Sellers• A Commodity• A Price A3 - 6
7. 7. Classification of Markets• Area: local, regional, national & international• Nature of transactions: spot & futures• Volume of transactions: whole sale & Retail• Time: very short , short & long period• Status of sellers: primary, secondary & terminal• Regulation: regulated & unregulated• Competition : perfect & imperfect A3 - 7
8. 8. Types of Markets - CompetitionType of Nature of No. of No. of Entry Price Nature ofMarket Product Buyers Sellers Conditions decision variablesPerfect Homogen large large Free entry, Uniform Only OutputCompetiti eous for free exit everyon all firms whereSimple & “ “ One Entry High Either output orDiscrimin barriers price &ating DiscriminationMonopoly in pricesMonopoli Product “ Many Product Lower Extent ofstic differentia differentio than productCompetiti tion by n as entry Monopo differentiationon each firm barrier ly and promotionDuopoly Homogen Large Two Product High Competitors eous or differentiati strategies differentia on ted A3 - 8
9. 9. Types of Markets - CompetitionType of Nature of No. of No. of Entry Price Nature ofMarket Product Buyers Sellers Conditions decision variablesOligopoly Homogen large A few Product High Competitors eous or differentiat strategies differentia ion tedBilateral One One Entry Power Output andMonopoly Homogen barriers of Seller Price ous or BuyerMonopso “ “ Large Free entry Lowest Adjustingny possible output price according to priceOligopso Homogen A few “ No entry “ Competitorsny eous or barriers strategies differentia ted A3 - 9
10. 10. Monopoly By A3 - 10
11. 11. Introduction• Meaning: only one firm produces and sells a particular commodity in the market.• Definition: Firm and Industry coincide; the single firm producing the product is itself both the firm and the industry A3 - 11
12. 12. Main Features• One and only firm(Seller).• Single product• No rivals or direct competitors of the firm.• Indirect competition may exist.• No other seller can enter the market.• Monopolist is price maker.• The monopolist is rational.• Independent decision making A3 - 12
13. 13. Causes of Origin of Monopoly• Legal monopoly: Copyrights, Patents, TMs• Government policies: licensing• Natural resources• Exclusive knowledge of technology by the firm.• Public benefit or interest.• Price policy of the firm A3 - 13
14. 14. Types• Legal• Economic• Natural• Regional A3 - 14
15. 15. Equilibrium• The monopolist can control both the price and supply of the product. But at any point of time he can fix only one of them• Equilibrium Rule: MC = MR• The AR curve is demand curve• Cost curves are identical of perfect market A3 - 15
16. 16. Short-Run Equilibrium -Monopoly Competition SMC SAC Cost &Revenue P C E AR MR Units of output A3 - 16
17. 17. Long-Run Equilibrium Under Monopoly Competition LMC LAC Price, Revenue, Cost P M E AR & D MR Quantity A3 - 17
18. 18. Price Discrimination• The practice of discriminating among buyers on the basis of price charged for the same good or service.• To maximise the profit the seller practices the discriminating price strategy based on the buyers income level, expectations. A3 - 18
19. 19. Prerequisites• Market control• Division of market• Different price Elasticities of demand in different markets. A3 - 19
20. 20. Bases• Personal• Geographical• Time• Purpose of use A3 - 20
21. 21. Oligopoly• Oligopoly = market dominated by a few sellers, at least several of which are large enough relative to the total market that they can influence the market price• Oligopoly ⇒ more intense competition than pure competition A3 - 21
22. 22. Oligopoly• Why Oligopolistic Behavior is So Difficult to Analyze ¤ Oligopolistic firms interact with each other in complex ways, and almost anything can and sometimes does happen under oligopoly. A3 - 22
23. 23. Oligopoly• Lines of Attack: ¤ Ignore interdependence ¤ Strategic interaction ¤ Cartels ¤ Price leadership and tacit collusion• To understand everything except first point, you must understand Game Theory A3 - 23
