Price Determination

SUBMITTED TO:- SUBMITTED BY:-
RASHMI VISHKARMA ADITI TRIPATHI(1150810003)
ARCHANA DIXIT(1150810016)
MUDIT MISHRA(1150810030)
SAUMYA GUPTA(1150810045)

Price.
 Determination Of Price.
 Factors Effecting Price.
 Factors Kept In Mind Before Determining The Price.
Perfect Competition
 Definition.
 Meaning.
 Features.
 Perfect Competition Vs Pure Competition.
 Condition For Firms Equilibrium Under Perfect
Competition.
 Price Under Perfect Competition In Short Period.
 Price Under Perfect Competition In Long Period.

Monopoly.
 Features.
 Demand & Revenue Under Monopoly.
 Determination Of Price & Equilibrium Under
Monopoly.
 Price Determination Under Short & Long Period.
 Price Discriminating Monopoly.
 Price & output determination under discriminating
monopoly.
Oligopoly.
 Types Of Oligopoly.
 Features Of Oligopoly.
 Sources Of Oligopoly Market.

Duopoly
 Definition.
 Duopoly exists when.
 Best Response function.
 Types of duopoly.
 Cournot Model.
 Stackelberg Model.
 Advantages.
 Disadvantages.
 Assumption.

 Definition of price.
 Definition of price determination.
 Objectives of price determination.
 Need of price determination.
 Factors effecting of price determination.
 Determination Of Price.
 Factors Effecting Price.
 Factors Kept In Mind Before Determining The
Price.

 The value that one will purchase a finite quantity,
weight, or other measure of a good or service.
OR
 Price is the sacrifice that one party pays another to
receive something in exchange.

 Pricing is the process of determining what a
company will receive in exchange for its
product.

 Maximize long-run & short-run profit.
 Increase sales.
 Increase market share.
 TO OBTAIN THE TARGET OF RETURN OF INVESTMENT.
 Company growth.
 To obtain or maintain the loyalty and enthusiasm
of distribution and other sales personnel.

 Market price serves as the adjustment mechanism
to move markets to equilibrium.

Factors
Your Cost
Market
Demand
Your Profit
Industry
Standards
Who is Your
Client
Skill Level
Experience

 Excess demand exists when, at the current price, the
quantity demanded is greater than quantity supplied.
 Excess supply exists when, at the current price, the
quantity supplied is greater than the quantity
demanded.

supply
demand
price
quantity
p = $3
QD QS
EXCESS SUPPLY

supply
demand
price
quantity
QDQS
EXCESS DEMAND

 When there is EXCESS DEMAND for a good, price will
tend to rise.
 When there is EXCESS SUPPLY of a good, price will
tend to fall.

 Changes in consumer incomes
 Changes in the prices of substitutes
 Changes in the prices of complements
 Changes in tastes

 Changes in prices of inputs.
 Changes in technology.
 Changes in taxes.

P
Q
supply
p0
q0
demand @ old beer price
demand @ higher beer price
p1
q1

 Definition.
 Meaning.
 Features.
 Perfect Competition Vs Pure Competition.
 Condition For Firms Equilibrium Under Perfect
Competition.
 Price Under Perfect Competition In Short Period.
 Price Under Perfect Competition In Long Period.

Perfect competition is the theoretical case illustrating the
most competitive market possible.

• “Perfect Competition Exists In Markets Where
There Are So Many Sellers That No One Is Big Enough
To Have Any Appreciable Influence Over Market
Price.”
-Prof. Bach

Both buyers and sellers are price takers.
 A price taker is a firm or individual who takes the market
price as given.
 In most markets, households are price takers – they
accept the price offered in stores.
 The retailer is not perfectly competitive.
 A store is not a price taker but a price maker.

The number of firms is large.
 Any one firm's output is minuscule when compared
with the total market.
 Large means that what one firm does has no bearing on
what other firms do.
The firms' products are identical.
 This requirement means that each firm's output is
indistinguishable from any competitor's product.

