1. Market Analysis

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. Features of the four market structures

4. Features of the four market structures

5. Features of the four market structures

6. Features of the four market structures

7. Features of the four market structures

8. Features of the four market structures

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. 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. 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. 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. 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. 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. Perfect Competition
 Long-run equilibrium of the firm
 all supernormal profits competed away
 LRAC = AC = MC = MR = AR

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. £
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. Perfect Competition Benefits of perfect competition
 price equals marginal cost
 prices kept low
 firms must be efficient to survive

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. 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. 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.  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. 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. Monopoly
 The monopolist’s demand curve
 downward sloping
 MR below AR
 Equilibrium price and output
 Equilibrium output, where MC = MR

25. Profit maximising under monopoly
MR
£
QO
MC
Qm

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. £
QO
MC
AC
Qm
MR
AR
AC
Profit maximising under monopoly
AR

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. £
QO
MC
AC
Qm
MR
AR
AC
Profit maximising under monopoly
AR
Total profit

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. Monopoly
 Disadvantages of monopoly
 high prices / low output: short run

32. AR = D
MC
MR
£
QO Q1
P1
Monopoly
Equilibrium of industry under perfect
competition and monopoly: with the same MC
curve

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. Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run

35. Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
 lack of incentive to innovate

36. Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
 lack of incentive to innovate

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. 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. £
QO Q1
MR
P1
MCmonopoly
AR = D
Equilibrium of industry under perfect
competition and monopoly: with different MC
curves

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. 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.  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. 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.