Prof.

(Dr) Vandana Bhavsar

 Economic Profit v/s
Accounting Profit
Accounting profit
The businesss revenue minus the
explicit cost and depreciation
Depreciation occurs because machines
wear out over time
Economic profit
The businesss revenue minus
opportunity cost
In economics, profit is simplification of
economic profit.
 REVENUE
Revenue is the amount of money firms get from
selling their products or services.
If firm sells only one product at a fixed price, then
revenue is calculated:
Multiplying the number of units sold by the price per
unit.
Total Revenue the total amount received from
selling a given output
TR = P x Q
Average Revenue the average amount received
from selling each unit
AR = TR / Q
Marginal Revenue the amount received from
selling one extra unit of output
MR = TRn TR n-1 units
 RELATION BETWEEN AR & MR
AR & MR under perfect AR & MR under Monopoly
competition If the firm faces a
If a firm is a price taker, downward-sloping demand
its output decisions do not for its output, marginal
affect the price of its revenue will be less than
output. price
MR = P
R
R

P AR = MR

AR
0 Q MR
0 Q
 Important Points to Note:
Marginal revenue and the price elasticity of
demand are related by the formula
If elasticity of AR = , MR coincides with
AR

If e = 1, MR is zero
If e > 1, MR is +ve
If e < 1, MR is ve
If e = 0, gap between AR & MR widens.
 MARKETS
Market structure identifies how a market
is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm
has
The degree to which the firm can influence
price
Profit levels
Firms behaviour pricing strategies, non-
price competition, output levels
The extent of barriers to entry
The impact on efficiency
 MARKET STRUCTURE

Perfect Pure
Competition Monopoly

More competitive (fewer imperfections)

 contd.

Perfect Pure
Competition Monopoly

Less competitive (greater degree

of imperfection)
 contd.

Perfect Pure
Competition Monopoly
Monopolistic Competition Oligopoly DuopolyMonopoly

The further right on the scale, the greater the

degree
of monopoly power exercised by the firm.
 PERFECT COMPETITION
Characteristics:
Infinitely large number of firms
Products are homogenous - consumer
has no reason to express a preference for any
firm
Freedom of entry and exit into and out
of the industry
Firms are price takers have no control
over the price they charge for their product
Each producer supplies a very small proportion
of total industry output
Consumers and producers have perfect
knowledge about the market
 TR, AR & MR IN PERFECT
COMPETITION
Quantity Price Total Revenue Average Revenue Marginal Revenue
(Q) (P) (TR=PxQ) (AR=TR/Q) (MR=DTR/ DQ )
1 Rs. 6.00 Rs. 6.00 Rs. 6.00
2 Rs. 6.00 Rs. 12.00 Rs. 6.00 Rs. 6.00
3 Rs. 6.00 Rs. 18.00 Rs. 6.00 Rs. 6.00
4 Rs. 6.00 Rs. 24.00 Rs. 6.00 Rs. 6.00
5 Rs. 6.00 Rs. 30.00 Rs. 6.00 Rs. 6.00
6 Rs. 6.00 Rs. 36.00 Rs. 6.00 Rs. 6.00
7 Rs. 6.00 Rs. 42.00 Rs. 6.00 Rs. 6.00
8 Rs. 6.00 Rs. 48.00 Rs. 6.00 Rs. 6.00
 PRICE DETERMINATION
FIRM C/R/P INDUSTRY
C/R/P SMC
SRSS

SAC
P P
D=MR=AR

q Q Q
Q

Market price is set at industry level at the

intersection of demand and supply
The firm accepts price as given at P & chooses
output at q where SMC=MR to maximise profits
The Firms Long-Run Decision
to Enter a Market

A firm will enter the industry if such an

action would be profitable.
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC
The Firms Long-Run Decision to
Exit a Market
In the long-run, the firm exit if the
revenue it would get from producing is
less than its total cost.
Exit if TR < TC
Exit if TR/Q < TC/Q
Exit if P < ATC
MONOPOLY
 MONOPOLY
Pure monopoly where only
one producer exists in the industry

In reality, rarely exists always

some form of substitute available!