There are no barriers to entry.
 Barriers to entry are social, political, or economic
impediments that prevent other firms from entering
the market.
 Barriers sometimes take the form of patents granted to
produce a certain good.
 Technology may prevent some firms from entering the
market.
 Social forces such as bankers only lending to certain
people may create barriers.

 There is complete information.
 Firms and consumers know all there is to know about
the market – prices, products, and available technology.
 Any technological advancement would be instantly
known to all in the market.
 Firms are profit maximizers.
 The goal of all firms in a perfectly competitive market is
profit and only profit.
 Firm owners receive only profit as compensation, not
salaries.

Pure Competition IS ABSENCE OF MONOPOLY…
CHARACTERISTICS OF PURE COMPETITION
 Large no. of buyers & sellers,
 Homogeneous Products,
 Free entry & exit of firms.

It means the level of output where firm
is maximizing it’s profits & therefore ,
has no tendency to change its output…


 Marginal Cost Curve should cut the Marginal Revenue
curve from below.
Marginal Cost= Marginal Revenue= Average Revenue

AR : Average Revenue curve
MR : Marginal Revenue curve
D : Demand)curve
AR=MR=D
It would be a horizontal line or parallel to the X-axis

Condition : 1
Marginal Cost=
Marginal
Revenue=
Average
Revenue
MC=MR=AR

Condition : 2
Marginal Cost
Curve should cut
the Marginal
Revenue curve
from below.

 Short Period is defined as the time
period in which the firm can change its
output without changing the existing plant
& machinery.

 Price will be affected because we cannot increase
our supply acc. to demand..
 Only variable factors can be altered..
 Price set so in the short run is EQUILIBRIUM
PRICE..

 Price at which there is no tendency to
change in the current situation..
Demand & Supply are equal…

 Pricing Decision is influenced by these
two forces of DEMAND & SUPPLY…

LAW OF DEMAND
 Applicable for buyers…
 Price is inversely
proportional to the
demand…
 Applicable for
suppliers…
 Price is directly
proportional to the
supply…
LAW OF SUPPLY

CASES OF FIRM’S EQUILIBRIUM
IN SHORT PERIOD
SUPER-NORMAL
PROFITS
SHUTDOWN
POINT
LOSS
NORMAL
PROFITS

SUPER-NORMAL
PROFITS
In situation of
firm’s
equilibrium
(i) MC=MR=AR
(ii) AR>SAC
AR>SAC

NORMAL
PROFITS
In situation of
firm’s
equilibrium
(i) MC=MR=AR
(ii) AR=min(SAC)
AR=SAC

 Firms can also earn zero profit or even a loss
where MC = MR.
 Even though economic profit is zero, all
resources, including entrepreneurs, are being paid
their opportunity costs.
 In all three cases (profit, loss, zero profit), determining
the profit-maximizing output level does not depend
on fixed cost or average total cost, by only where
marginal cost equals price.

LOSS
In situation of
firm’s
equilibrium
(i) MC=MR=AR
(ii) AR<(SAC)
AR<SAC

 The shutdown point is the point at which the firm
will gain more by shutting down than it will by staying
in business.
 As long as total revenue is more than total variable
cost, temporarily producing at a loss is the firm’s best
strategy since it is taking less of a loss than it would by
shutting down.

SHUT-DOWN
POINT
In situation of firm’s
equilibrium
(i) MC=MR=AR=
min SAVC
(ii) AR=SAVC<SAC
AR<SAC :
AR=SAVC

 Equilibrium Price is determined at the point
where the se forces are EQUAL…
 Quantity demanded & supplied at this point is
EQULIBRIUM QUANTITY…

 When the price is less /more than equilibrium
price , then there will be tendency of movement
of this equilibrium output & ultimately equilibrium
price will prevail…
 Demand & Supply forces counteract each other…

Industry :as price maker
Firm :as price taker.

