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PRICE - financial expression of the value of the

product
Price determined by supply and demand
Relationship between price and supply negative
For a consumer - price is the monetary expression
of the value to be enjoyed/benefits of purchasing a
product

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 Customers motivation to purchase a product
depends on:
1. need and a want.
2. perception of the value of a product in satisfying
need/want.
Perception of the value of a product varies from
customer to customer- dependent on personal
taste.
To obtain the maximum possible value - segment
the market that is to divide up the market into
groups of consumers whose preferences are
broadly similar

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 When the price of any commodity is neither
more nor less than what is sufficient to pay
the rent of the land, the wages of the
labour, and the profits of the stock
according to their natural rates, the
commodity is then sold for what may be
called its natural price.
The natural price itself varies with the
natural rate of each of its component parts,
of wages, profit, and rent

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 The natural price of labour is that price
which is necessary to enable the labourers,
to subsist and to perpetuate their race
The natural price of labour, therefore,
depends on the price of the food,
necessaries, and conveniences required for
the support of the labourer and his family.
With the progress of society the natural
price of labour has always a tendency to
rise.

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 The natural price of all commodities, except
raw produce and labour, has a tendency to
fall, in the progress of wealth and
population.
Though, they are enhanced in real value,
from the rise in the natural price of the raw
material of which they are made, this is
more than counterbalanced by the
improvements in machinery etc.

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 Actual price at which any commodity is sold
Regulated by quantity and demand
Effectual demanders - who are willing to
pay the natural price of the commodity

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 Case 1: When quantity of any commodity
which is brought to market falls short of the
effectual demand:
competition begins
market price will rise above natural price

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 Case 2 : When the quantity brought to market
exceeds the effectual demand:
It cannot be all sold to those who are willing to pay
the whole value
Some part must be sold to those who are willing to
pay less
market price will sink below the natural price

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 Market price of labour - price really paid for
it
Labour is dear when it is scarce, and cheap
when it is plentiful.
It has tendency to conform to it natural price

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 When the quantity brought to market is
sufficient to supply the effectual demand -
market price ~ natural price.
Whole quantity upon hand cannot be
disposed of for more.

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 If quantity exceeds the effectual demand:
some of the component parts of its price must be
paid below their natural rate.

If quantity brought to market fall short of the

effectual demand:
some of the component parts of its price must rise
above their natural rate

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 When market price of labour exceeds its natural
price - labourer is flourishing and happy
high wages increase labour population
wages again fall to their natural price.

When the market price of labour is below its

natural price - condition of the labourers is
most miserable.
demand for labour increases
market price of labour will rise to its natural price

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 Natural price - central price
Prices of all commodities are continually gravitating.
Different accidents keep them suspended above it and
sometimes force them below it.

But whatever may be the obstacles which hinder

them from settling in this centre of repose and
continuance, they are constantly tending towards
it.

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 Four basic market forms :
Monopoly
Oligopoly
Perfect competition
Monopolistic competition

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 A monopoly is a market structure in which
a single supplier produces and sells a given
product.

If there is a single seller in a certain

industry and there are not any close
substitutes for the product, then the market
structure is that of a "Pure Monopoly

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 There are only a few firms that make up an
industry.

This select group of firms has control over

the price and like a monopoly, an oligopoly
has high barriers to entry.

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 Oligopolistic firms :
Products they produce are often nearly
identical.
The companies which are competing for
market share are interdependent as a
result of market forces.

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 Characterized by :
Many buyers and sellers.
Many products that are similar in nature and, as a
result, many substitutes.
There are few (If any) barriers to entry for new
companies.
Prices are determined by supply and demand.

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 Characteristics of monopoly
Formation of monopolies
Sources of monopoly power
Types of monopolies
Monopoly and efficiency
Examples of monopolies

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 Profit Maximizer: Maximizes profits.

Price Maker: Decides the price of the

good or product to be sold.

High Barriers to Entry: Other sellers are

unable to enter the market of the
monopoly.

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 Single seller: In a monopoly, there is one
seller of the good that produces all the
output. Therefore, the whole market is
being served by a single company.

Price Discrimination: A monopolist can

change the price and quality of the product.

