- A market is defined as the interaction between buyers and sellers of a product where the price tends to be uniform. Market structure depends on the number of firms, nature of products, barriers to entry, and degree of price control. - Under perfect competition there are many small firms, homogeneous products, free entry and exit, and no single firm can influence price. Equilibrium occurs where marginal cost equals price. - Monopoly is characterized by a single firm, no close substitutes, and high barriers to entry. The monopolist's equilibrium occurs where marginal revenue equals marginal cost and price is above marginal cost.

1. Market Structure

2. What is a Market

The determination of Price and Output of
various products depends upon the type of
market structure in which the goods are sold and
produced.
 A Market is a whole of a region where buyer
and seller interact with each other and price of
the same good tends to be equity.
 Essentials of a Market
- Commodity which is dealt
- Existence of Buyer and seller
- a Place
- Communication between buyer and seller
that only

3. Classification of Market forms
 Market structure are classified on:
1) Number of firms producing a product
2) The nature of product produced by the firm
3) The ease at which the new firms can be a part of
the existing Industry.
4) Degree of control over price.

4. Classification of Market forms
Market
Structure
No of
Firms
a) Perfect
Large
Competition
Nature of
Product
Control
over
price
Entry
ep
Condition
Homogeneou None
s
Free entry, Infinite
exit
b) Imperfect
Competition
i)
Monopolistic
Competition
Large
Differentiated Some
(close
substitute)
Barrier –
Large
product
differentiat
ion
ii) Oligopoly
Few
Firms
Homogeneou Some
s/
Differentiated
Barriers –
firms
dominatin
g
Small
Unique
(No
Barriers
Very
Small
iii) Monopoly One
Very
Large

5. Perfect Competition
 Demand curve for the single firm will be infinite (perfectly
elastic)
The maximum output an individual firm can produce is small.
Products are standardized commodities
 No single firm can influence the price of the product
(price taker)
 Many small sellers


More sellers, more substitutes the consumer has
Market power is none
 Homogenous product

the substitutes are "perfect substitutes."
 Sufficient knowledge

When customers know the prices offered by other
sellers, they will be better able to switch – increasing
elasticity further.

6. Perfect Competition
 Free entry

companies may even enter the market to provide still
more substitutes
 Long-run economic profit (above normal) is none
 No Government intervention
 Example:
Agricultural products, Precious metals, Financial
instruments,
ep = ∞
global petroleum industry
D
P
Q

7. Imperfect Competition
 Individual firm exercise control over the price
 Can be caused by
- Fewness of firms
- Product differentiation
 Sub- categories
 Monopolistic Competition
 Pure Oligopoly
 Differentiated Oligopoly

8. i) Monopoly
 Existence of a single producer
 Has no close substitutes
P
 Large control over prices
P’
ep < 1
 Market power : High
 Long run economic profit : High
Q Q’
 Kind of business
Govt sanctioned regulated monopolies
Public utilities, Telephones, Electricity
 The expansion and contraction of output will
have a
effect on the prices of the product

9. i) Monopolistic Competition
P
P’
 Large no of Firms
ep > 1
D
Q
 Relatively easy barrier
 Product differentiation which are close




substitutes
Start up capital is low
Market power – low to high
Long run economic profit : none
Kind of Business
Small business- retail and services
Boutiques, shoe store, restaurants,
laundries
Q’

10. ii) Oligopoly
 Competition among few large firms producing


Homogenous – Pure Oligopoly
Products differentiation – Differentiated Oligopoly
 Fewness of firms / size of the firm ensures that each of them






have some control over the price
Market entry: Difficult
Market Power : Low to High
Long run economic profit : Low to high
Pricing behaviour is of mutual interdependence
(Each seller is setting its price on the basis of reaction from the
competitor)
Demand curve slopes downwards and ep is small
( Relatively Inelastic)
Kind of firms:
 Manufacturing sector-, oil refineries, tobacco, steel
automobile, soft drinks