Long Period is defined as that period
during which , all factors become variable
factors & firms can change their scale of
production…

 Price that prevails in long-run is NORMAL
PRICE..
 Supply plays a dominant role in determination of
long-run normal price..
 Demand & Supply can be adjusted to every
possible way as per requirement in long run..

 Change all types of fixed factors..
 Normal Price is always equal to minimum long
run average cost..
 Supply gets sufficient time to adjust itself
according to changed conditions & demand..

In situation of
firm’s
equilibrium
(i) MC=MR=AR=
min LAC
(ii) AR(P)=LAC
AR=LAC

 Definition.
 Features.
 Type.
 Demand & Revenue Under Monopoly.
 Price Discriminating Monopoly.
 Monopolistic competition.
 Advantages And Disadvantages.

 “A pure monopoly exists when there is only one
producer in a market. There are no direct
competitors.”
-According to Prof. Ferguson
 “Pure or absolute monopoly exists when a single
firm is the sole producer for a product for which
there are no close substitutes.”
-Mc Connel

One seller & large number of buyers:
 Under monopoly there should be single
producer of the commodity.
 The buyers of the product are in large
number.
 Only Seller can influence the price.
Monopoly is also an industry:
• There is only one firm & the difference
between firm & industry disappears.

Restrictions on the entry of new firms:
 There are some restrictions on the entry of new
firms into monopoly industry
 There is no competitor o a monopoly firm.
 No close substitutes:
 If close substitute are available then the
monopolist will not be able to determine the
price of his commodity as per his discretion.

 Natural monopoly.
 Public monopoly.
 Legal monopoly.
 Simple and discriminating.
 Absolute monopoly and limited monopoly.
 State monopoly and private monopoly.

 In a monopoly situation there is no difference
between firm & industry. Accordingly, under
monopoly situation, firm’s demand curve also
constitutes industry’s demand curve. Demand
curve of the monopolist is also average revenue
(AR) curve. It slopes downward. It means if the
monopolist fixes high price, the demand will
shrink. On the contrary, if he fixes low price, the
demand will expand. Under monopoly, average
revenue & marginal revenue curves are separate
from one another. Both slope downwards.

 Following facts come to light as a result of
negative AR & MR:
 Demand rises with fall in price (AR). Hence, by
lowering the price, a monopolist can sell more units
of the commodity.
 AR is another name of price per unit, i.e., P=AR.
 With fall in price, both AR & MR fall, but falling MR
is more. Rate of fall in MR is usually more than rate of
fall in AR.
 AR is never 0, but MR may be 0 or even -ve.

 Main objective of monopoly is: maximum profit from sale:
 It can achieve in 2 ways:
 firm can either fix price
 it can fix the quantity to be sold the customers.
 A monopoly firm fixes the price and leave the quantity to
be determined by demand of customer in market During
fixing the price ,monopoly firm has 2 imp conderation :
 nature of demand
 nature of supply of commodity.

Definition:
It is a market situation in which there are many seller
of a particular product but the product of each seller is
in some way differentiated in the mind of consumer s
from the product of every other seller .
- Leftwitch

 A: large number of sellers:
 B:freedom of entry or exit:
 C:non-price competition:
 D:product differentiation:

 A Monopolist avoid duplication of staff, equipments,
expenses are reduced. this means lower price and
consumers benefit .
 When there is single producer ,scale of production
become large. large output reduced cost…
 A monopolist needs not spend huge sum of money on
wasteful and competitive advertisement .this reduce
selling cost.

 Monopoly leads to unequal distribution of income.
 It leads restriction in output. By limitation output,
one can charge a high price and make more profits.
 He limits output:
 By preventing new firm from entering into industry and this
limitation results in high price
 By destroying a portion of article already produced.
 By keeping productive resources partly idle.

 Definition.
 Features of oligopoly.
 Types Of Oligopoly.
 Classification of Oligopoly Market.
 Price and Output Determination in Oligopolistic Market.
 The Kinked Demand Curve.
 Oligopoly and its Efficiency.
 Advantages and Disadvantages.
 Comparison b/w Monopoly and Oligopoly.