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 Monopolies can form for a variety of reasons,
including the following :

If a firm has exclusive ownership of a scarce

resource.
Example Microsoft owning Windows OS

Governments may grant a firm monopoly status,

also known as legal monopoly
Example K.S.E.B (Electricity)

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 Producers may have patents over designs, or
copyright over ideas, characters, images, sounds
or names, giving them exclusive rights to sell a
good or service
Example - A song writer having a monopoly
over their own material.

A monopoly could be created following the

merger of two or more firms.

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Sources of Monopoly Power

Monopolies derive their market power from

barriers to entry
3 types of barriers to entry

1) Economic
2) Legal
3) Deliberate

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Economic Barriers

Economies of scale: Reduce prices below a

new entrant's operating costs and thereby
prevent them from continuing to compete
Capital requirements: Production processes
that require large investments of capital, or
large R&D costs limit the number of
companies in an industry
Technological superiority: Entrants do not
have the size or finances to use the best
available technology

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 No substitute goods: There is no close
substitute for a good.
Control of natural resources: Control of
resources that are critical to the production of
a final good.
Network externalities: There is a direct
relationship between the proportion of people
using a product and the demand for that
product. More people who are using a
product the greater the probability of any
individual starting to use the product
Ex. MS

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Legal Barriers

Legal rights can provide opportunity to

monopolise the market of a good
Patents and Copyrights

Deliberate Actions
Deliberate actions to eliminate
competitors. Such actions include
collusion, lobbying governmental
authorities, and force.

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Types of monopolies
1. Natural monopoly
Cost of production declines throughout the
relevant range of product demand.
Cost curve below the demand curve.
Company with low production cost will
dominate the market, naturally evolve into a
monopoly.
Regulation is difficult.

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2. Government-granted monopoly
Government grants exclusive privilege to a
private individual or company to be the sole
provider of a commodity; potential
competitors are excluded from the market
by law, regulation, or other mechanisms of
government enforcement.
Ex; Patents and Copyrights
3. Bilateral Monopoly
Both a monopoly (a single seller)
and monopsony (a single buyer) in the same
market.

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 Market price and output will be determined
by forces like bargaining power of both buyer
and seller.
Ex: Labour Union and Factory
4. Complementary Monopoly
Consent must be obtained from more than
one agent in order to obtain the good.
This can be seen in private toll roads where
more than one operator controls a different
section of the road

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Monopoly and Efficiency

Monopoly setting is less efficient than perfect

competition.
Monopoly pricing creates a deadweight
loss referring to potential gains that went
neither to the monopolist nor to consumers.
Monopolies tend to become less efficient and
less innovative over time.

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 The Monopolies & Restrictive Trade Practices
Act, 1969

First enactment to deal with competition

issues
Came into effect on 1st June 1970.
Aims :-
Control of monopolies.
Probation of monopolistic, restrictive and
unfair trade practice.
Protect consumer interest.

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 Competition Act, 2002

To shift focus of law from curbing monopolies to

promoting competition.

Enacted on 13th January 2003

Objectives of the Competition Act:-

To prevent anti-competitive practices.
Promote and sustain competition.
Protect the interests of the consumers
Ensure freedom of trade.

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 Can benefit from economies of scale.

Earns export revenues for the country-

dominant Domestic monopolies entering
overseas market

Profits invested in new technology reduces

costs via process innovation.

Lower price and higher output in the long

run.

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 Generate dynamic efficiency (technological
progressiveness):-

High profit levels boost investment in R&D.

Innovation -large enterprises - lower costs.

Firm needs dominant position to bear risks.

Establishing barriers to entry.

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 Restricting output onto the market.

Charging higher price than in competitive

market.

Reducing consumer surplus and economic

welfare.

Restricting choice for consumers.

Reducing consumer sovereignty

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 Monopoly Perfect competition
Price>Marginal cost Price= Marginal cost

Great to absolute product zero product differentiation

differentiation

Involves single seller Infinite no of buyers and sellers

High barriers to entry Free entry and exit
Can preserve excess profit Cannot preserve excess profit
Does not have a well defined supply Has a well defined supply function
function

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 Oligopoly

An oligopoly is a market form in which

a market or industry is dominated by a small
number of sellers.

