Business economics market structures


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Business economics market structures

  1. 1. Business Economics – Market Structures 23 rd Oct 2009 Sameer Gunjal
  2. 2. <ul><li>Perfect Competition </li></ul>
  3. 3. Assumptions <ul><li>Perfect competition is a market structure where no participant can influence the prices. </li></ul><ul><li>Some of the basic assumptions of this market structure are: </li></ul><ul><li>Large number of buyers and sellers present in the market and so no individual buyer or seller has the liberty to define the prices, thus making all the individual participants insignificant in the overall market place. </li></ul><ul><li>All the firms produce homogeneous product. All the firs produce similar products and offer similar services and he buyer cannot differentiate between any two product and the allied services available with the same. </li></ul><ul><li>No barrier for entry or exit in this type of market structure. </li></ul>
  4. 4. Demand Curve
  5. 5. Price & Output determination <ul><li>From the equilibrium curve of the market we can see that the market forces determine the price of the goods. </li></ul><ul><li>The output gets fixed and neither the entry of new customers nor the entry of new producers changes the picture. </li></ul><ul><li>The demand for the output of the competitive firms remains fixed at the price levels defined by the market. </li></ul><ul><li>Even if additional quantities are produced there are no buyers for the excess quantity. </li></ul>
  6. 6. Supply Side <ul><li>The supply curve shows the amount of output the firm will supply at different prices. In a competitive environment the supply side is more or less defined and the price levels are fixed. No firm in a competitive market place can continuously have above average profits. The movement of curves is further clarified in the figure below: </li></ul>
  7. 7. Profit Determination <ul><li>Economic Profit </li></ul><ul><li>Break Even </li></ul><ul><li>Possibility of Loss </li></ul><ul><li>Shut Down Point </li></ul>
  8. 8. Efficiency in competitive markets <ul><li>An efficient condition in the market would be termed when resources are allocated in ways allowing the maximum possible net benefit from their use. </li></ul><ul><li>This will include: </li></ul><ul><li>Efficient allocation of resources among the firms </li></ul><ul><li>Efficient distribution of goods produced between consumers </li></ul><ul><li>Efficient combinations of products. </li></ul>
  9. 9. Example <ul><li>Market demand equation for a perfectly competitive market is as given </li></ul><ul><li>Q D = 2000 – 100P </li></ul><ul><li>The market supply equation is </li></ul><ul><li>Qs=1200 + 150P </li></ul><ul><li>  </li></ul><ul><li>What does the demand equation say? </li></ul><ul><ul><li>Quantity demanded increases by 100 every 1 unit rise in the price </li></ul></ul><ul><ul><li>Quantity demanded decreases by 100 every 1 unit rise in the price </li></ul></ul><ul><ul><li>Quantity demanded remains fixed to 2000 every 1 unit rise in the price </li></ul></ul><ul><ul><li>None of the above </li></ul></ul><ul><li>  </li></ul><ul><li>What does the supply equation say? </li></ul><ul><ul><li>Quantity supplied increases by 150 every 1 unit rise in the price </li></ul></ul><ul><ul><li>Quantity supplied decreases by 150 every 1 unit rise in the price </li></ul></ul><ul><ul><li>Quantity supplied remains fixed to 1200 every 1 unit rise in the price </li></ul></ul><ul><ul><li>None of the above </li></ul></ul>
  10. 10. Example contd… <ul><li>  </li></ul><ul><li>What is the equilibrium price for the above scenario? </li></ul><ul><ul><li>3 </li></ul></ul><ul><ul><li>3.1 </li></ul></ul><ul><ul><li>3.2 </li></ul></ul><ul><ul><li>3.3 </li></ul></ul><ul><li>  </li></ul><ul><li>What is the equilibrium quantity for the above scenario? </li></ul><ul><ul><li>1660 </li></ul></ul><ul><ul><li>1680 </li></ul></ul><ul><ul><li>1700 </li></ul></ul><ul><ul><li>1720 </li></ul></ul>
  11. 11. <ul><li>MONOPOLY </li></ul>
  12. 12. Types of Markets
  13. 13. Imperfect competition <ul><li>A market is imperfectly competitive if some individual sellers have some degree of control over the price of the output. </li></ul><ul><li>Any market can be classified based on </li></ul><ul><ul><li>Number of sellers and buyers </li></ul></ul><ul><ul><li>Nature of the product being sold </li></ul></ul>
