INTRODUCTION TO VARIOUS CONDITONS OF MARKET PERFECT COMPETITION

SHORT RUN LONG RUN

MONOPLY
SHORT RUN LONG RUN

MONOPLISTIC COMPETITION
SHORT RUN LONG RUN

It is the market situation where there is large number of buyers and sellers of a homogeneous product and the price of such product is determined by market forces i.e.industry.

FEATURES OF PERFECT COMPETITION

Large no. but small size of buyers and sellers

Homogeneous products
Perfect knowledge Free entry and exit of firms

Free from checks

Perfect mobility Same price

Price of commodity is determined by industry and not by any one seller or a firm. Equilibrium price of commodity is determined by industry at that point at which aggregate demand for commodity is equal to aggregate supply by the industry.

EQUILIBRIUM OF FIRM UNDER PERFECT COMPETITION

SHORT RUN :Under short run period firm may earn:Super normal profits (AR>AC) Normal profits (AR=AC) May suffer minimum losses (AR<AC) (AR<AVC)

In the figure (15.3), output is measured along OX axis and revenue / cost on OY axis. We assume here that the market price is equal to OP. A price taker firm has to sell its entire output at this prevailing market price i.e. OP. The firm is in equilibrium at point L. Where MC = MR. The inter section of MC and MR determine the quantity of the good the firm will produce.

We assume in the figure (15.4) that OP is the prevailing market price and PK is the average revenue, marginal revenue curve. At point K, which is the break even price for a Competitive firm, the MR, MC and ATC are all equal. The firm produces OM output-and sells at market price OP. The total revenue of the firm to equal is the area OPKM. The total cost of producing OM output also equals the area OPKM. The firm is earning only normal profits. It is a situation in which the resources employed by the firm are earning just what they could-earn in some other alternative occupations.

MINIMUM LOSSES
FIGURE EXPLANATION
In this figure (15.6) we assume

that the market price is OP. The firm, is in equilibrium at point Z where MR = MC. The firm produces OK output and sells at OP unit cost. The total revenue of the firm is equal to the area OPZK. Whereas .the total cost producing OK output is OTFR. The firm is suffering a net loss of total fixed cost equal to the area PTFZ. The firm at point Z is just covering average variable costs.

NORMAL PROFITS
EXPLANATION

FIGURE

LONG RUN :It is that period in which producer get sufficient time to adjust their supplies acc. To changed conditions of demand. In this time period firm will earn only normal profits. LMC=MR=AR=LAC

It is that situation of market in which there is single seller of a product. For e.g.-you get your electricity supply from one agency i.e. state electricity board;you travel by railway train owned and run by government of india.

MONOPLY

One seller and large no. of buyers Monoply is also an industry Restrictions on the entry of new firms No close subsitutes Price maker

 Two

conditions must be fulfilled :MR=MC MC cuts MR from below EQUILIBRIUM UNDER SHORT RUN :Firm may earn : Super normal profits(AR>AC) Normal profits(AR=AC) Minimum losses(AR<AC)

SUPER NORMAL PROFITS

FIGURE EXPLANATION
In this diagram, the monopoly firm is in equilibrium at point K where SMC = MR. The short run marginal cost (SMC) curve cuts MR from below. At point K both the equilibrium conditions are fulfilled. As a result, therefore, OE is monopoly price and OB, the monopoly output. At the monopoly output OB, the average total cost OF = BN. The profit per unit is FE. The short run monopoly profit is ETNF, It is represented by the area of shaded rectangle

NORMAL PROFITS
FIGURE EXPLANATION

a firm is in the short run equilibrium at point K, where SMC = MR. The price line is tangent to SAC at point C. The firm charges CB price per unit for units of output OB. The total revenue of the firm is equal to the area OPCB. The total cost of the firm is also equal to the area OPCB. The firm earns only normal profits and continues operating.

FIGURE

EXPLANATION

the best short run level of output is OB units which is given by the point L where MC = MR. A monopolist sells OB units of output at price CB. The total revenue of the firm is equal to OBCF. The total cost of producing OB units is OBHE. The monopoly firm suffers a net loss equal to the area FCHE. If the firm ceases production, it then has to bear to total fixed cost equal to GKHE. The firm in the short run prefers to operate and reduces its losses to FCHE only. In the long, if the loss continues, the firm shall have to close down.

LONG RUN EQUILIBRIUM

The monoplist will be in equilibrium at a point where

his LMC=MR. Monoply will fix price in such a way as to earn super-normal profit refers to situation where AR>LAC.

In the long run, all the factors of production including the size of the plant are variable. A monopoly firm will maximize profit at that level of output for which long run marginal cost (MC) is equal to marginal revenue (MR) and the LMC curve intersects the MR curve from below. In the figure, the monopoly firm is in equilibrium at point E where LMC = MR and LMC cuts MR curve from below. QP is the equilibrium price and OQ is the equilibrium output.

FIGURE

EXPLANATION

It is that situation of market where there are many sellers of a commodity,but the product of each seller is different from the product of other sellers in one way or other,there is product differentiation may be in form of difference in brand name,trade mark. For e.g.lipton,tata tea,brook bond.

EQUILIBRIUM UNDER IMPERFECT COMPETITION

To be in equilibrium, two conditions must be fulfilled : MR=MC MC curve cuts MR Curve from its below EQUILIBRIUM IN: SHORT RUN: Super normal profits Minimum losses LONG RUN:Earns only normal profit

SUPERNORMAL PROFIT
FIGURE

EXPLANATION
In the figure (17.1), the downward sloping demand curve (AR curve) is quite elastic. The MR curve lies below-the average curve except at point N. The SMC curve which includes advertising and sales promotional costs is drawn in the usual fashion. The SMC curve cuts the MR curve from below at point Z. The firm produces and sells an output OK, as at this level of output MR = MC. The firm sells output OK at OE/KM per unit price. The total revenue of the firm is equal to the area OEMK, whereas the total cost of producing output OK is OFLK. The total profits of the firm are equal to the shaded rectangle FEML. The firm earns abnormal profits in the short run.

FIGURE

EXPLANATION

In the Figure (17.2), marginal cost (SMC) equates marginal revenue MR curve from below at point Z. The firm produces output OK and sells at OF/KT per unit-price. The total receipt of the firm is OFTK. The total cost of producing output OK is equal to OEMK. The firm suffers a net loss equal to the area FEMT on the sale of OK output.

LONG RUN PERIOD

Firm get only normal profits because if firm earns super normal profits,several firms will be attracted,total supply will increasewhich will lower the profits to normal profit

the figure (17.3), the higher shifted long-run marginal cost curve intersects the higher shifted marginal revenue curve at point M. The firm at this raised equilibrium point, produces the reduced level of output OK. It sells this output at price TK as at point T, LAC is a tangent to the demand or average revenue curve at its minimum point. The total revenue of the firm is equal to the area OETK. The total costs of the firm are also equal to the area OETK. The firm is earning only zero or normal economic profits. As the monopolistically competitive firm sets a price higher than that minimum average cost in the long-run, the firm therefore produces a smaller output.

FIGURE

EXPLANATION

 Under perfect competition,price is equal to marginal

and average cost. Under monoply,price is greater than both marginal and average cost Under monoplistic competition,price is equal to average cost but greater than marginal cost.