Lack of competition can lead to higher costs

for consumers.

The decisions of one firm influence, and are

influenced by, the decisions of other firms

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 Examples

Verizon, AT&T, Sprint, and T-Mobile together

control 89% of the US cellular phone market.

Nike, Reebok and Adidas has 70% of athletic

shoe market in the world.

Pepsi Co and Coco Cola has 72% of the soft

drink market in the world.
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 Characteristics of Oligopoly

Product may be homogeneous (steel) or

differentiated (automobiles).

They are price setters rather than price

takers.

Interdependence among various firms - Each

firm must consider reaction of rivals to
determine price and production.

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 Non-Price Competition-Oligopolies tend to
compete on terms other than price,
advertisement and product differentiation
are all examples of non-price competition.

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 Cartels

Formal agreement among firms.

Agreement are on matters such as price

fixing, industry output, market shares ,
allocation of territories, division of profits.

Aim of these agreement is to increase

individual members profit by reducing
competition.

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 Example for Cartel-OPEC

OPEC - Organization of Petroleum

Exporting Countries.

It is an inter governmental organization of

twelve oil-producing countries.
OPEC members collectively hold 79% of world
crude oil reserves and 44% of the worlds crude
oil production capacity

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 Modeling
Game theory Model- Analyzes
oligopolistic behaviour as a complex series of
strategic moves and reactive counter moves
among rival firms. In game theory, firms are
assumed to anticipate rival reactions.

Prisoners Dilemma
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 Cournot-Nash model

It is the simplest oligopoly model.

The model assumes that there are two

equally positioned firms.

The firms compete on the basis of quantity

rather than price and each firm makes an
output decision assuming that the other
firms behaviour is fixed.

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 Bertrand model

The Bertrand model is essentially the

Cournot-Nash model except the strategic
variable is price rather than quantity.

There are two firms in the market.

They produce a homogeneous product.
They produce at a constant marginal cost.
Firms choose prices PA and PB simultaneously.
Firms outputs are perfect substitutes.

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 Firms compete for market share and the
demand
Price competition involve discounting the
price of a product to increase demand.
Non-price competition focuses on other
strategies.
- Mass media advertising and
marketing

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 Store Loyalty cards .
Banking and other Financial Services.
In-store chemists / post offices / crches
Home delivery systems
Discounted petrol at hyper-markets
Extension of opening hours
Innovative use of technology
Financial incentives to shop at off-peak
times
Internet shopping for customers

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 Occurs when one firm has a dominant
position in the market .
lower market shares firms simply follow the
pricing changes prompted
examples :major mortgage lenders and petrol
retailers.

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 Domains Monopoly Oligopoly
Meaning one seller dominates numerous sellers have
the entire market their presence in one
single market
Characteristics A single firm A small number of
controls a large firms dominate the
market share in the industry and compete
industry, thereby based on product
gaining the ability to differentiation, price,
set price customer service etc
Prices High prices may be Moderate/fair pricing
charged since there is due to competition in
no competition market.

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 Domains Monopoly Oligopoly
Sources of Power By being the only Very few firms in the
viable seller in the industry,each firm
industry. significantly influence
the market by setting
price or production
quantity.
Barriers to entry Due to technology, Difficult to enter the
patents, distribution industry because of
overheads, economies of scale.
government regulation
or capital-intensive
nature of the industry.
Examples Microsoft, Health insurers,
Google,DeBeers, wireless carriers, beer
Monsanto (seeds), (Anheuser-Busch and
Long Island Rail Road MillerCoors), media
etc. (TV broadcasting,
book publishing,
movies) etc.

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 monopolistic market derives its power
through three sources: economic, legal and
deliberate.
oligopolistic market comes into existence
solely due to the accommodating nature of
other sellers.