24. 24. Oligopoly and Game Theory• Game Theory analyzes problems where agents account for others’ actions when taking a decision• Ex: duopoly – two firms serving one market ¤ Each firm supplies half of total quantity ¤ Choice of firm 1 affects choice of firm 2 and vice versa A3 - 24
25. 25. Monopolistic Competition, Oligopoly, & Public Welfare• Behavior is so varied that it is hard to come to a simple conclusion about welfare implications.• In many circumstances, the behavior of monopolistic competitors and oligopolists falls short of the social optimum. A3 - 25
26. 26. Monopolistic Competition, Oligopoly, & Public Welfare• Oligopolistic market can be perfectly contestable: ¤ If firms can enter and exit without losing the money they have invested• If so, then the performance of the firms is likely to be close to perfectly competitive• And thus, socially efficient A3 - 26
27. 27. Comparing the Four Market Forms• Perfect competition and pure monopoly are uncommon in reality.• Many monopolistically competitive firms exist.• Oligopoly firms account for the largest share of the economy’s output. A3 - 27
28. 28. Comparing the Four Market Forms• Profits are zero in long-run equilibrium under perfect competition and monopolistic competition because of free entry and exit.• Consequently, AC = AR = P in long-run equilibrium under these two market forms. A3 - 28
29. 29. Comparing the Four Market Forms• In equilibrium, MC = MR for the profit- maximizing firm under any market form.• In the equilibrium of the oligopoly firm, MC may be unequal to MR. A3 - 29
30. 30. Comparing the Four Market Forms• Perfectly competitive firm and industry theoretically ⇒ efficient allocation of resources.• Monopoly and monopolistic competition are likely ⇒ inefficient allocation of resources.• Under oligopoly, almost anything can happen, ⇒ impossible to generalize about its vices or virtues. A3 - 30
31. 31. TABLE 5: Attributes of the Four Market Forms Copyright© 2006 South-Western/Thomson Learning. All rights A3 - 31 reserved.
32. 32. Perfect Competition Markets By Mrs. N. Jayaprada 32 A3 - 32
33. 33. Introduction• The concept of competition is used in two ways in economics. ¤ Competition as a process is a rivalry among firms. ¤ Competition as the perfectly competitive market structure. ¤ A perfectly competitive market is one in which economic forces operate unimpeded 33 A3 - 33
34. 34. A Perfectly Competitive Market• A perfectly competitive market must meet the  The number of sellers and buyers is large. following requirements:  There are no barriers to entry and exit.  The firms’ products are identical or standardised.  Both buyers and sellers are price takers.  Each buyer and seller operates under conditions of certainty.  There is complete information.  Firms are profit maximizers.  Each firm takes its independent action.  Perfect mobility of factors of production A3 - 34
35. 35. The Competitive Industry and Firm typical firm can sell 1.The intersection of the market 3.The supply and the market demand all it wants at the curve… market price… Price Market Price Firmper unit per unit S 35 35 Demand Curve D Facing the Firm Units of output Units of output 2.determine the 4.so it faces a equilibrium market horizontal demand price curve 35 A3 - 35
36. 36. Goals and Constraints of the Competitive Firm• Perfectly competitive firm faces a cost constraint like any other firm• Cost of producing any given level of output depends on ¤ Firm’s production technology ¤ Prices it must pay for its inputs 36 A3 - 36
37. 37. Costs Relevant to a FirmP=MR= AR Output Total cost Marginal Average Total Profit Cost Total Cost Revenue TR-TC 0 40.00 - - 0 -40.00 35.00 1 68.00 28.00 68.00 35.00 -33.00 35.00 2 88.00 20.00 44.00 70.00 -18.00 35.00 3 104.00 16.00 34.67 105.00 1.00 35.00 4 118.00 14.00 29.50 140.00 22.00 35.00 5 130.00 12.00 26.00 175.00 45.00 35.00 6 147.00 17.00 24.50 210.00 63.00 35.00 7 169.00 22.00 24.14 245.00 76.00 35.00 8 199.00 30.00 24.88 280.00 81.00 35.00 9 239.00 40.00 26.56 315.00 76.00 35.00 10 293.00 54.00 29.30 350.00 57.00 A3 - 37
