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# MICRO ECONOMICS

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### MICRO ECONOMICS

1. 1. Project Submitted On“Micro Economic” By Sagar Vishwa (BBA 1st Year) 106/10 civil lines,Ajmer 305001Website: www.dezyneecole.com CONTENTS 1
2. 2. CHAPTER PAGES1. Introduction of Monopoly Market ______________ 32. Monopoly Price Determination ________________ 33. Assumptions_______________________________34. Price and Output Determination _______________45. Short-run Monopoly Equilibrium_______________46. Marginal Revenue-Marginal Cost Approach______57. Long—run Equilibrium______________________58. Introduction Of Oligopoly Market______________69. Price Determination Under Oligopoly___________610. The Sweezy Method of Kinked Demand Curve (Rigid Price)_____________________________711. Assumption_______________________________712. The Modal________________________________813. Changes in Costs___________________________914. Changes in Demand________________________1015. Conclusion_______________________________10 2
3. 3. INTRODUCTION OF MONOPOLY MARKETMonopoly is the form of market organization in whichthere is a single firm selling a commodity for which thereare no close substitutes. Monopoly Price DeterminationTwo types of pricing:  Short-run.  Long-run. Assumptions There are no close substitutes for the product. There is one seller or producer of a homogenous product. The monopolist is a rational being who aims of at maximum profit with the minimum of cost. There is no threat of entry of other firms. The monopoly price is uncontrolled. There are no restrictions on the power of the monopolist. 3
4. 4. Price and Output Determination If the demand for his product is highly elastic. Hecan sell more by small production in price if on the otherhand the demand is less elastic the tendency will be to risethe price and profit more by selling price. 𝑬MC = MR in monopoly price = MC 𝑬−𝟏 𝑬AR = MR and MC = MR 𝑬−𝟏 𝑬Monopoly Price = MC 𝑬−𝟏 Short-Run Monopoly Equilibrium In the short-run the monopoly firm attainsequilibrium when its profits are maximised or losses areminimised. 4
5. 5. Marginal Revenue – Marginal Cost Approach In short-run monopolist can change the price andquantity for occurring the profit but price cannot be belowthe variable condition: IN SHORT-RUNSuper Normal Profit: P > SMC = MRSo the firm has a super normal profit.Normal Profit: P = SMC = MR In this case firm earn normal profit.Minimum Losses: P < SMC = MRIn this case when price is less than SMC = MR. So thefirm is suffering from minimum losses. Long-Run Equilibrium In monopoly perform has always earn super normalprofit.P > MR = LMC 5
6. 6. INTRODUCTION OF OLIGOPOLY MARKET Oligopoly is a market situation in which there are afew firms selling homogeneous or differentiated products.It is difficult is pinpoint the number of firms in theoligopoly market. There may be three, four of five firms.It is also known as competition among the few.Price Determination under Oligopoly We shall confine our study to the non-collusiveoligopoly model or Sweezy (the kinked demand curve)and to the collusive oligopoly models relating to cartelsand price leadership. 6
7. 7. The Sweezy Model of Kinked demand curve (Rigid Price) Sweezy presents the kinked demand curve analysis toexplain price rigid cities often observed in oligopolistmarket. Sweezy assumes that if the oligopolist firmlowers its price, its rivals will react by matching thatprice cut in order to losing their customers. Thus the firmlowering the price will not be able to increase its demandmuch. This portion of its demand curve is relativelyinelastic. Assumptions There are few firms in the oligopolist industry. The product produced by one firm in a close substitute for the other firms. The product is of the same quality. There is no product differentiation. There are no advertising expenditure.  Each seller’s attitude depends on the attitude of his rivals. 7
8. 8. THE MODAL Given this assumptions the price output relationshipin the oligopoly market is explained in figure whereKPD is the kinked demand curve and OP0 theprevailing price in the oligopoly market for the ORproduct of one seller. Starting from point P,corresponding to the current price OP0’ any increases inprice above it, will considerable reduce his sales, for hisrivals are not expected to follow his price increase. Thisis so because the KP portion of the kinked demand curveis elastic and the corresponding portion KA of the MRcurve will not only reduce his total sales but also his totalrevenue and profit. 8
9. 9. Changes in Cost In oligopoly under the kinked demand curveanalysis, changes in costs within a certain range do notaffect prevailing price. In case the cost of productionrises the marginal cost curve will shift to the left of the oldcurve MC and MC2. So long as the higher MC curveintersects the MR curve within the gap upto point A, theprice situation will be rigid. However with the rise incosts the price is not likely to remain stable indefinitelyand if the MC curve rises above point A, it will intersectthe MC curve in the portion KA so that a lesser quantityis sold at a higher point. We may conclude that there may be price stabilityunder oligopoly even when costs change so long as theMC curve cuts the MR curves in its discontinuousportion. However, chances of the existence of price-rigidity are greater where there is a reduction in coststhen there is a rise in costs. 9
10. 10. Changes in DemandWe now explain price rigidity where there is a change indemand with the help of figure D2 is the original demandcurve MR is its corresponding marginal revenue curveand MC is the marginal cost curve.This case can be reversed to show increase in demand bytaking D1 and MR1 as the original demand andmarginal revenue curves and D2 and MR2 as the higher4demand and marginal revenue curves respectively. Theprice OP is maintained but the output rises from OQ1 toOQ. So long as the MC curve continuous to intersect theMR curves in the discontinuous portion, there will beprice rigidity. CONCLUSIONThe whole analysis of the kinked demand curve point outthat price rigidity in oligopolistic market is likely toprevail if there is a price reduction move on the part of allsellers changes in costs and demand also lead to pricestability under normal condition so long as the MC curveintersects the MR curve in its discontinuous portion. Butprice increase rather than price rigidity may be found inresponse to rising cost or increased demand. 10