3. SYLLABUS – UNIT 05 - HNDA
Market Structures and pricing 08 hrs
5.1 Distinguish among four major categories of
market structures
5.2 Assumption of perfect competition and short – run
equilibrium of the firm
5.3 Explain short-run equilibrium of the industry and
the firm.
5.4 Assumption of monopoly and its demand and
revenue.
5.5 Explain the concept of price discrimination.
4. GROUP MEMBERS
T. Mithusha
K.Mathusika
R.Rajeevani
Srithar
Aslam
Sugirjan
Thushan
Mithushan
Krishneetha
T.supajini
5. Introduction to Market
The term market is derived from the latin word “marcatus”which means
merchandise or trade.
Market is a place where buyers and sellers meet together for the
exchange of title of goods.
It is therefore understood as those characteristic of a market that
influence the behavior and result of the firms working in that market
6. Things to be Considered
Number and size of sellers and buyers
Nature of the product
Condition of entry and exit
Transperency of information
Pricing
advertising
9. Perfect Competition
A purely competitive market with added feature that buyers and
sellers have complete and continuous knowledge of all bids and
offers in the market and mobility to take immediate action on this
basis of that knowledge
Features:
Free entry and exit to industry
Homogenous product – identical so no consumer preference
Large number of buyers and sellers – no individual seller can
influence price
Sellers are price takers – have to accept the market price
Perfect information available to buyers and sellers
10. Advantages of Perfect Competition
High degree of competition helps allocate resources to most efficient
use
Price = marginal costs
Normal profit made in the long run
Firms operate at maximum efficiency
Consumers benefit
Examples:
Financial markets – stock exchange, currency markets, bond
markets
Agriculture
11. Demand and Supply Curve in Perfect
Market
Demand Curve Supply Curve
Market supply
curve
12. Demand and Supply Curve in Perfect Firm
Demand Curve Supply Curve
D=AR=MR=P
S=MC
14. AR and MR in Perfect Firm
Price Quantit
y
TR AR MR
20 1 20 20
20 2 40 20 20
20 3 60 20 20
20 4 80 20 20
20 5 100 20 20
TR=P×Q
AR=TR/Q
MR=∆TR/ ∆Q
P=AR=MR
p
Q
20
1 2 3 4 5
15. Short run Equlibrium Point in Perfect
Market
Conditions,
At the where MC=MR, the firm attains equlibrium
It’s MC curve cut it’s MR curve from below.
In the short period the attains equlibrium,
1. Abnormal profit
2. Normal profit
3. loss
16. Abnormal Profit
The profit is measured by the difference in AC and AR and
competing the rectangle. (TR>TC) / (AR>AC)
E=Equlibrium In Firm
(MC=MR)
OP- Average revenue
OQ - productin quantity
OPEQ – total revenue
OP1 – average cost
OP1AQ – total cost
P1PEA – abnormal
profit
P1
P
=D
17. Normal profit
In short run, some firms may be making normal profits where total
revenue equals total cost. (Break- even output)
In the diagram below, At equilibrium ,the firm has same costs such that
the market price is equal to the average cost curve.
At the profit maximising level of output, the firm is making an normal
profits .
P
E – equlibrium in firm
(MC=MR)
OP – AR or AC
OQ1 – production
quanity
OPEQ1 – TR or TC
18. loss
The firm shown has high costs such that the market price is below the
average cost curve.
At the profit maximising level of output, the firm is making an economic
loss. (AR<AC) / (TR<TC)
E - E – equlibrium in firm
(MC=MR)
OP – AR
OQ – production quanity
OPEQ – TR
OP1 – AC
OP1AQ – TC
PP1AE - loss
P1
P
19. Equlibrium Price and Output Under perfect
market in long run
In the long run the firm attains equilibrium
when long run AC and MC are equal to
the long run AR and MR.
The firm and the industry enjoy only
normal profit.
The reason is that sufficient time
available for adjusting the supply
according to the supply.
The condition is AC=MC=AR=AC
In the long period all costs are variable
so supply will be increased only when
price is equal to AC
In the the long run normal price is equal
to minimum AC of the industry
20.
21. Monopolistic Competition
It may be defined as a combination of both perfect competition and
monopoly.
A market structure with a large number of sellers some product
differentiation and fairly easy enter and exit.
It refers to that market situation
In which large number of producers produce goods which are
close substitutes of each other
These goods are similar, but not exactly identical or homogenous.
