Market Analysis

The Degree of Competition

 Classifying markets
 number of firms
 freedom of entry to industry
 nature of product
 nature of demand curve
 The four market structures
 perfect competition
 monopoly
 monopolistic competition
 oligopoly
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
The Degree of Competition
 Classifying markets
 number of firms
 freedom of entry to industry
 nature of product
 nature of demand curve
 The four market structures
 perfect competition
 monopoly
 monopolistic competition
 oligopoly
Perfect Competition
 Assumptions
 firms are price takers
 freedom of entry
 identical products
 perfect knowledge

 Short-run equilibrium of the firm

 price, output and profit
Short-run equilibrium of industry and
firm under perfect competition

P £
S MC AC

D = AR
Pe AR
AC = MR

D
O O Qe
Q (millions) Q (thousands)

(a) Industry (b) Firm

Loss minimising under perfect
competition
P £ AC
S MC

AC
D1 = AR1
P1 AR1
= MR1

D
O O Qe
Q (millions) Q (thousands)

(a) Industry (b) Firm

Perfect Competition
 Assumptions
 firms are price takers
 freedom of entry
 identical products
 perfect knowledge
 Short-run equilibrium of the firm
 price, output and profit
 The short-run supply curve of the
firm
Deriving the short-run supply curve

P S £
MC = S
a D1 = MR1
P1
b D2 = MR2
P2
c D3 = MR3
P3
D1
D2
D3
O O
Q (millions) Q (thousands)

(a) Industry (b) Firm

Perfect Competition
 Long-run equilibrium of the firm

 all supernormal profits competed away

 LRAC = AC = MC = MR = AR
 Long-run equilibrium under Profits
perfect
return
competition Supernormal
New firms enter to normalprofits
P £
S1
Se

LRAC
P1 AR1 D1
PL ARL DL

D
O O QL
Q (millions) Q (thousands)

(a) Industry (b) Firm

Long-run equilibrium of the firm under perfect
£ (SR)MC
competition
(SR)AC

LRAC

DL
AR = MR

LRAC = (SR)AC = (SR)MC = MR = AR

O Q
Perfect Competition
 Benefits of perfect competition

 price equals marginal cost

 prices kept low

 firms must be efficient to survive

 In a perfectly competitive market
supply and demand functions are
 Qs = 1000P + 500
 Qd = 5000 – 500P
 If variable cost function of a firm is
TVC = 103Q – 0.5Q2
5. Profit maximizing output for the firm
6. Economic profit?
 XYZ Ltd., operating in a perfectly competitive
market, sells a stationery item at Rs.10 per
unit. The cost function is given as
TC = 4,000 + 4Q + 0.02Q2
1.The profit maximizing output for the firm?
 Softy Cereals Inc. (SCI) produces and markets Tasties, a
popular ready-to-eat breakfast cereal. The
demand and supply functions of Tasties are as follows:

 QD = 150– 3P
 QS = 50 +10P.

 If excise tax of Rs.3 is imposed on Tasties, what is the

proportion of tax that will be borne by the consumers ?
 Demand and supply functions for a product
are:
 Qd = 10,000 – 4P
 Qs = 2,000 + 6P
 If the government imposes a sales tax of
Rs.100 per unit, what will be the new
equilibrium price?
Monopoly
 Defining monopoly
 Barriers to entry
 economies of scale
 economies of scope
 product differentiation and brand loyalty
 lower costs for an established firm
 ownership/control of key factors
 ownership/control over outlets
 legal protection
 mergers and takeovers
 aggressive tactics
Monopoly
 The monopolist’s demand curve
 downward sloping
 MR below AR
 Equilibrium price and output
 Equilibrium output, where MC = MR
Profit
£ maximising under
MC monopoly

MR
O Qm Q
Monopoly
 The monopolist’s demand curve
 downward sloping
 MR below AR
 Equilibrium price and output
 Equilibrium output, where MC = MR
 Equilibrium price, found from demand
curve
Profit
£ maximising under
MC monopoly
AC

AR

AC

AR
MR
O Qm Q
Monopoly
 The monopolist’s demand curve
 downward sloping
 MR below AR
 Equilibrium price and output
 Equilibrium output, where MC = MR
 Equilibrium price, found from demand
curve
 Profit
 Measuring profit
Profit
£ maximising under
MC monopoly
Total profit
AC

AR

AC

AR
MR
O Qm Q
Monopoly
 The monopolist’s demand curve
 downward sloping
 MR below AR
 Equilibrium price and output
 Equilibrium output, where MC = MR
 Equilibrium price, found from demand
curve
 Profit
 Measuring profit
Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
Equilibrium of industry under perfect
competition and monopoly: with the same MC
curve
£ MC

Monopoly
P1

AR = D

MR
O Q1 Q
Equilibrium of industry under perfect
competition and monopoly: with the same MC
curve
£ MC ( = supply under
perfect competition)

Comparison with
P1 Perfect competition

P2

AR = D

MR
O Q1 Q2 Q
Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
 lack of incentive to innovate
Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
 lack of incentive to innovate
Monopoly
 Disadvantages of monopoly
 high prices / low output: short run
 high prices / low output: long run
 lack of incentive to innovate
 Advantages of monopoly
Monopoly
 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
Equilibrium of industry under perfect
competition and monopoly: with different MC
curves
£

MCmonopoly

P1

AR = D

MR
O Q1 Q
Equilibrium of industry under perfect
competition and monopoly: with different MC
curves
£ MC ( = supply)perfect competition

MCmonopoly

P2

P1
x
P3

AR = D

MR
O Q2 Q1 Q3 Q
Monopoly
 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
 Demand functions of a monopolist in two effectively
segmented markets are:
 Qa = 1,000 – 50Pa
 Qb = 800 – 25Pb
 Total cost function of the monopolist is TC = 500 + 10Q.
 If the monopolist does not practice price discrimination,
what is the sales maximizing price ?
Price Discrimination
 A firm sells in two markets and has constant marginal costs of
production equal to $2 per unit. The demand and demand and
marginal revenue equations for the two markets are as follows:

 Market 1 Market 2

 P1 = 14 – 2Q1 P2 = 10 – Q2

MR1 = 14 – 4Q1
MR2 = 10 – 2Q2

 Using third-degree price discrimination, what are the profit-
maximizing prices and quantities in each market? Show that
greater profits result from price discrimination than would be
obtained if a uniform price were used.