2. MARKET
• The function of a market is to enable an
exchange of goods and services to take place.
• A market which brings buyers and sellers into
contact with one another.
• According to Frederic Bentham, “A market is
any area over which buyers and sellers are in
such close touch with one another, either
directly or through dealers, that the prices
obtainable in one part of the market affect the
prices paid in other parts.”
3. MARKET
• Thus, a market is any organization whereby
buyers and sellers of a good are kept in close
touch with each other.
• It is precisely in this context that a market has
four basic components
• 1.consumers,
• 2. sellers,
• 3. a commodity,
• 4. a price
4. Criteria for Market Classification
• by the area-- local markets, regional markets, national
markets and international markets.
• by the nature of transactions-- The spot market and
the future market.
• by the volume of business: wholesale and retail
markets.
• on the basis of time: very short period, short period
and long period.
• by the status of sellers: Primary, Secondary and
Terminal markets.
• by the nature of competition: perfect competition,
monopoly, oligopoly etc
5. Kinds of Competition
• Perfect Competition is said to prevail where there is a
large number of producers (firms) producing a
homogeneous product. No individual firm is in a
position to influence the price of the product
• Imperfect Competition individual firms exercise
control over the price. Caused either by the fewness of
the firms or by the product differentiation.
• sub-categories of imperfect competition—
Monopolistic competition
Oligopoly
• Monopoly existence of a single producer
6. • The competition in the market depends upon
three main factors:
• a) Substitutability factor
• (b) Interdependence factor and
• (c) Ease of entry factor
7. EQUILIBRIUM PRICE
• Qty demanded and Qty supplied varies with
price.
• The price at which demand and supply are equal
is known as Equilibrium price.
• Above this price – more qty offered for sale than
demand--- fall in price.
• If price is below Eq. price -- More is demanded
than supply– Rise in price.
• Hence only at eq.point the price remains steady.
8. EQUILIBRIUM PRICE
• Firm’s equilibrium level of output will lie
where its money profits are maximum.
• profits are the difference between total
revenue and total cost.
• So in order to be in equilibrium, the firm will
attempt to maximize the difference between
total revenue and total cost.
10. Perfect competition
• Perfect competition is said to prevail where
there is a large number firms producing a
homogeneous product.
• Competition is perfect in the sense that every
firm considers that it can sell any amount of
output it wishes at the prevailing market
price, which cannot be affected by the
individual producer whose share in the market
is very small.
11. PERFECT COMPETITION
• Perfect competition is a market structure characterized by a
complete absence of rivalry among the individual firms.
• In practice, businessmen use the word competition as
synonymous to rivalry. In theory, perfect competition
implies no rivalry among firms.
• The perfect competition is defined as the form of market
organization in which
• (1) There are many buyers and sellers of a product, each
too small to affect the price of the product;
• (2) the product is homogeneous;
• (3) there is perfect mobility of resources; and
• (4) economic agents have perfect knowledge of market
conditions
12. FEATURES OF PERFECT COMPETITION
• Large Numbers of Sellers and Buyers( too small fraction of
Mkt D & S
• Product Homogeneity (substitute for other firms, )buyers can buy from any seller.
• Free Entry and Exit of Firms ( earns only normal profit. If profit is more than
normal, new firms enter, thereby reducing profit. Vis.)
• No Government Regulation tariffs, subsidies, rationing of production or
demand and so on are ruled out).
• Perfect Mobility of Factors of Production ( reduce
tendency of monopoly power over supply)
• Perfect Knowledge- nobody can sell at higher price) sellers can sell as much as they
want at ruling price.
• No transport costs to rule same price
13. TIME ELEMENT IN THE THEORY OF
PRICE
• Time element is of great relevance
• Supply conditions vary with regard to the
length of period.
• market-period,
• short-period,
• long-period
14. Determination of Price in Market
period
• The market period is a very short period in
which the supply is fixed. (An hour, a day or few days or even a few weeks)
• In this period more goods cannot be produced
in response to an increase in demand.
• New firms can’t enter and existing firms do
not have time to change scale.
• Supply curve is inelastic.
• market price is determined by the conditions
of demand
15. Determination of market price for perishable goods
• Goods like fish, milk cannot be stored or kept
back; they will go waste if stored.
• Therefore, the whole of the given stock of a
perishable good has to be sold , whatever the
price
• As a result, the market period supply curve is
perfectly inelastic or a vertical straight line.