Oligopoly is a market structure featuring a small
number of sellers that together account for a large
fraction of market sales.
Oligopoly is derived
from the Greek work
“olig” meaning “few” or
“a small number.”

 An oligopoly is a market structure characterized by:
 Few firms
 Either standardized or differentiated products
 Difficult entry

Oligopoly is :
‘Competition among the few.’
OR
‘Few sellers DOMINATE the market.’

•Fewness of sellers
•Seller interdependence
•Feasibility of coordinated action among
ostensibly independent firms
•Price rigidity

Types of Oligopoly
On nature of product sold, oligopoly is of
two types:
 Homogeneous Oligopoly
such as industries producing steel, aluminium,etc.
 Heterogeneous Oligopoly or
Differentiated Oligopoly
such as industries manufacturing automobiles,tv
sets,computers,etc.

Classifications Of Oligopoly
Open and Closed Oligopoly Partial and Full Oligopoly
Perfect and imperfect
Oligopoly
Syndicated and Organised
Oligopoly
Collusive and Non-Collusive
Oligopoly

We have good models of price-
output determination for the
structural cases of pure competition
and pure monopoly. Oligopoly is
more problematic, and a wide range
of outcomes is possible.

 Some economists have assumed that
oligopolists firms ignore interdependence which
however helps in finding the equilibrium price and
output of a particular oligopolist firm.
 Second assumption is that oligopolist is able to
predict the reaction pattern of the rivals.
 Third assumption is that oligopoly firms
realising their interdependence will pursue their
common interest and will enter into the aggrement
and work .

Howsoever, still we find that
fixing of price under oligopoly
market situation is very
difficult and involves a no. of
assumptions regarding
behaviour of oligopoly group
& reactions of rival firms to
price and output changes.

 Many oligopolistic industries exhibit price rigidity or
stability . Price rigidity may be due to following reasons:
(a): The oligopolistic industry has reached in a stage of maturity.
(b): Firms might have learnt by experience that price war is
harmful & firms have found satisfactory price level.
(c): Firms have realised that they cannot increase their profit by
lowering the price otherwise other firms will follow the price cut
by the firm.
(d): A firm may compete by non-price competition rather than
reducing the price.

quantit
y
$
D
P*
Q*
It has been observed that in many
oligopolistic industries prices remain sticky
or inflexible for a long time . The most
popular explanations for this behaviour is
given by an American economist Sweezy
called “Kinked Demand Curve
Hypothesis”.

The kinked demand curve has
following features:
 The upper portion of demand curve is
elastic.
 The lower portion of demand curve is
inelastic.

 If the firm raises its
price above P, it faces an
elastic demand curve,
payoff low
 If the firm lowers its
price below P, it faces
an inelastic demand
curve, payoff low

 Different firms can have
different MCs. As long as
they fall with in the
discontinuous MR, P will
remain stable.
 Output Effect < Price
Effect for price
movements with the
discontinuous MR curve.
 If MC increases enough,
all firms raise their prices
and the kink vanishes.

 The question whether oligopoly affects economic
welfare depends on whether or not they exercise
market power over prices and production
 In competition, the level of output produced is
where P=MC or MB=MC. Hence, net benefits to
society are maximized. Market prices as low as
possible and respond to changes in market forces.
This allows prices to help direct resource
allocation.

 Large firms with strong hold over the market are able to
make huge profits.
 Companies are capable of deciding prices as their own
choice.
 Dominant market players are able to make long-term
profits.(As market don’t allow old business to increase
their shares.)
 High profits generated by companies can be used for
innovation & development of products.
 Helps in lowering average cost of production of goods.
 Stable prices in market helps customers to plan and
stabilize their expenditure.

 There is only one dominating company,hence
customers have no other choice.
 Small business fail to establish themselves as a brand.
 With presence of little competition ,dominant
companies may not think of improving their products.
 New firms can’t enter the market easily.
 Firms cannot take independent decisions.
 The micro-economic goal of fair wealth is not fulfilled
as maximum profit is made by major players only.