Monopoly exists, therefore,

where one firm dominates the market
 Greyhound

Cable TV

Government Monopoly Natural Monopoly

Owned & operated Competition would be
Eg: Post office chaotic. It is natural
State Highways to give it to one co.
Eg: Utilities
Price Makers Cable TV

Monopoly Waste
[mono(1) poly (seller)] Management
Control over price: Total
Rubiks Product: unique
Eg: Cable TV
Cube
Technological Monopoly
Geographic Monopoly
Patent
Only seller in a specific area
Ex: Rubiks Cube
Example: Remote Store

Monopoly the power of one

 CHARACTERISTICS
One Seller & large Number of Buyers
Only a person/few partners/joint stock co.
One powerful firm controlling the market
No close substitutes
Goods are unique, no available substitutes
When cross elasticity of demand for the product
of a single seller is zero or very small.
Restriction on the Entry of new Firms
Legal restrictions, Economies of scale, Control
of an essential resource
Informative selling Costs
in beginning it is incurred to give information
to buyers about the product
No Consumer Sovereignty
 EXAMPLES
Local services local telephone, gas, water &
electricity.

Indian Railways has monopoly in Railroad

transportation

State Electricity board have monopoly over

generation and distribution of electricity in many
of the states.

Hindustan Aeronautics Limited has monopoly

over production of aircraft.

There is Government monopoly over production of

nuclear power.
 DEMAND, AR & MR
DIAMOND PRICE TR AR MR
UNITS [Rs.]
SOLD
3 7000

4 6750

5 6000

6 5250

7 5000
 PRICE DISCRIMINATION
A monopolist can sometimes increase
economic profit by charging higher
prices to customers who value the
product more

The practice of charging difference

prices to different customers when the
price differences are not justified by
differences in cost is called price
discrimination
 CONDITIONS FOR PRICE
DISCRIMINATION
The demand curve for the firms product must
slope downward the firm has some market
power and control over price
There are at least two groups of consumers for
the product, each with a different price
elasticity of demand
The producer must be able, at little cost, to
charge each group a different price for
essentially the same product
The producer must be able to prevent those
who pay the lower price from reselling the
product to those who pay the higher price
 APPLE PATENT VICTORY OVER
SAMSUNG
Apple Inc. scored a clear victory in its patent
dispute with Samsung Electronic on 24th August,
2012.
This will increase pressure on Smartphone
makers around the world to create handsets that
stand apart from the iphone and deliver more
choices for consumer
The verdict strengthens Apples position and
discourages rivals such as Samsung, HTC etc.
from mimicking iphone.
Conversely its good for competitors as new
designs will come into market leading to
innovation
MONOPOLISTIC
MARKETS
 CHARATERISTICS OF
MONOPOLISTIC COMPETITION
Fairly Large number of firms in the industry
Each firm has relatively small market share.
Each firm must be sensitive to average market
price of its product
Collusion is not possible due to the number of
firms
Product Differentiation
may have some element of control over price
due to the fact that they are able to
differentiate their product in some way from
their rivals products are therefore close, but
not perfect, substitutes.
 contd.
Price & Quality
An attempt to increase price will normally
results in a lower volume sold.
Quality is design, reliability, service provided to
buyer and ease of access to product.
A downward sloping demand curve
Relative Easy Entry And Exit From The
Industry
few barriers to entry and exit
Consumer And Producer Knowledge Is
Imperfect
Selling Costs
Competition on Quality, Price, Marketing firm
must market = promotion, distribution,
packaging
 EXAMPLES
Monopolistically competitive firms are most common in
industries where differentiation is possible.
The best examples of monopolistic competition come
from retail trade, including restaurants, clothing stores,
and convenience stores
Sporting Goods,
Radio Stations,
Clothing,
Computer,
Health Spas,
Frozen Foods, Canned Goods
Apparel Stores,
Convenience Stores,
Plumbers/electricians/local builders,
Solicitors,
Private schools,
Insurance brokers
 SELLING COSTS
Meaning
They are incurred in order to alter the
position or shape of the demand curve for
the product.
Selling Costs are generally of U shaped
curves.
Selling costs affect demand curve in two
ways:
Change in the shape of Demand Curve
from inelastic to elastic
Change in the location of Demand Curve -
shifting of demand curve.
 EXCESS CAPACITY
It is the difference between optimum
output & the actual output in the long
run equilibrium.