11. AR and MR under
Perfect competition





Demand curve is perfectly elastic
Price is beyond the control of the firm
AR remains constant
If price or AR remains the same , then MR = AR
As with addition of one more unit, price does not fall
No of
Price
Units Q (AR)
TR
P*Q
MR
1
16
16
16
2
16
32
16
3
16
48
16
4
16
64
16
5
16
80
16

12. AR and MR under
Perfect competition
 The price or average remain the same at OP level
 TR slopes upwards
TR
AR = MR
P
O

13. AR and MR under
Perfect competition
 Demand curve is





downward sloping
Firm increases
production and sale of
its product, price starts
falling
AR starts falling
MR falls more rapidly
MR is +ve as long as
TR is increasing
MR is -ve when TR
starts declining
No of Price TR
Units (AR) P*Q
Q
MR
1
16
16
16
2
15
30
14
3
14
42
12
4
13
52
10
5
12
60
8
6
11
66
6
7
10
70
4
8
9
72
2

14. AR and MR under
Perfect competition
P
AR
O
Q
M
M
MR
TR

15. AR and MR under Imperfect
competition
 In all forms of imperfect competition
 AR curve of a firm slopes downwards
i.e If firms lowers the price of the product, the
quantity demanded and sales would increase

MR is zero TR is maximum

16. Equilibrium of the
Firm and Industry
under Perfect
Competition

17. Meaning and Condition of Perfect
Competition

Large Number of Firms
- Individual firm exercises no control over the prices
- Output constitutes a very small fraction of total output
- Price taker and output adjuster

Homogenous Product
- Perfect substitutes
- Cross elasticity is Infinite

18. Meaning and Condition of Perfect
Competition

Perfect Information about the prevailing Price
- Buyer and seller are fully aware about the price in the market
- Buyer would shift if seller increase the price
- Seller are aware and will not charge less price.

Free entry and Exit
- If firms are making super normal profit in short run, in long run
new firms will enter and compete away the profits
- If firms are making losses in the short run, some of the existing
firm will leave the industry in the long run and the firms left will
make normal profit.

19. Equilibrium of the Firm Short Run
 In short run perfect competition we are assuming that







All firms are working under identical cost condition
Shapes of AR and MR curve are same
All firms are of equal efficiency
The MC= Price to attain
equilibrium output
F
At point F the firm can further
increase its profits as MR > MC
At point E, MC = MR
MC cuts MR from below
O
SMC
E
AR =-MR
M

20. How much profit does the firm
earn in the short run?
 Profit per unit of output = AR – AC
 It should produce at that level of output at which the additional
revenue received from the last unit is equal to the additional cost of
producing that unit.
 MC = MR
 It depends upon the average cost curve ( AC)
 Which determine whether the firm earns




Super normal profit
Normal profit
Losses
Shut down

21. a) Super Normal Profit
 Equilibrium output of OM
 Average Revenue = ME
 Average Cost = MF
SAC
 Profit per unit is EF
( AC- AR)
 Total profit is HFEP
 Super normal profit in short run
 As normal profits are included in
average cost
Super Normal Profit
SMC
E
P
AR = MR
H
F
O
M

22. b) Normal Profit
 When AC is tangent to AR and MR curve
SAC
i.e AR = AC
 Then firm makes normal profit
SMC
E
P
AR =-MR
H
O
M

23. c) Losses
 If the AR and MR curve lies below the AC curve
 Firm would be making a loss since AR < AC
SAC
 Loss is of PEFH
SMC
Losses
AVC
F
H
E
P
O
M
AR =-MR

24. Will the firm decide to
shut down?

Why do they not suspend production if they are making loss?