But their use is the same
Thus product differentiation is the hall mark of monolistic
Example: variety of soaps
medical stores
retail general stores
hair dressers
22. characteristic of Monopolistic Competition
Many buyers and sellers
Products differentiated
Free entry and exit of firm
As high advertising cost
Non price competition
consumer’s attachment
Firm is price maker not taker
Examples : restaurants
professions – solicitors
building firms – plasterers
plumbers
24. Price determination under monopolistic under
monopolistic competition
The monopolistic price detremination can be studied under two different
time periods,
1. Short period
2. Long period
SHORT RUN
The price determination under the short run is same as that of monopoly
1. Abnormal profit
2. Normal profit
3. Loss profit
25. LONG RUN
As we known that long run is a time when firm can change all factors of
production.
In this period, each firm will produce up to that limit where LMR=LMC.
In long run firms earn normal profits only.
But in practical life a monopolistic firm may earn abnormal profits
Because other firms are not in a position to bring out closely related
products
Nor can new firms enter the group during short period
26. No firm earns abnormal profits in the long run
because of following reasons
If firm earns abnormal profits, then several new firms will enter the
market as entry is free.
In order to create demand for their products, the new firms will fix the
price at a low level.
Thus in long run monopolistic firm earns only normal profits.
The price determinination is same as that of monopoly i-e the case of
normal profit
27.
28. Oligopoly
It is a imperfect market where there are a few seller in the market.
They are producing identical products.
Products are close but not perfect substitutes of each other.
Examples: steel
cement
soft drinks
tyres
Because of their interdepence they face a situation:
In which the optimal decision of one firm depends on what other
firms decide to do
29. Features of oligopoly
A few sellers
Lack of uniformity(size of the firm)
Homogenous or differentiated product
Huge expenditure
Price rigidity
Objective of the firm may be non profit
High degree of interdependence between firms
32. Monopoly
A market structure in which there is only a single seller, no acceptable
substitutes are available for the product offered for sale and no entry into
the market is possible.
Monopoly is a market structure characterized by a single supplier and
high barriers to entry.
It is composed,
MONO + POLY
single + seller
Example: Railway
Tobacco company
Electricity
Water supply
33. Characteristic of Monopoly
There is one seller in the market
Large number of buyers
There are no close substitutes
High barriers to entry
Firm controls price OR output/supply
Abnormal profits in long run
Consumer choice limited
34. Advantages and Disadvantages of Monopoly:
Advantages:
May be appropriate if natural monopoly
Encourages R&D
Encourages innovation
Development of some products not likely without some guarantee of
monopoly in production
Economies of scale can be gained – consumer may benefit
Disadvantages:
Exploitation of consumer – higher prices
Potential for supply to be limited - less choice
Potential for inefficiency –
X-inefficiency – complacency over controls on costs
36. Equlibrium Price and Output Under Monopoly
Profit – maximizing case:
A firm in the short run earn maximum profit when it meets the following
condition
MR=MC and MC curve cuts MR from below
Average revenue is greaterthan average total cost
In the short period the attains equlibrium,
1. Abnormal profit
2. Normal profit
3. Loss
It is always posibile for a monopolist to earn super normal profit
In the long run the firm has time to adjust his plant size or to use existing
plants so as to maximize profit
37. Abnormal profit
In the graph the firm in equlibrium at output OQs.
OA or QB is the price.
CQ is the average total cost.
The grey area ABCD represents monopoly profit
Any other combination of price & output will yield less than maximum
possible profit.
38. Normal profit
In the graph R is the point of equilibrium where MR=MC.
OQ is the equilibrium output.
The firm is earning normal profits in equilibrium situation as,
At equilibrium output AR=AC
And normal profits are included in short run average cost.
39. loss
In the graph the firm in eqilibrium at
output OQ
Where MR=MC
OP or QB is the price
QC is the average total cost
The grey area PDCB represents loss
area
But here the loss is minimum because
AR=AVC
Thus loss is limited to fixed cost.
The monopolist will suffer this loss
even if he closes down the
production.
If the price of monopolist falls below
the QB he would prefer to close down
the production in short term period.
40. Long term
In the period all factors of the production are variable
Monopolist firm in the long run also is in equilibrium at a point where
MR=MC
But in long run, a monopolist firm earns only profits
It is in a position to earn supernormal profits
The long period equilibirium of a monopolist firm is same as that of
during short run (abnormal profit)
