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MArkets
Sonia Singh
2
What is market ?
$5 $5 d
D
Bushels of Bushels of
0 1,200,000 wheat per day 0 5 10 15 wheat per day
•The firm maximizes economic profit by finding
the rate of output at which total revenue exceeds
total cost by the greatest amount
SA SB SC SASBSC S
Price per unit
p p p p
0 10 20 0 10 20 0 10 20 0 30 60
Quantity per period Quantity per period Quantity per period Quantity per period
ATC
AVC
$5 d $5
Profit
4
D
•If there are 100,000 identical wheat farmers, their individual supply curves are summed horizontally
to yield the market supply curve, panel b, where market price of $5 is determined.
•At this price, each farmer produces 12 bushels per day, as in panel a, for a total quantity supplied of
1,200,000 bushels per day
•Each farmer earns an economic profit of $12 per day as shown by the shaded rectangle.
Monopoly
Monopoly is a well defined market structure where there is
only one seller who controls the entire market supply, as
there are no close substitutes for that product.
Features of monopoly
- Monopolist is the single producer of the product in the
market
- under monopoly firm and industry are identical
- No close competitive substitutes
- It’s a complete negation of competition
- A monopolist is a price maker and not a price taker.
Bases of monopoly
- Natural factors
- Control of raw material
- Legal restrictions
- Economies of large scale production
- Business Reputation
- Business combines
Types of monopoly
- Pure & Imperfect Monopoly
- Legal monopoly
- Natural monopoly
- Technological monopoly
- Joint monopoly
- Simple & discriminating monopoly
- Public & private monopoly
Monopoly Equilibrium
The monopolist can control both price and supply of the product. But
at any point of time she can fix only one of them. Either she can fix
the quantity of output and let the market demand determine the price
of the product; or she can fix the price of the product and let the
market demand determine the quantity which she can sell at the given
price.
Having profit maximising objective, she adopts the rationale of
equating MC with MR and fixes the level of output which gives her
the maximum profits or where the losses are minimum. Thus when
equilibrium output is decided, the price is automatically determined in
relation to the demand for the product.
A monopolist may be earning profits or incur losses in
the short run.
Features of Monopoly price
- It is not the highest possible price.
- This price does not bring the highest average profit to the seller
- Monopoly price is often associated with the output, the AC of which
is still falling.
- Under perfect competition, the price charged is equal to MC but in
monopoly the price is above MC.
Price discrimination
Price discrimination implies the act of selling the output of the same
product at different prices in different markets or to different buyers.
Types of price discrimination
- Personal discrimination
- Age discrimination
- Sex discrimination
- Locational or territorial discrimination
- Size discrimination
- Use discrimination
- Time discrimination
Objectives of price discrimination
- To maximise the profits.
- To convert the consumers’ surplus into producer’s profit.
- To capture new markets.
- To keep hold on export markets.
- To exploit the unutilised capacity by widening the size of
market through price discrimination.
- To clear off surplus stock.
- To augment future sales by quoting lower rates at present to the
potential buyers who may develop the taste for the product in
future.
- To weed out the potential competition from the market or
destroy a rival firm.
Conditions necessary for price discrimination
- Separate markets
- Apparent product differentiation
- Prevention of re-exchange of goods
- Non-transferability nature of product
- Let go attitude of buyers
- Legal sanctions
- Buyer’s illusion
When price discrimination is profitable?
Even though circumstances are favourable to practice price discrimination, it
may not always be profitable. It is profitable only when the following two
conditions are prevailing.
- Elasticity of demand differs in each market
- The cost-differential of supplying output to different markets should not be
large in relation to the price differential based on elasticity differential.
• The monopolist’s demand curve
– downward sloping
– MR below AR
MC
ATC
P*
MR AR
Q
Q*
• Disadvantages of monopoly
– high prices / low output: short run
– high prices / low output: long run
– lack of incentive to innovate
• Advantages of monopoly
– economies of scale
– profits can be used for investment
Monopolistic Competition
“
Monopolistic competition is defined as a market setting in
which a large number of sellers sell differentiated
products”
“ Monopolistic competition is a market situation in which
there is keen competition, but neither perfect nor pure,
among a group of large number of small producers or
suppliers having some degree of monopoly power
because of their differential products” – Prof. E.H.
Chamberlin
Main Features
• In Monopolistic
Competition, multiple
Monopolies co-exist
while producing Goods
that are similar enough
to readily act as
Substitutes for each
other.
SimilarProducts
• In Monopolistic Competition,
the products available in the
Market must be Similar, but
not Identical.
• This allows the Consumer to
select the Good best suited to
their tastes and needs at Prices
comparable to their
Substitutes.
LimitedPriceControl
• In Monopolistic
Competition, Producers
have limited control
over the Prices that they
can charge because
Consumers have a
number of alternatives
readily available to
them.
DifferentiatedProducts
• In Monopolistic
Competition, Producers must
act to separate their good
from those offered by their
competitors.
• They do this by creating both
perceived and actual
differences between their
products to make them more
desirable to select
Consumers.
Price and output determination under monopolistic competition
£0.60
MR D (AR)
Q1
Output / Sales
Monopolistically Competitive
Firm in the Long Run
MC This is the long run
Cost/Revenue
equilibrium position of a
firm in monopolistic
competition.
AC
AR = AC
AR1
MR1
Q2 Output / Sales
• Short run
– Downward sloping demand – differentiated
product
– Demand is relatively elastic – good substitutes
– MR < P
– Profits are maximized when MR = MC
– This firm is making economic profits
• Long run
– Profits will attract new firms to the industry (no
barriers to entry)
– The old firm’s demand will decrease to DLR
– Firm’s output and price will fall
– Industry output will rise
– No profit (P = AC)
Oligopoly
Market structure that is dominated by just a
few firms
MC1
P* MC2
b AR
Q
Q*
MR
• For any MC between a and b, the profit maximizing price and
output remain unchanged