The firm cannot dispose of the fixed capital equipment in the short run
The firm has to incur losses equal to fixed cost
So if the firm shuts down it can avoid only variable cost



Therefore if the firm earn revenue which covers variable cost as well as
part of fixed cost, its quite rational for to be in business

Two instances in which it can operate

If AVC curve lies below the Price

If AVC = P

25. i) When AVC = Price
 If the AVC = Price
 The firm is able to recover its variable cost of OMEP
SAC
 No Fixed cost (PEFH) is recovered
SMC
 The firm should operate and bear
losses equal to its fixed cost
AVC
F
H
AR =-MR
P
E
O
M

26. ii) When AVC is below the Price
 The firm is able to recover its variable cost of OMBA
SAC
 And a part of Fixed cost of ABEP
SMC
 The firm should operate and bear
losses of PFEH
AVC
F
H
E
P
A
B
O
M
AR =-MR

27. d) Shut Down
 If the price falls below the AVC.
 Then it makes losses greater than total fixed cost
SAC
 It will be rational for the firm to close down
 As the firm is not able to recover even
SMC
AVC
its variable cost
F
H
AR =-MR
P
O
M

28. Long Run
 It is a period of time which is sufficient to allow firm to have a
change in all the factors of production.
 Long run the market price will settle at the point where the firms
earn Normal profit.
 Price that enable firm to earn above normal profit would induce
other firms to enter the market
 Whereas prices below the normal level would cause firms to leave
the market.
 Price = Marginal Cost = Average cost

29. Long Run
 Price = Marginal Cost = Average cost
LMC
LAC
P
AR = MR
OUTPUT

30.  Long run equilibrium is established at the minimum point of the long
run average cost curve.
 i.e working a the minimum efficient scale.
 With utmost technical efficiency and the resources are used
efficiently.

31. Why to competitors stay in
business if they make Zero
economic profit
 The producers are earning fair rate of return in the long run
 Earlier the firm enters a market, the better the chance of earning
above normal profit.
 Firms can innovate to earn positive economic profit
 Or to survive firms must find ways to produce at the lowest possible
cost or atleast at cost levels below those of their competitors.

32. Equilibrium of the
Firm and Industry
under Monopoly

33. Meaning
 Monopoly is said to exist when one firm is the sole producer or
seller of a product which has no close substitutes.
- One single producer
- No close substitutes should be available in the market.
- Strong barriers to the entry into the industry.
That is there is NO COMPETITION.

34. Sources / Reasons of
Monopoly Power
1. Patent / Copyright
For a certain period of time, firm can attain a patent right on the new
product from the government.
2. Control over an essential Raw – material.
3. Grant of Franchise by the Government
A firm is granted the exclusive legal rights by the Government to
produce a given product. Government keep with itself the right to
regulate its price and quality.

35. Sources / Reasons of
Monopoly Power
4. Advertising and Brand Loyalties of the established Firms.
Strong loyalties to the brands of the established firms . And their
heavy advertising campaigns, to enhance the market power of the
producer and prevent the entry of potential competitors.
5. Economies of Scale: Natural Monopoly
When significant economies of scale are present, the AC of production
goes on falling over a wide range of output, which (output) meets the
demand of entire market.
Natural monopoly are regulated by the Government so that the Firm
does not charge a high prices and exploit the consumers.

36. Nature of MR and AR Curve
 Both AR and MR curve are Downward sloping
 MR curve lies below the AR curve. As when the monopolist sells
more, the price of the product falls and the MR would be less than
the price.
 Monopolist has to choose a price –quantity combination which
yields him maximum possible profits.
 Monopolist ability to set its price is limited by the demand curve of
its product i.e Price elasticity of demand for its product.

37. Nature of MR and AR Curve
P
AR
O
Q
M
MR

38. Monopoly Equilibrium and
Price Elasticity of Demand
 Monopolist ability to set price is limited by the demand curve for its
product i.e the price elasticity of demand.
 The price elasticity of demand indicates how much more or less
people are willing to buy in relation to price decrease or increase.
 Monopolist will never be in an equilibrium at a point on demand
curve where price elasticity of demand is less than one.
 As when price elasticity is less than one, marginal revenue is
negative.
 Monopoly equilibrium will always lie where price elasticity is greater
than one if marginal cost is positive.