  14. 14. Source of market imperfections <ul><li>Barriers to entry </li></ul><ul><ul><li>Eg High capital requirements - metal refining </li></ul></ul><ul><li>Legal Restrictions </li></ul><ul><ul><li>Eg. Heavy govt license - Telecom </li></ul></ul><ul><li>High Cost Industry </li></ul><ul><ul><li>Eg. High Intangible investments – Qualcom (Patent based) </li></ul></ul><ul><li>Advertising and Product Differentiation </li></ul><ul><ul><li>Eg. Heavy advertising expenses - Coca Cola or Pepsi </li></ul></ul>
  15. 15. Revenues under a Monopoly <ul><li>The total Revenue Curve </li></ul><ul><li>AR and MR curves </li></ul>
  16. 16. Price and Output determination in a Monopoly
  17. 17. Comparison – Monopoly & Perfect Competition
  18. 18. Price Discrimination <ul><li>Price discrimination occurs when a monopolist charges different prices to different buyers. </li></ul><ul><li>Discrimination occurs due to </li></ul><ul><ul><li>consumers’ peculiarities or </li></ul></ul><ul><ul><li>the nature of the goods or </li></ul></ul><ul><ul><li>the distance and frontier barriers. </li></ul></ul><ul><li>Another type of market imperfection. </li></ul>
  19. 19. Assignment <ul><li>Select a company or sector which exhibits a Monopoly </li></ul><ul><li>Discuss your findings on the following points: </li></ul><ul><ul><li>Which company is in monopoly? </li></ul></ul><ul><ul><li>Which product is in monopoly? </li></ul></ul><ul><ul><li>Reason for the product monopoly </li></ul></ul><ul><ul><li>Strategies adopted for monopoly </li></ul></ul><ul><ul><li>Competitors and reasons for their failure to break monopoly. </li></ul></ul><ul><ul><li>Your comments or suggestions to the competitors to break through the monopoly. </li></ul></ul>
  20. 20. <ul><li>Monopolistic Competition </li></ul>
  21. 21. Assumptions <ul><li>Monopolistic competitive markets are similar in nature to the perfect competition except the product which is not homogeneous. </li></ul><ul><li>Large number of firms capturing small market share </li></ul><ul><li>Products are similar but not identical products </li></ul><ul><li>Relative freedom of entry and exit is present in this market structure </li></ul><ul><li>No opportunity or incentive exits for the rivals to team up in this market structure. </li></ul>
  22. 22. Product Differentiation <ul><li>Product Quality </li></ul><ul><li>Services </li></ul><ul><li>Location </li></ul><ul><li>Advertising and Packaging </li></ul>
  23. 23. Price and Output determination in a Monopolistic Competition
  24. 24. Effect of advertising & product development <ul><li>Product development remains the hallmark of a monopolistically competitive market structure. </li></ul><ul><li>Advertising and allied expenditures add on to the total cost of the product. </li></ul><ul><li>These push the ATC curve in the upward direction and reduce the economic profit generated in the equilibrium state. </li></ul><ul><li>Firms use advertising as another differentiator while they are in this type of market structure. </li></ul>
  25. 25. <ul><li>Oligopoly </li></ul>
  26. 26. Assumptions <ul><li>Oligopoly is a market structure in which a few sellers dominate the sales of a product and the entry of new sellers is either difficult or impossible. </li></ul><ul><li>The products can be similar or differentiated. In case the products are differentiated then it will be termed as a differentiated oligopoly. </li></ul><ul><li>Some firms in this market structure have a larger market share. </li></ul><ul><li>Firms in an oligopoly are aware of their interdependence and consider rival reactions while fixing prices. </li></ul>
  27. 27. Types of Oligopoly Oligopoly
  28. 28. Kinked Demand Curve
  29. 29. Kinked demand curve <ul><li>In an oligopoly the competitors don’t have price as a major differentiating factor. </li></ul><ul><li>Increase in price results in drastic fall of demand. </li></ul><ul><li>So the rise in profits due to a price increase would be overshadowed by the fall in quantity sold, so a competitor cannot increase the price. </li></ul><ul><li>Decrease in price drastically creates nominal increase in demand. </li></ul>
  30. 30. Impact of price leadership in oligopoly <ul><li>Price leadership is another form of collusive market. </li></ul><ul><li>In this form one sets the price and the other firs follow it as the price setting firm is at an advantage to the others. </li></ul><ul><li>The most common forms of price leadership are </li></ul><ul><ul><li>price leadership by a low cost firm, </li></ul></ul><ul><ul><li>price leadership by a dominant firm. </li></ul></ul>
  31. 31. <ul><li> Thank You </li></ul>