Market Structures Firm Equilibrium Perfect Competition

Market Structures Firm Equilibrium Perfect Competition - Transcript

Market Structures Firm Equilibrium
Perfect Competition Monopoly





What is a Market What is a Market


Market is a place where buyers and sellers interact

Benham says Market is any area over which buyers and sellers are kept in close touch with each other either directly or through dealers that the price obtainable in one part of market affects the prices in other parts

Criteria for market Criteria for market classification


Classification by area Nature of transaction spot vz future Volume of business wholesale vz retail Time period very short short vz long run Status of sellers primary vz secondary Regulated vz unregulated market Market structures

Market Structures Market Structures
This is the competitive environment in which buyers and sellers operate This influences pricing of product Determinants of market structure
Number of buyers and sellers Freedom of entry and exit Nature of the product homogenous identical differentiated Control over supply output Control over price Barriers to entry

Classification of Market forms Classification of Market forms

Market Structure Perfect Monopolistic Oligopoly Monopoly

No of firms Large Large Few One

Product Homogenous Differentiated Differentiated Unique

Control over price None Some Large Very large

barriers None Easy entry No easy entry Barriers

Market Structure Market Structure
Perfect Competition Monopolistic Competition Oligopoly Monopoly Less Competitive

o Ce o M r

Perfect Competition Perfect Competition
There are large number of independent sellers of a commodity each too small to affect the price a All firms sell homogenous products b Perfect mobility of resources firms can enter or leave the industry without much difficulty c Firm is a price taker d Economic agents have perfect knowledge Eg stock market agricultural commodities

Monopoly Monopoly


Single seller and many buyers No close substitutes for product Significant barriers to resource mobility
Control of an essential input Patents or copyrights Economies of scale Natural monopoly Government franchise Post office

Monopolistic Competition Monopolistic Competition


Many sellers and buyers Differentiated product Perfect mobility of resources Example Fast food outlets

Oligopoly Oligopoly




Few sellers and many buyers Product may be homogeneous or differentiated Barriers to resource mobility Example Automobile manufacturers

Perfect Competition Perfect Competition Price Determination

Perfect Competition Perfect Competition Price Determination
QD 625 5 P QD QS QS 175 5 P
625 5 P 175 5 P 450 10 P P 45

QD 625 5P 625 5 45 400 QS 175 5P 175 5 45 400

Profit Maximisation Short run Profit Maximisation Short run Marginal approach
In perfect competition the firm can sell any amount at prevailing market price Hence AR MR The demand curve is horizontal or infinitely elastic How much quantity is to be produced in the short run A firm expands its output until MR rising MC Total profits are maximised when difference between TC and TR is greatest


Perfect Competition Perfect Competition Short Run Equilibrium
Firm s Demand Curve Market Price Marginal Revenue Firm s Supply Curve Marginal Cost where Marginal Cost Average Variable Cost

Perfect Competition Perfect Competition Short Run Equilibrium

Short run profit Short run profit


The firm maximises profits when P exceeds AC where MR P rising MC If price AC the firm is breaking even If price AVC but smaller than AC the firm minimises losses If price is smaller than AVC the firm minimises total losses by shutting down

Long run equilibrium Long run equilibrium






If firms in a perfectly competitive industry are making short run profits more firms enter the industry This increases market supply of commodity and reduce the market price until all profits are competed away and firms just break even In long run firms produce where P lowest LAC

Perfect Competition Perfect Competition Long Run Equilibrium

Perfect Competition Perfect Competition Long Run Equilibrium
Quantity is set by the firm so that short run Price Marginal Cost Average Total Cost At the same quantity long run Price Marginal Cost Average Cost Economic Profit 0

Competition in the Competition in the Global Economy
Domestic Supply

World Supply Domestic Demand

Competition in the Competition in the Global Economy


Foreign Exchange Rate



Depreciation of the Domestic Currency Appreciation of the Domestic Currency

Price of a foreign currency in terms of the domestic currency Increase in the price of a foreign currency relative to the domestic currency Decrease in the price of a foreign currency relative to the domestic currency



Competition in the Competition in the Global Economy
R Exchange Rate Dollar Price of Pounds Supply of Pounds

Demand for Pounds

Monopoly Meaning and Monopoly Meaning and Sources
Monopoly is that form of market structure in which there is a single seller of a commodity for which there are no close commodity Monopoly may be due Increasing returns to scale Control over raw material supply Patents Government franchise e gXerox corp


Demand and marginal Demand and marginal revenue


Under monopoly the firm is the industry and faces the negatively sloped demand curve for the commodity

If the monopolist wants to sell more of the commodity it must lower its price MR is lower than P MR curve lies below D curve


Short Run Analysis of Short Run Analysis of monopoly


Profit maximisation is given at that output where MR MC Depending on the level of AC at this output the monopolist can have profits break even or minimise shortrun total losses

Monopoly Monopoly Short Run Equilibrium
Q 500 P 11

Monopoly Monopoly Short Run Equilibrium




Demand curve for the firm is the market demand curve Firm produces a quantity Q where marginal revenue MR is equal to marginal cost MR Exception Q 0 if average variable cost AVC is above the demand curve at all levels of output

Monopoly Monopoly Long Run Equilibrium
Q 700 P 9

Long run price and output Long run price and output under Monopoly
In long run all plants are variable and monopolist can construct optimal scale of plant Output where P LMC and optimum scale of firm where SATC is tangent to LAC curve As entry is blocked profits occur also monopolist does not produce at lowest point


Control of monopoly Control of monopoly


Government regulation Banning of cartels Antitrust laws

Social Cost of Monopoly Social Cost of Monopoly