39. Monopoly Equilibrium and
Price Elasticity of Demand
e >1
e=1
P
e<1
AR
O
M
MR
M
TR

40. Price – Output Equilibrium
under Monopoly
Short Run


Monopolist will go on producing as long as MR > MC
Profits will be maximum at which MR = MC

The price under perfect competition is equal to marginal cost
But price under monopoly is greater than marginal cost

In Monopoly equilibrium



MR = MC
P > MC

41. Price – Output Equilibrium
under Monopoly
Q P
TR
TC
AC
MC
MR
Remarks Profit or
Loss
0
200
0
100
-
-
-
1
200
200
250
250 150
200 MR > MC -50
2
180
360
350
175 100
160 MR > MC +10
3
160
480
420
140 70
120 MR > MC +60
4
140
560
500
125 80
80
MR = MC +60
5
120
600
600
120 100
40
MR < MC 0
6
100
600
720
120 120
0
MR < MC _80
7
80
560
870
120 150
-40
MR < MC -20
-

42. Price / Output Equilibrium
a) Super Normal Profits

43. Price / Output Equilibrium
b) Losses

44. Long Run Equilibrium under
Monopoly
 In long run monopolist make adjustments to the plant size
 The monopolist would choose that plant size which is most
appropriate with particular level of demand.
 In the Long run the equilibrium would be at the level of output where
given MR cuts the long run MC curve
 The firm will operate where LAC is tangent to SAC
MR = LMC = SMC
 SAC = LAC
 P = > LAC
 As the price cannot fall below LAC, in long run the monopolist will
quit the industry if it is not even able to make normal profits.


45. Long Run Equilibrium under
Monopoly
SMC
LMC
P
H
G
LAC
SAC
F
AR
O
Q
MR

46. Difference
Perfect Competition
Monopoly
1. In equilibrium
P= MC
1. In equilibrium
P > MC
2.
2. In long run equilibrium
Average cost is still declining
In long run
MR / P= MC= minimum AC
3. In long run they make normal
profits
3. In long run they can also make
super normal profits
4. Price Discrimination is not there
4. Price Discrimination is there if
elasticity's of demand are different in
different market.
5. In equilibrium price and output are
determined by demand and supply curve
5. In equilibrium price is higher and
output smaller

47. Is there Price Discrimination
in Monopoly?
Yes

48. Meaning
 It refers to the practice of a seller selling the same product at different
prices.
 Sellers does this when it is possible and profitable.

i.e
“ Sales of technically similar products at prices which are not
proportional to Marginal cost”.

49. Types
 First Degree – Personal
When the monopolist is able to sell each separate unit of output at
different prices
 Second Degree - Local
When monopolist is able to charge separate prices for different blocks
or quantities of commodity from buyers.
 Third Degree - According to use or Trade
When the seller divides his buyers into two or more than two submarket depending upon the price elasticity of demand
( A manufacture who sells his product at a higher price at home and at
a lower price abroad)

50. When is Price Discrimination
Possible?
 If its not possible to transfer any unit of the product from one market to
another.
 It should not be possible for the buyer in the dearer market to transfer
themselves into the cheaper market to buy the product at lower price.





The nature of the commodity ( Surgeon or lawyer)
Long distance / Tariff Barrier (Distance increases the cost)
Legal Sanction ( Electricity supplied at different prices in
Residential / Commercial areas)
Ignorance of Buyers
Preferences of Buyers

51. Equilibrium Under Price
Discrimination
 Monopolist will charge different prices in different sub- markets.
 Which is on the basis of differences in price elasticity of demand.
 Monopolist can divide his total market into several sub – market.
 For example




Two market – Relatively Elastic and Relatively Inelastic
Higher price in relatively inelastic market, so profit margin high
Lower price relatively elastic market, so profit margin are low
So put together higher profits collectively by Price discrimination

52. Managerial Decision Making in
Monopoly
 Monopoly can earn economic profits in the short run or long run.
 It depends upon demand for its product
 It can earn higher profits by discriminating prices
 Dumping the products at lower rate in international market and
charging higher profits in domestic market can maximise profits.
 But the changes in economies of business ( customers, technology
and competition) can break down the a dominating company’s
monopolistic power.