16. Determination of market price for durable goods
• Most commodities which are durable can be
kept in stock.
• When the price of durable goods decreases
with decrease in its demand, its supply can be
decreased
• On the other hand, supply can be increased
out of the given stock if its demand and price
increases.
17. • Supply can’t be vertical straight line. If price is
not acceptable , keep back the goods and
present in next mkt. period
• In this connection there are two important
price levels. Firstly, a very high price level.
• Secondly, reserve price”.
• (Below at which the sellers will not be prepared to sell at all, instead they will hold back the
whole stock of the goods.)
18. • At a reserve price the quantity supplied of the
goods will be zero, and as the price rises the
quantity supplied will increase till a price is
reached at which the whole stock of the goods
will be offered for sale.
• So, the supply curve of a durable commodity
slopes upward to a point and then it becomes
a vertical straight line.
19. Determination of Short-run Price
• In the short period, production has to be
managed with existing plant.
• Supply can be increased with variable input.
Hence SRS curve is less steep than MPS curve.
• In the short period, price is determined by the
forces of demand and supply.
• The point of equilibrium is located where
demand and supply curves intersect.
• Price is determined by industry.
• No individual firm decide its own price
20. Determination of Short-run Price
• The equilibrium price determined by the
intersection of the short period normal supply
and normal demand curves.
• Volume of output directly depends on variable
costs and these costs should be covered by
price.
• If price falls below AVC, firms stop production
to minimize losses.
21. SHORT-RUN ANALYSIS OF A PERFECTLY
COMPETITIVE FIRM
• The best level of output of the firm in the
short-run is the one at which the firm
maximizes profits or minimizes losses.
• The best level of output of the firm in the
short-run is the one at which the marginal
revenue (MR) of the firm equals its short-run
marginal cost (MC).
• As long as MR exceeds MC, the firm would
add more to its total revenue than to its total
costs.
22. SHORT-RUN ANALYSIS OF A PERFECTLY
COMPETITIVE FIRM
• On the other hand, as long as MC exceeds MR,
the firm will reduce its total cost more than its
total revenue.
• Thus, the best level of output of any firm is the
one at which MR=MC.
• in order to maximize profits, a firm must produce
where marginal revenue (MR) equals marginal
cost (MC). Since for a perfectly competitive
• firm P is constant and TR = (P) . (Q) so that
23. • the first order condition for profit
maximization for a perfectly competitive firm
becomes P = MR = MC.
24. Determination of output to maximize
profits
• As a price taker, firms can accept a price which equals the AVC.
• Price should not be less than AVC
• If price covers AC – normal profits
• If price is above AC – Super normal profits
• But firm can’t influence
• It has to adjust output to earn minimum profits
• This can be possible at which MC = MR. but it is not sufficient for
equilibrium.
• It also be seen that MC cuts MR from below
• MR is horizontal straight line
• MC is U shaped hence MC cuts MR at 2 points.
• MR is above MC – firm make profits
•
25. Determination of Long-run Normal Price
• Adjust production and supply completely to changes in
demand.
• Complete adjustment to supply of demand is possible.
• In long run new firms enter, existing firms leave
• For an individual firm no difference b/w Fixed and variable
costs.
• Long-run price is also known as normal price. Long-run
price or normal price is determined by long-run equilibrium
between demand and supply when the supply conditions
have fully adjusted to the given demand conditions.
• A firm under perfect competition is in long-run equilibrium
at the output whose price is equal to both marginal cost
and average cost.
26. Determination of Long-run Normal
output
• In long run both FC and VC decides price
• Price must cover TC
• Price should equal the LAC
• When P=AC= normal profits
• If firms earns super profits , new firms enter
thereby bringing down to normal profits
again.
• If firm incur loss– quit industry, increase profit
27. Determination of Long-run Normal
output
• Then Equilibrium at where MC = MR
• therefore Price = MC
• During Short period every competitive firm
cover attempts to cover AVC
• In long run all costs should be covered
• firm can bear loss for short period but not for
long period
• So equilbrium = op=LAC=LMC
28. LONG-RUN ANALYSIS OF A PERFECTLY
COMPETITIVE FIRM
• In the long-run all inputs and costs of
production are variable and the firm can
construct the optimum or most appropriate
scale of plant to produce the best level of
output. The best level of the output is one at
which price P=LAC equals the long-run
marginal cost (LMC) of the firm.