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 Four music companies control 80% of the
market - Universal Music Group, Sony Music
Entertainment, Warner Music Group and EMI
Group
Six major book publishers - Random House,
Pearson, Hachette, HarperCollins, Simon &
Schuster and Holtzbrinck
Four breakfast cereal manufacturers -
Kellogg, General Mills, Post and Quaker

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 Definition-It is that market where no
participants are large enough as the market
to set the price of the good
Also called as pure competition
A perfectly competitive market is a
hypothetical market where competition is at
its greatest possible level.
It serves as a benchmark against which we
measure real-life and imperfectly competitive
markets

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 Infinite buyers and sellers-An infinite
number of consumers to buy the product at
a certain price and infinite producers to
supply the product at a certain price
Zero entry and exit barriers-the market is
open to competition from new suppliers
Perfect factor mobility -allows free long term
adjustments to changing market conditions

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 Perfect information-All consumers and
producers are assumed to have perfect
knowledge of price, utility & quality
Zero transaction costs-Buyers and sellers are
not charged in making an exchange of goods
Profit maximization-Firms are assumed to
sell where marginal costs meet marginal
revenue, where the most profit is generated.

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 Homogenous products-The qualities and
characteristics of a market good does not
vary between different suppliers
Non-increasing returns to scale-This ensures
that there will always be a sufficient number
of firms in the market
Property rights-Well defined property rights
determine what may be sold, as well as what
rights are conferred on the buyer.

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A firm in a perfectly competitive market
is a PRICE-TAKER
PRICE-TAKER : No control over the price
of the good it sells ; simply take the
market price as given
homogeneous product, no single firm
can increase the price that it charges
above the price charged by the other
firms in the market without losing
business

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 A perfectly competitive market is one
in which economic forces operate
unimpeded.

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 The number of firms is large.

Large means that what one firm

does has no bearing on what
other firms do.
Any one firm's output is
minuscule when compared with
the total market.

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 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.

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 There are no barriers to entry.

Technology may prevent some

firms from entering the market.
Social forces such as bankers only
lending to certain people may
create barriers.

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 The firms' products are identical.

- This requirement means that each

firm's output is indistinguishable from
any competitor's product

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 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.

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 no actual perfectly competitive market
in the real world, a number of
approximations exist

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 Free software works
Anyone is free to enter and
leave the market at no cost
All code is freely accessible
and modifiable, and
individuals are free to
behave independently
Free software may be
bought or sold at whatever
price that the market may
allow

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 Stock Exchange

Flaw in considering
as perfect
competition-large
institutional investors
(e.g. investment
banks) may solely
influence the market
price
violates the condition
that "no one seller
can influence market
price"

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 Street food in
developing countries

relatively few barriers to

entry/exit exist for street
vendors
street vendors may serve a
homogenous product; in
which little to no variations
in the product's nature exist
numerous buyers and sellers
of a given street food, in
addition to
consumers/sellers
possessing perfect
information of the product

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 A large street or a wholesale market for fruit
and vegetables will be quite close to perfect
competition

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 It is the point where market demand will
be equal to market supply
In short run, equilibrium will be
affected by demand
In the long run, both demand and
supply of a product will affect the
equilibrium
A firm will receive only normal profit in
the long run at the equilibrium

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short run and long run

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 the revenue of a firm is its turnover
The amount of money that a firm 'makes' is
not the profit; it is the amount of money left
after costs are taken away from revenue

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 This is the total receipts of money received by
a firm from the sale of its good or service in a
given time period. It can be calculated by
multiplying the quantity sold by the price at
which the goods were sold, or TR = P Q.

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 This is the amount of money received, on
average, for each good sold. If you think
about it, this is effectively the price.

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 Marginal cost is the cost of producing one
more unit of output. Marginal revenue is the
revenue received from selling one more unit
of output. It is the extra revenue at the
margin (i.e. by selling themarginal unit of
output).

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 Average Total revenue Marginal
Sales (Q)
revenue (AR) (TR) revenue (MR)
1 300 300 300
2 280 560 260
3 260 780 220
4 240 960 180
5 220 1100 140
6 200 1200 100
7 180 1260 60
8 160 1280 20
9 140 1260 -20
10 120 1200 -60

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 equilibrium market price is determined by the
interaction between market demand and
market supply
the market price is constant for each unit
sold, the AR curve also becomes the Marginal
Revenue curve (MR)
A firm maximises profits when marginal
revenue = marginal cost

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 firms are attracted into the industry if the
incumbent firms are making supernormal
profits
no barriers to entry and because there is
perfect knowledge
drives down price until the point where all
super-normal profits are exhausted

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