Monopoly Oligopoly
Meaning: One seller dominates the A small no .of sellers
entire market. dominate the industry.
Prices : High prices may be Moderate/fair
charged. pricing.
Barriers A monopoly usually exist Barriers to entry are very
entry : when barriers to entry are high because of economies
high. of scale.
Sources of Market making ability by Market making ability because
Power : virtue of being only viable of very few firms in the industry.
seller in the industry.
Examples: Microsoft(OS),Google Health insurers,wireless carriers,beer,
(web search),DeBeers, etc. media(TV,book publishing,movies)etc.

 In monopoly, the level of
output produced is
where P>MC or MB>MC.
Hence, net benefits to
society are NOT
maximized.
 Market prices are higher
and respond to changes
in market forces. This
allows prices to help
direct resource
allocation.
 In oligopoly, the level of
output is somewhere
between the competitive
and the monopolistic
outcome. As the
oligopolist produces
closer to the competitive
solution, the net benefits
to society move closer to
being maximized.

 Definition.
 Definition.
 Duopoly exists when.
 Best Response function.
 Types of duopoly.
 Cournot Model.
 Stackelberg Model.
 Advantages.
 Disadvantages.
 Assumption.

 An oligopoly with two firms.
OR
 Control of a commodity or service in a given market by
only two producers or suppliers.

 No firm can gain by unilaterally changing its own
output to improve its profit.
 A point where the two firm’s best-response functions
intersect.

 Firm 1’s best-response function is
 Similarly, Firm 2’s best-response function is (c2 is
firm 2’s MC)
  2
1
211
2
1
2
Q
b
ca
QrQ 


  1
2
122
2
1
2
Q
b
ca
QrQ 



Cournot model Stackelberg model

1. Each firm chooses a quantity of output instead of a price.
2. In choosing an output, each firm takes its rival’s output
as given.

 The First firm’s best response function is:
y1
*=30 – y2/2
 The Second firm’s best response function is:
y2
*=30 – y1/2
 Taken together, these two best response functions can
be used to find the equilibrium strategy combination
for Cournot’s model.

 The profit of one firm decreases as the output of the
other firm increases (other things equal).
 The Nash equilibrium output for each firm is positive.

 All strategy combinations that give the first firm the
chosen level of profits is known as an indifference
curve or iosprofit curve.
 Profits are constant along the isoprofit curve.

 y1* maximizes profits for the first firm given the second
firm’s output of y2*.
 Any strategy combinations below the indifference curve
gives the first firm more profit than the Nash
equilibrium.
 The result above relates to the key assumption that the
first firm’s profit increases as the second firm’s output
decreases.

Q1
Q1
M
r1
Q2
C
Q1
C
r2
Q2
Q1
S
Q2
S
Stackelberg Equilibrium
Note: Firm 1 is producing on Frim 2’s reaction function
(maximizes its profits given the reaction of Firm 2)
Cournot equilibrium

123
 Leader produces more than the Cournot
equilibrium output.
 Larger market share, higher profits.
 First-mover advantage.
 Follower produces less than the Cournot
equilibrium output.
 Smaller market share, lower profits.

 Large firms having strong hold over the market are able to
make huge profits as there are few players in the market.
 Prevents new players from entering the market through
several barriers of entry. Dominant market players usually
make long-term profits in an oligopolistic environment.
 High profits generated by the companies can be used for
innovation and development of new products and
processes.
 Close competition between two firms.

 Setting of prices may be advantageous for the firms,
but if done unrealistically, it may prove to be a great
disadvantage for consumers.
 Creative ideas or plans of small businesses in the
oligopolistic market fail to realize because they cannot
overcome the control of major market players.
 With the presence of little competition, dominant
companies may not think of improving their products.

 Two firms are producing and selling Homogeneous
product.
 The firms operate at zero cost of production.
 Each firm has a aim of profit maximization.
 Market demand is equally divided in the two firms.
 Each firm demand curve is linear.
 Each firm can not supply to entire market.

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