29. Determination of Long-run Normal
Price
• long-run equilibrium is established at the
minimum point of the long-run average cost
and long-run price OP is established which is
equal to minimum long-run average cost.
• Long-run Price = LAC = LMC
30. MONOPOLY
• One seller
• No close substitutes for product
• Single firm constitute whole industry
• Control over supply
• Cross elasticity of demand is zero
• Monopolist fix price and pursue an independent
policy—(price maker)
• Monopolist exist so long as he prevents entry of
competitors.
• Firms AR curve slopes downward.
31. MONOPOLY
• Indian Railways has monopoly in Railroad
transportation
• State Electricity board have monopoly over
generation and distribution of electricity in
many of the states.
• Hindustan Aeronautics Limited has monopoly
over production of aircraft.
• Government monopoly over production of
nuclear power.
32. MONOPOLY
• Monopolist can lower the price by increasing
his level of sales and output and he can raise
the price by reducing his level of sales.
• Demand curve facing the monopolist will be
his average revenue curve, which also slopes
downward.
• Since average revenue curve slopes
downward, marginal revenue curve will be
below it.
33. SHORT-RUN EQUILIBRIUM
• In the short-run the monopolist maximizes his
short-run profits or minimizes his short-run
losses if the following two conditions are
satisfied:
• (i) MC = MR and
• (ii) The slope of MC is greater than the slope
of MR at the point of their intersection (i.e.
MC cuts the MR curve from below).
34. SHORT-RUN EQUILIBRIUM
• In the short-run a monopolist has to work
with a given existing plant. He can expand or
contract output by varying the amount of
variable factors but working with a given
existing plant.
• Monopolist is in equilibrium at E where
marginal revenue is equal to marginal cost.
35. SHORT-RUN EQUILIBRIUM( profits)
• MR=MC
• Up to OM level of output MR>MC
• Beyond OM level of output MC>MR
• Hence equilibrium output is OM, where MC=MR
• The price at which OM is sold can be seen on AR curve.
• It is MP. i.e OP
• At OM level of output MP is AR and ML is COP
• Therefore PL is monopoly profit per unit
• Total monopoly profit = OM* PL
• Total profit earned by monopolist at equilibrium is
equal to the rectangle PPLT
36. • But in the short-run he will continue working
so long as price is above the average variable
cost.
• If the price falls below average variable cost
the monopolist would shut down even in the
short-run.
• P>AVC------ Continue
• P<AVC------ shutdown
37. SHORT-RUN EQUILIBRIUM (losses)
• A monopolist need not make super normal profits in short
run. Sometimes make normal profits or even losses.
• If price fixed at equilibrium above AC – super normal profits
• If it is equal to AC – normal profits
• Price below AC – incurs loss
• AR>AC– super normal
• AR=AC– normal
• AR<AC--- loss
• In case of losses, monopoly equilibrium at Om level of
output with price OP. Since the price (or AR) is smaller than
average cost, he is making losses which are equal to area of
the rectangle PQGH .
38. LONG-RUN EQUILIBRIUM
• In the long-run the monopolist has the time to
expand his plant or to intensively use his existing
plant which will maximize his profits.
• The size of his plant and the degree of utilization
of any given plant size depend entirely on the
market demand.
• He may reach the minimum point of LAC or
• remain at falling part of his LAC and
• expand beyond the minimum LAC depending on
the market conditions
39. • Just like short run ,monopolist makes super
normal profit in long run by producing and
selling a quantity at which Long run MC = Long
run MR
• Eq.output is where MC intersects MR
40. LONG-RUN EQUILIBRIUM
• In long run produces more and sells at low price
thus making large monopoly profit.
• In long run if cost is in increasing trend , then fix a
high price and sell less qty– make max profit
• If cost decreases , prefer a lower price, sell more
and increase profit.
• If the demand for product is relatively inelastic---
fix high price
• If elastic---- low price.
41. COMAPARISION OF MONOPOLY AND PERFECT
COMPETITION.
Perfect competition monopoly
Eq at MC=MR Eq at MC=MR
Large no of sellers and buyers Single firm
No control control
AR curve elastic. Horizontal line and
parallel to X axis. So MR= MC
AR slope downward
MR lies below AR
Equilibrium at MC=MR=P Equilibrium at MC=MR<AR or price.
