Pricing and output decision

1. PRICING & OUTPUT
DECISION
- Market Structure

2. Chapter Organization
• Introduction to Market Structure
• Perfect Competition
• Monopoly
• Monopolistic Competition
• Oligopoly

3. Market Structure
Determinants of market structure
• Freedom of entry and exit
• Nature of the product-
homogeneous, differentiated
• Control over supply/output
• Control over price
• Barriers to entry

4. Classification of market based
on nature of competition
MARKET
Perfect competition Imperfect Competition
Pure Perfect Monopoly Oligopoly Monopolistic

5. Perfect Competition
Assumptions
• Large number of Buyers & Sellers.
• Homogeneous product.
• Free entry & exist to industry.
• No govt. regulation.
• Price takers
• Perfect Knowledge of market conditions.
• Perfect mobility of factors of production.

6. • A perfectly competitive market is where
agents in the market (buyer&seller) are
price taker.
• Price taking behaviors: agents believe
that the market price is given and their
actions do not influence the market
price.
• Examples of Perfect Competition
- Financial markets - (stock exchange,
currency market), agriculture

7. FIRM-PRICE TAKER

8. Equilibrium of firm in short run
(A) TR and TC approach TC
TR
C
R
XA
X
XB

9. (B) MR and MC approach
MC
P=AR=MR
X
P
P0
0
e
Xe

10. Profit Maximization for a Perfectly
Competitive Firm
• All firms maximization for a Perfectly
Competitive Firm
MR = MC
•Since the perfectly competitive firm is a
price taker, marginal revenue equals price.
MR = P
•Therefore, profits will be maximized where
MR (= P) = MC or P = MC

11. Profit Maximization
All firms can maximize profits (or minimize
losses) by comparing marginal revenue (MR)
with marginal cost (MC)
• If MR > MC, profits are increasing
• If MR < MC, profits are decreasing
• Therefore, profits must be maximized where
MR=MC

12. • Since the perfectly competitive
firm is price taker, marginal
revenue equals price.
MR= P
• Therefore, profits will be
maximized where
MR (=P) = MC or P = MC

13. Is the firm making a profit?
For a price taker, price is also equal to
the average revenue and we need to
compare average total cost with price in
order to tell whether the firm is making
a profit.
• If P > ATC , the firm is making a profit
that is , it is selling its output at mere
than its cost.

14. •If P < ATC, the firm is losing money
MC
ATC
Loss
D
C
P=AR = MR
0
Quantity
E
F

15. •If P > ATC, the firm is having super normal profits
MC
ATC
Super Normal Profit
E P=AR = MR
0
Quantity
P0
A B
Xe

16. •If P = ATC, the firm is having normal profits.
MC ATC
C
P=AR = MR
0
Quantity
B

17. Shut down point

18. What if the Firm is Losing
Money?
• If a firm is losing money, it has to decide whether
to operate at a loss or shut down.
• If a firm shuts down, its loss will be equal to the
amount of its total fixed costs.
• But, if a firm can cover its variable costs, it should
continue to operate even though it’s losing money.

19. The Shut-Down Condition
•If P < AVCmin , the firm should shut down.
Why? Because it’s not covering its variable costs.
•If P > AVCmin , the firm should continue to
operate at a loss.
Why? Because it will cover its variable costs
•The minimum of average variable cost is called
the shutdown price.

20. Short run equilibrium of industry

21. Long Run Equilibrium - Firm

22. Long Run Equilibrium- Industry