53. Equilibrium of the Firm
and Industry under
Monopolistic Competition

54. Introduction
 The difference between the price and MR at equilibrium output is
regarded as the Degree of Imperfection
 The relative magnitudes of price and MR at equilibrium output help
us to distinguish between different degrees of Imperfection or
Monopoly power in various market structure.
 The product differentiation is a distinguishing feature of monopolistic
competition which makes it as a blending of competition and
Monopoly.,

55. Introduction
Thus as each Monopolist has a competitor which
produces a product not homogenous but differentiated
though closely related, it becomes a
Monopolistic Competition.

56. Overview of
Competitive Environment
Perfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly
Market Power
No
Yes, subject to Yes
Govt regulation
Yes
Mutual Interdependence
among competing Firms
No
No
No
Yes
Non- Price Competition
No
Optional
Yes
Yes
Easy Market entry or Exit
Yes
No
Yes, relatively
Easy
No,
relatively
Difficult

57. Features of
Monopolistic Competition
1. A large number of Firms:
Each firm having a small share of the market demand
There exist a stiff competition
Size of each firm is relatively small
2. Product Differentiation
3. Some influence over Price
A firm has to choose a price and output which maximises profits
4. Non Price Competition
Expenditure on Advertising and other selling cost

58. Non- Price Competition
The ability to differentiate their product in Imperfect competition with
the
variable other than price.








Advertising
Promotion
Location and distribution channels
Market segmentation
Loyalty program
Product extension / new product development
Special customer service
Product tie-ups

59. Shape of MR and AR curve
 Sine close substitutes are available in the market, the demand curve
for the product of an individual firm under monopolistic competition
is fairly Elastic.
 Both AR and MR curve are Downward sloping
 MR curve lies below the AR curve.
 Producer has to choose a price –quantity combination which yields
him maximum possible profits.

60. Nature of MR and AR Curve
P
M
AR
O
Q
MR

61. Short Run Equilibrium
1) Super Normal Profits

62. 2) Losses

63. Long Run Equilibrium
 If the firm earn supernormal or economic profits in the short run, it
will lead to entry of new firms in the long run.
 The cross elasticity of demand between the products of various
firms will increase.
 Which will cause a resultant shift in the demand curve to the left.
 Equilibrium will be at a point where AR becomes tangent to the AC
curve.
 The firm would be making normal profits in the long run, but its price
would be higher and output smaller than under Perfect
Competition.

64. Long Run Equilibrium

65. Equilibrium of the Firm
and Industry under
OLIGOPOLY

66. Introduction
 It is refereed to as “Competition among few firms”.
 Two kinds


Pure Oligopoly : Oligopoly without Product Differentiation
Differentiated Oligopoly: Oligopoly with Product Differentiation

67. Features / Characteristics
 Few Sellers
 Interdependence
Competitors are few, any change in price, output, product will have
a direct effect on competitors .
 Importance of Advertising and selling cost
Aggressive and defensive marketing strategies.
 Group Behaviour
Do the few firms cooperate with each other in promotion of common
interest or do they fight to promote individual interest.
 Constant shifting of the demand curve.
Competitors keep on changing the price with the change in price of the
firm.

68. Causes for the Oligopolies
 A large amount of Fixed Cost
 Barriers to Entry : Technological and Legal Barriers
 Product differentiation creates Market Power
 Takeovers / Mergers create oligopolies.
 Economies of Scale
Few firms can fulfil the demand of the product by producing at large
scale and thus lowering the average cost of production.
 Economies of Scope
 Production of multi-products leads to lower average cost

69. Causes for the Oligopolies
Are oligopolies due to Economies of scale or Mergers / Take-over?
 Both
 In some industries few firms dominate due to Economies of scale
 But in some its get dominated due to policy of mergers and
takeovers

70. Cooperative Vs
Non Cooperative Behaviour
 The behaviour of oligopolistic firm can be strategic in deciding about
their price and output policies.
 The strategic behaviour means that the oligopolistic firms must take
into account the effect of their price- output decision on their firms
and on the reaction they expect from other firms.
 Two types of strategies:


Compete with their rivals to promote their individual interests
Cooperate with them to promote mutual interest ( maximise profits)

71. Collusive Oligopoly :
Cooperative Model
 To avoid uncertainty of interdependence, price wars, cut throat
competition, firms enter into agreement regarding uniform priceoutput policy.
 The agreement can be formal (open) or tacit (secret)
 These agreements are called as Collusive agreements:


A)
B)
Cartels
Price leadership

72. A) CARTELS
 Firms jointly fix a price and output policy through agreements
 Now-a-days all types of formal or informal and tacit agreements are
made among oligopolisitic firms.
Cartel
Perfect Cartel
Market Sharing
Cartel
Non- Price
Competition
Output Quota

73. Perfect Cartels
When member firms agree to surrender completely their rights of price
and output determination to Central Administrative agency, so
as to secure maximum joint profits.
The total profits is distributed among the member firm already agreed
between them.
The output to be produced by each firm is decided by the central
agency in such a way that total cost of the total output is minimum.
The total cost will be minimum when firms in cartel produces such
output so that their marginal cost is equal.
Perfect Cartel is quite rare in the world
As both Price and output get decided by the central Agency

74. Market Sharing Cartels
 1) Non- Price Competition:





A uniform price is fixed and members are free to produce and
sell
the amount of output which will maximise their individual profits.
The firms agree not to sell at a price below the fixed price.
But they are free to vary the style of their product and advertising
expenditure.
If the members firms have identical cost then the price (monopoly
price) will ensure maximisation of joint profits
But when the cost differs firms the cartel price will be fixed by
bargaining between the firms.
But with cost differences such loose cartels are unstable.

75. Market Sharing Cartels
 2) Output Quota:




Agreement between firms regarding quota of output and sold by
each of them at the agreed price.
As the cost of firms are different , the quotas will be fixed and
market share differ
Which are decided through bargaining between the firms.
Which is based on
 Past – period sales
 Productive capacity
 Division of market share region wise

76. B) Price Leadership
 One firm sets the price and other follows it.
 The follower firm adopts the price of the leader, even though they
have to forgo from their profit maximising position.

Price leadership are illegal, so it is a result of informal and tacit
understanding.
 Types of Price Leadership
 Price
set by low- cost firm
 Price by dominant firm
 Barometric price

77. Difficulties of Price Leadership
 Success of Price leadership depends upon the correctness of his
estimates about the reactions of the followers. If its not correct then
it jeopardise his position in the market
 If the leader fixes a higher price than the price preferred by followers,
the followers can make hidden price cuts in order to increase their
share.
 Tendency on part of the followers to indulge in non- price competition
to increase sales

78. Pricing in a Oligopolistic Market
 In oligopoly there is a degree of price rigidity or stability.
 Price rigidity is been explained by Kinked Demand Curve
 As in oligopoly the products are differentiated, it is unlikely that when
the firm raises it price all customers would leave.
 As a result the demand curve is not perfectly elastic or inelastic.
 The kink is formed at the price because the segment of the demand
curve above the price is highly elastic and the segment of the demand
curve below the price is inelastic

79. Pricing in a Oligopolistic Market
 Kinked Demand Curve:
Each oligopolist believes that if he lowers the price below the
prevailing level, his competitor will follow him and will accordingly
lower their prices. Whereas if he raises the price, competition will not
follow his increase in the price.

Oligopolist will not gain a large share by
reducing its price, and will have reduction in sales
P
if it increase price. So there is Price Rigidity
d
K
 dK of the demand curve is relatively elastic
D
 KD is relatively inelastic
M

80. Equilibrium in a Oligopolistic
Market
 Oligopoloist will be maximising his profits at the current price level.
 MR curve is a discontinuous curve
 The length of the MR discontinuity depends upon the relative




elasticities of the demand curve (dK and KD)
Greater the difference in two elasticities, greater the length of the
discontinuity.
MR curve is drawn with a gap of BC
If the MC passes between this gap say point C it will be maximising
profit at the price of OP
Even if there is change in cost and MC1 shifts to MC2, equilibrium
output will remain unchanged

81. Equilibrium in a Oligopolistic
Market

82. Critical Appraisal of Kinked
Demand Curve Theory
 It does not explain how price has been determined.
 It does not apply to the oligopoly cases of prices of Price leadership
and price cartels which account for quite a large part of oligopolist
markets.