In long run firm make only normal
profits
In short run earns super normal
profits but cannot continue.
Earn super normal profits both Long
and short runs.
Price is low Price is set higher and output smaller
42. Monopolistic
• large number of independent firms are supplying
products that are slightly differentiated from the point
of view of buyers.
• Thus, the products of the competing firms are close but
not perfect substitutes because buyers do not regard
them as identical.
• same commodity is being sold under different brand
names
• For example, Lux, Lyril, Rexona, Hamam,, etc.brands of
toilet soap,
• Colgate, Cibaca, Promise, etc. brands of toothpaste
43. • Each firm is therefore the sole producer of a
particular brand or “product”. It is monopolist
as far as a particular brand is concerned
• Closer to perfect competition
• Books, CDs, movies, computer software,
restaurants, furniture, and so on.
44. FEATURES OF MONOPOLISTIC
COMPETITION
• Existence of many firms
• Differentiated Products
• Large no. of buyers
• Free entry and exit
• Selling costs
• Imperfect knowledge
45. Short run equilibrium
• equilibrium at Where MR and SMC
intersects.
• Earns super normal profits
• In short run these firms incur losses
also where the price is less than
average cost of production.
47. Oligopoly
• Few sellers, each selling either differentiated
or homogeneous products.
• homogeneous – perfect oligopoly
• Differentiated– imperfect oligopoly
• Each seller commands sizeable portion of
market supply
• Every seller can exercise influence on price
and output policies of rivals as number of
sellers is not very large
• Sellers are interdependent
48. Oligopoly
• Airlines industry (jet airways, Kingfisher, Air India)
• Petroleum refining(Indian Oil, Bharat Petroleum,
Hindustan Petroleum and Reliance)
• Power generation and supply in most of the parts of
the country(National Thermal Power Corporation (NTPC), National Hydro-electric
Power Corporation (NHPC) and Power Grid Corporation Limited (PGCL)
• Automobile industry
• Long distance road transportation by bus. Many of
there routes have buses operated by limited numbers
of operators.
• Mobile telephone(Airtel, Vodafone, Idea, Reliance)
• Internet service providers
49. features
• Few firms
• Interdependence
• Indeterminate demand curve
• Advertising and selling costs
• Price rigidity
50. Kinked demand curve
• It explains price rigidity
• Does not deal with price and output
determination
• Once the price and quantity combination has
been determined, an oligopoly firm will not
find it profitable to change its price even when
the cost and demand conditions change.
Because one firm reduces price--- immediate
reaction from rivals – so it can’t increase sales.
51. • AQD has 2slopes
• MR also same and gap b/w MR
• If price increased by one firm--- rivals not
increase – so oligopolist lose customers AQ
portion more elastic
• QD shows less elastic- can’t sell more by lowering
price.
• So firm finds it more desirable it maintain the its
price and output at ruling price.
• hence price is rigid.
52. Price leadership
• Leader fix price for entire industry
• It can be biggest firm in industry or it may be a
firm with the cost of low cop.
• As a result of price war –it emerged as winner.
• Agreement among various firms with regard
to price – formal or informal.
• Example if there are 2 firms
53. Types of price leadership
• Price leadership of dominant firm major
supply
• Barometric old experienced firm-
• Aggressive– dominant firm to eliminate rivals
54. features
• Firm has considerable share
• reputed firm
• initiative and timely action
• Difficulties
• Leader not able to make correct estimation– lose
his share.
• Rivals charge lower prices
• Non price competition
• New entrants may not accept leader
55. Advantages
price war among firms can be avoided
Survival of both large and small firms
Reduce uncertainty in oligopoly market
Leader considers the possibility of new entrants,
and restrict entry
Frequent price changes can be avoided.
56. Discriminating monopoly
• Monopolist may charge different prices for
different people- form different markets
belongs to non competing groups.
• Discrimination may be---
• Personal
• Local
• Trade or use eg . Electric current
• baby set(Trade)
57. Necessary conditions
• Two or more groups
• to maximise his profits– doctor high class
patient and low class patient
• Buyers are not able to shift
• Price discriminating firm must be monopoly
firm.
58. degrees
• Max amount of money for each consumer
• Groups -- not individual–
• Mkt into sub mkts.
