2. Introduction to pricing concept.
• Pricing is an important function of all enterprises.
• Since every enterprise is engaged in production of some goods or
services, incurring some expenditure to sell in the market, it must
set a price for its products.
• There is never a unique price. Instead there are multiple prices.
• While selecting the price for any product, the answer of following
questions should be given:
Price of what?
Price to whom?
Price where?
Price when?
3. • Unless a good is properly defined, one can’t talk of its prices.
Ex: Maruti Car (Multiple prices)
• Price is different for wholesalers and commission agents, to
retailers and to customers.
• Secondly, price of a good also depends on the place where it is
received; for there is a transport cost.
• Thus, it can be concluded that the case of multiple price is more
serious in case of items like cars, refrigerators, furniture, bricks,
etc. and it is of a little significance for items like shaving blades,
soaps, tooth pastes, creams and stationery.
4. Price determinants
• The price of a product is determined by the demand for and the
supply of that product.
• The role of these two determinants are like that of a pair of
scissors in cutting cloth.
Price Demand Supply
5 100 200
4 120 180
3 150 150
2 200 110
1 300 50
11. Change in demand and supply-
opposite direction
INCREASE IN ‘D’ AND DECREASE IN ‘S’
12. Change in demand and supply-
opposite direction
DECREASE IN ‘D’ AND INCREASE IN ‘S’
13. Conclusion.
• In most countries today, prices of many goods and services are
subject to government interventions of many various kinds.
• These include direct interventions such as price setting/ pegging,
price ceilings and price floors, and direct controls, such as taxes
and subsidies. Through there measures, government exercise
influence on product prices.
• Taking into account all the factors discussed above, we have the
following price function.
Px = f (Dx, Sx, Gx)
Px = price of good x
Dx = demand for good x
Sx = supply of good x
Gx = govt. intervention in good x
14. Pricing under monopoly market.
• Introduction:
• In today’s world, we can find out many situations in the
market. Monopoly is one of them.
• Definition: In general, we can say that a monopoly means a
one handed market.
• In economic terminology, monopoly means if in the market
there are number of buyers or consumers but only one
supplier.
• When there is only one buyer, the monopolist market
becomes a bi-lateral monopoly market.
15. Features of monopoly market.
Single seller of the product.
In this type of market, only the firm produces the goods
and supply such goods.
Restriction to entry.
In this market, there are strong barriers for making the
entry of any new product such as economical barrier, legal
barrier, etc.
No close substitution.
The monopolist market provides the goods which generally
have no substitutes. Ex: Indian Railway.
17. • Here M.C. = Marginal cost
M.R. = Marginal revenue.
A.C. = Average cost
A.R. = Average revenue.
In the above diagram we can see that the firm is
maximizing the profit. In the above diagram, P is the
equilibrium and hence at P point, the M.R. and M.C. will
become equal.
i.e. in monopolistic market in short run we can say
that M.R.=M.C.
Here OMRS is total revenue of the firm and OMTS
is total cost for the firm.The average curve includes
normal profits and hence RSTC is nothing but a
supernormal profit for the firm
18. LOSS MINIMIZATION
Here all the persons may arise a question
that can a monopolists incur losses? The
answer is yes. At least it is possible in a
short run. Since in short run if the demand is
too small, then the A.R. is smaller than the
A.C., which can be seen from the diagram
20. SOURCES OF MONOPOLY
POWER
• Immobilities of factors of production.
• Ignorance of possible competitors.
• Indivisibility.
• A deliberate policy of excluding competitors.
21. Oligopoly.
• Oligopoly is a term having two words, Oligo & poly.
Oligo means a few and poly means sellers.
Oligopoly means a market where there are only a
few sellers.it is a monopoly of a few.
22. Features of oligopoly market.
1) Only a few sellers :-
It is one kind of imperfect
market. All producers are monopolist in a
smaller or greater degree and yet all of them
are in competition with others.
When all oligopoly firms are
more or less equal size, then it is known as full
oligopoly.
When one or two firms are
dominant and rest of them are small sized, it is
known as partial oligopoly.
23. (2) Interdependence :-
In this market as there are
only a few firms, each of the firms has a close
watch on the activities of its rivals.
(3) Non price competition :-
In this market, there are
few sellers. So the companies avoids price wars
and tries to provide better qualities goods,
after sales service, guarantees and warranties
etc. and try to win over the buyers.
24. (4) Group behavior :-
Avoid competition and try to
collectively maximize their profit.
(5) Entry :-
Entry in the market may be free or
closed, but one thing is certain that the entry
in this type of market is very difficult.
(6) Products :-
Products of various firms may be
substitutes or may be imperfact substitute.
25. (7) Kinked demand curve :-
The demand curve under all
other markets is linear and certain while here it is
kinked or cornered. This point is explained in the
following diagram.
27. It will be shown from the diagram that the
kinked demand curve GDK is made up of two
segments. Corresponding to lower is shown the
inelastic portion of demand curve. This is
because price reduction by a firm is followed
by its rivals, whereas price increase isn’t
followed by the rival firms.
28. In the above diagram OP shows the original price
when the quantity is OM. When the firm raises
the price from OP to OA,the other rival firms
don’t follow this price and sales reduced from OM
to OM1. The GD part shows the Elastic portion of
demand curve.
When the firms lower its price from OP to OB, at
that time rival firms also follow this price
reduction,there is only a marginal increase in sale
from OM to OM2. And that part shows inelastic
portion of demand curve.
29. (8) Price rigidity :-
Under oligopoly, price tend to be a sticky.
If any firm raises price to increase its profit, the
rival firms will not follow it with the result that the
former may find itself out of the market to the
benefit of the rival firms.
Hence no attempt will be made by any firm to raise
its price. It is in the sense that prices tend to be
rigid under oligopoly condition.