Optimum output of firm is mini. of

LRAC.

Monopolists always is in equilibrium

before mini. of LRAC.

This means prices would be more as

compared to perfect competition.
OLIGOPOLY
 CHARACTERISTICS OF
OLIGOPOLY
Few Firms
Rival firms dominate.
Rivalry takes its most direct & active form.
Homogeneous Or Differentiated Products
Lack Of Uniformity
Some firms may be very large and some may be
small
E.g. share of Maruti Udyog is 70% in small car
segment of the automobile industry while the
share of Ceilo or Tata is comparatively much
less.
Advertisements
It has strategic importance
 contd

Elements of Monopoly
Product differentiation creates brand loyalty
Keen competition
Interdependence Of Firms
Policies of one firm affect the other firms
Existence Of Price Rigidity
Uncertainty
Due to interdependence of firms on each
other, no certain prediction about the
behaviour of different firms can be made.
Substantial Barriers To Entry
Existence of Non-profit Motive
Sales maximisation, output maximisation.
 EXAMPLES
Athletic shoe market
Nike has 47% of market
Reebok has 16%
and Adidas has 7%
Cement,
Steel,
Pepsi and Coke,
Petroleum refining
Power generation and supply in most of the parts of
the country
The car market is an apt oligopoly example. There
are few car manufacturers across the world as
against the demand for millions of cars every day. The
Indian automobile market is considered to be the best
examples of oligopoly.
 OLIGOPOLY MODELS MODERN
VERSION
NON- COLLUSIVE MODELS
Non-collusive models assume that there is
no collusion between the firms
Price Rigidity Paul Sweezys Kinky
Demand model
COLLUSIVE MODELS
Cartels
 CARTELS
Formal (explicit) agreement among firms.
Usually occur in an oligopolistic industry, where there is
a small number of sellers and usually involve
homogeneous products.

Members may agree on such matters as price fixing, total

industry output, market shares, allocation of customers,
allocation of territories, establishment of common sales
agencies, and the division of profits or combination of
these.
The aim of such agreement is to increase individual
member's profits by reducing competition.
Two typical services
Cartels & Profit Sharing
Cartel & Market Sharing
Jaypee Cement and Shree Cement are among 10
cement companies likely to be probed for
suspected cartelisation.
The three companies - Ultra tech, Gujarat Ambuja
ACC control almost one-third of the country's total
cement manufacturing capacity of 300 million
tonnes.
Last year, the Builders Association of India had
moved the Competition Commission of India
alleging the cement manufacturers of having
formed a price cartel.
 EXAMPLES

OPEC: As its name De Beers is a cartel

suggests, OPEC is of companies that
organized by sovereign trade in rough
states is a good example of diamond exploration.
cartel.
 DUOPOLY
Market structure where the industry is
dominated by two large producers
Collusion may be a possible feature
Price leadership by the larger of the two firms
may exist the smaller firm follows the price lead
of the larger one
Highly interdependent
High barriers to entry
Cournot Model French economist analysed
duopoly suggested long run equilibrium would
see equal market share and normal profit made
In reality, local duopolies may exist
Pepsi & Coca-Cola in the soft drink market
Global aircraft market Airbus & Boeing
 Structure No. Of Firms & Part Of Degree Of Price Methods Of
Degree Of Product Economy Control Marketing
Differentiation Where
Prevalent

Perfect Many producers A few raw agri. None Market

Competition Identical Products Goods [wheat, exchange or
corn.] auction

Monopolistic Many producers Retail trade Some Advt. & quality

Perceived [food, rivalry, Admin.
differences in gasoline,..] Prices
product

Oligopoly Few Producers Steel, Some Advt. & quality

Homogeneous aluminum rivalry, Admin.
Prices
Few Producers Autos, Some -do-
Product Machinery
differentiation
Monopoly Single producers Local Considerable but Advt. & service
No close telephone, regulated promotion
substitute electricity & gas
THANK YOU