38. 38. Profit Determination Using Total Cost and Revenue Curves TC TR 385 Loss 350Total cost, revenue 315 Maximum profit =81 Profit 280 245 210 130 175 140 105 Profit =45 70 35 Loss 0 1 2 3 4 5 6 7 8 9 Quantity A3 - 38
39. 39. Marginal Cost, Marginal Revenue, and Price MC CostsPrice = MR Quantity Marginal Produced Cost 35.00 0 60 28.00 35.00 1 50 20.00 35.00 2 16.00 35.00 3 40 A C 14.00 P = AR = MR 35.00 4 B 12.00 30 A 35.00 5 17.00 35.00 6 22.00 20 35.00 7 30.00 35.00 8 10 40.00 35.00 9 54.00 0 35.00 10 68.00 1 2 3 4 5 6 7 8 9 10 Quantity A3 - 39
40. 40. Short run Equilibrium• Depending upon the positions of the short run cost curves, in short run, individual firm can make• Super normal profits• Normal profits• Losses 40 A3 - 40
41. 41. Determining Profits GraphicallyPrice MC Price MC Price MC 65 65 65 60 60 60 55 55 55 50 50 50 ATC 45 45 ATC 45 40 D A P = MR=AR40 40 Loss P=MR=AR 35 35 35 30 Profit 30 P = MR=AR 30 B ATC 25 C 25 25 20 E 20 20 15 15 15 10 10 10 5 5 5 0 1 2 3 4 5 6 7 8 910 12 0 1 2 3 4 5 6 7 8 910 12 0 1 2 3 4 5 6 7 8 910 12 Quantity Quantity Quantity(a) Super Profit case (b) Normal profit case (c) Loss case A3 - 41
42. 42. Determining Profit and Loss From a Graph• Find output where MC = MR. ¤ The intersection of MC = MR (P) determines the quantity the firm will produce if it wishes to maximize profits.  Find profit per unit where MC = MR . Drop a line down from where MC equals MR, and then to the ATC curve. This is the profit per unit. Extend a line back to the vertical axis to identify total profit. A3 - 42
43. 43. Determining Profit and Loss From a Graph• The firm makes a super profit when the ATC curve is below the MR curve.• The firm makes a normal profit when the ATC curve is equal to the MR curve.• The firm incurs a loss when the ATC curve is above the MR curve. A3 - 43
44. 44. Special case: Exit / Shutdown• The shutdown point Pointpoint at which the is the firm will be better off it shuts down than it will if it stays in business.• If total revenue is more than total variable cost, the firm’s best strategy is to temporarily produce at a loss.• It is taking less of a loss than it would by shutting down. Condition I – Price < AVC – Shut down Condition II – Price >= AVC – Continue A3 - 44
45. 45. The Shutdown Decision MCPrice 60 50 ATC 40 Loss 30 P = MR=AR AVC 20 A 10 0 2 6 4 8 Quantity A3 - 45
46. 46. Long-Run Competitive Equilibrium• Profits and losses are inconsistent with long-run equilibrium. ¤ Profits create incentives for new firms to enter, output will increase, and the price will fall until zero profits are made. ¤ The existence of losses will cause firms to leave the industry. ¤ In the long-run equilibrium of a competitive industry, all firms make normal profits. A3 - 46
47. 47. Long-Run Competitive Equilibrium MCPrice 60 P=MR=AR=SAC=SMC=LAC 50 SRATC LRATC 40 30 P = MR=AR 20 10 0 2 4 6 8 Quantity A3 - 47
48. 48. Price Determination in a Perfectly Competitive Industry• In the short run, the price does more of the adjusting.• In the long run, more of the adjustment is done by quantity. A3 - 48
49. 49. Price Determination in a Perfectly Competitive Industry Price Determination in Market Period (very short run) s • Supply of the D’ D commodity is fixed asPrice of Good P’ E’ inputs are fixed in D” P E supply. X P” E” D’ • Demand changes Price D and Equilibrium points D” also change accordingly. Quantity of Good X A3 - 49
50. 50. Price Determination in a Perfectly Competitive Industry Price Determination in short run • Supply of the D’ s commodity changes asPrice of Good D variable factors can be P’ E’ changed but scale of X D” plant is not possible. P E D’ P” E” • Demand changes Price D s D” and Equilibrium points also change Quantity of Good X accordingly. A3 - 50
51. 51. Price Determination in a Perfectly Competitive Industry Price Determination in Long Run • Supply of the D commodity fully LPPrice of Good D’ S adjusted to meet the P’ E’ changes in the industry X P E as scale of plant is E” possible. D D’ • Supply changes Price and Equilibrium points Quantity of Good X also change accordingly. A3 - 51