Market Structurre

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Market Structurre

  1. 1. Market Analysis
  2. 2. The Degree of Competition  Classifying markets  number of firms  freedom of entry to industry  nature of product  nature of demand curve  The four market structures  perfect competition  monopoly  monopolistic competition  oligopoly
  3. 3. Features of the four market structures
  4. 4. Features of the four market structures
  5. 5. Features of the four market structures
  6. 6. Features of the four market structures
  7. 7. Features of the four market structures
  8. 8. Features of the four market structures
  9. 9. The Degree of Competition  Classifying markets  number of firms  freedom of entry to industry  nature of product  nature of demand curve  The four market structures  perfect competition  monopoly  monopolistic competition  oligopoly
  10. 10. Perfect Competition  Assumptions  firms are price takers  freedom of entry  identical products  perfect knowledge  Short-run equilibrium of the firm  price, output and profit
  11. 11. O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) S D Pe MC AR D = AR = MR Qe AC AC Short-run equilibrium of industry and firm under perfect competition
  12. 12. Qe P1 D1 = AR1 = MR1 AR1 O O (a) Industry P £ Q (millions) S D (b) Firm MC AC AC Q (thousands) Loss minimising under perfect competition
  13. 13. Perfect Competition  Assumptions  firms are price takers  freedom of entry  identical products  perfect knowledge  Short-run equilibrium of the firm  price, output and profit  The short-run supply curve of the firm
  14. 14. O O (a) Industry P £ P1 Q (millions) S D1 (b) Firm D1 = MR1 MC P2 D2 = MR2 D2 P3 D3 = MR3 D3 Q (thousands) Deriving the short-run supply curve a b c = S
  15. 15. Perfect Competition  Long-run equilibrium of the firm  all supernormal profits competed away  LRAC = AC = MC = MR = AR
  16. 16. O O (a) Industry P £ Q (millions) S1 D (b) Firm LRAC PL P1 QL Se AR1 D1 ARL DL Q (thousands) Long-run equilibrium under perfect competition New firms enterSupernormal profits Profits return to normal
  17. 17. £ QO (SR)AC (SR)MC LRAC AR = MR DL LRAC = (SR)AC = (SR)MC = MR = AR Long-run equilibrium of the firm under perfect competition
  18. 18. Perfect Competition Benefits of perfect competition  price equals marginal cost  prices kept low  firms must be efficient to survive
  19. 19.  In a perfectly competitive market supply and demand functions are  Qs = 1000P + 500  Qd = 5000 – 500P  If variable cost function of a firm is TVC = 103Q – 0.5Q2 1. Profit maximizing output for the firm 2. Economic profit?
  20. 20. XYZ Ltd., operating in a perfectly competitive market, sells a stationery item at Rs.10 per unit. The cost function is given as TC = 4,000 + 4Q + 0.02Q2 1.The profit maximizing output for the firm?
  21. 21. Softy Cereals Inc. (SCI) produces and markets Tasties, a popular ready-to-eat breakfast cereal. The demand and supply functions of Tasties are as follows:  QD = 150– 3P  QS = 50 +10P.  If excise tax of Rs.3 is imposed on Tasties, what is the proportion of tax that will be borne by the consumers ?
  22. 22.  Demand and supply functions for a product are:  Qd = 10,000 – 4P  Qs = 2,000 + 6P  If the government imposes a sales tax of Rs.100 per unit, what will be the new equilibrium price?
  23. 23. Monopoly  Defining monopoly  Barriers to entry  economies of scale  economies of scope  product differentiation and brand loyalty  lower costs for an established firm  ownership/control of key factors  ownership/control over outlets  legal protection  mergers and takeovers  aggressive tactics
  24. 24. Monopoly  The monopolist’s demand curve  downward sloping  MR below AR  Equilibrium price and output  Equilibrium output, where MC = MR
  25. 25. Profit maximising under monopoly MR £ QO MC Qm
  26. 26. Monopoly  The monopolist’s demand curve  downward sloping  MR below AR  Equilibrium price and output  Equilibrium output, where MC = MR  Equilibrium price, found from demand curve
  27. 27. £ QO MC AC Qm MR AR AC Profit maximising under monopoly AR
  28. 28. Monopoly  The monopolist’s demand curve  downward sloping  MR below AR  Equilibrium price and output  Equilibrium output, where MC = MR  Equilibrium price, found from demand curve  Profit  Measuring profit
  29. 29. £ QO MC AC Qm MR AR AC Profit maximising under monopoly AR Total profit
  30. 30. Monopoly  The monopolist’s demand curve  downward sloping  MR below AR  Equilibrium price and output  Equilibrium output, where MC = MR  Equilibrium price, found from demand curve  Profit  Measuring profit
  31. 31. Monopoly  Disadvantages of monopoly  high prices / low output: short run
  32. 32. AR = D MC MR £ QO Q1 P1 Monopoly Equilibrium of industry under perfect competition and monopoly: with the same MC curve
  33. 33. £ QO MC ( = supply under perfect competition) Q1 MR P1 P2 Q2 AR = D Comparison with Perfect competition Equilibrium of industry under perfect competition and monopoly: with the same MC curve
  34. 34. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run
  35. 35. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate
  36. 36. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate
  37. 37. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate  Advantages of monopoly
  38. 38. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate  Advantages of monopoly  economies of scale
  39. 39. £ QO Q1 MR P1 MCmonopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves
  40. 40. £ QO MC ( = supply)perfect competition Q1 MR P1 P2 Q2 MCmonopoly AR = D x Q3 P3 Equilibrium of industry under perfect competition and monopoly: with different MC curves
  41. 41. Monopoly  Disadvantages of monopoly  high prices / low output: short run  high prices / low output: long run  lack of incentive to innovate  Advantages of monopoly  economies of scale  profits can be used for investment
  42. 42.  Demand functions of a monopolist in two effectively segmented markets are:  Qa = 1,000 – 50Pa  Qb = 800 – 25Pb  Total cost function of the monopolist is TC = 500 + 10Q.  If the monopolist does not practice price discrimination, what is the sales maximizing price ?
  43. 43. Price Discrimination  A firm sells in two markets and has constant marginal costs of production equal to $2 per unit. The demand and demand and marginal revenue equations for the two markets are as follows:   Market 1 Market 2   P1 = 14 – 2Q1 P2 = 10 – Q2 MR1 = 14 – 4Q1 MR2 = 10 – 2Q2   Using third-degree price discrimination, what are the profit- maximizing prices and quantities in each market? Show that greater profits result from price discrimination than would be obtained if a uniform price were used.

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