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Market Analysis
Performance
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
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
Qualifying a perfectly competitive market :
Large number of buyers and sellers (price takers)
Freedom of entry
Identical products
Uniform Pricing policy
Perfect knowledge
Free mobility of factors
Least intervention of government
No Transportation cost
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)
P £ AC
S MC
AC
D1 = AR1
P1 AR1
= MR1
D
O O Qe
Q (millions) Q (thousands)
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)
– LRAC = AC = MC = MR = AR
Long-run equilibrium under perfect competition
Profits return
Supernormal
New firms enter to normalprofits
P £
S1
Se
LRAC
P1 AR1 D1
PL ARL DL
D
O O QL
Q (millions) Q (thousands)
LRAC
DL
AR = MR
O Q
Perfect Competition
• Benefits of perfect competition
• Qs = 20,000 + 30P
• Qd = 40,000 – 20P
• 1.Determine the equilibrium price and quantity
• Suppose an increase in housing starts results in a new demand equation
• Qd = 50,000 -20P
• 2.What is the new equilibrium price and quantity
• The Plywood industry is perfectly competitive, and the marginal cost equation for one firm,
Greenply,is given by MC = 200 + 4Q
• 3.What is the short-run output rate for Greenply?
• Average Cost is given by
• AC= 1000/Q +200 + 2Q
• 4.In the short-run , how much economic profit will the firm earn?
• Suppose in the long-run many firms will enter the industry and the supply would increase to
• S = 24000+30P. Find out the long-run profit for the firm.
Perfect competition
• The market demand and supply equations for Plywood are given by
• Qs = 20,000 + 30P
• Qd = 40,000 – 20P
• 2.What is the new equilibrium price and quantity
• The Plywood industry is perfectly competitive, and the marginal cost
equation for one firm, Greenply, is given by MC = 200 + 4Q
• 3.What is the short-run output rate for Greenply?
• Average Cost is given by
• AC= 1000/Q +200 + 2Q
• 4.In the short-run , how much economic profit will the firm earn?
• Suppose in the long-run many firms will enter the industry and the
supply would increase to
• S = 24000+30P. Find out the long-run profit for the firm.
• In a perfectly competitive market supply and
demand functions are
• Qs = 1000P + 500
• Qd = 5000 – 500P
• If variable cost function of a firm is VC = 103Q
– 0.5Q2
1.Profit maximizing output for the firm
2.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.
– MR = P (1+1/e)
£ Profit maximisingMC
under 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 maximisingMC
under 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 maximisingMC
under 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
– Supernormal profit can persist in long run
Monopoly
• Disadvantages of monopoly
– high prices / low output: short run
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
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
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
– high profits encourage risk taking
Monopoly Control
• Promoting competition
• Government Regulation
• Public Ownership
• Legal Action
• Fiscal Measures
• Promotion of Co-operation
• Publicity Drive
• Consumer Awareness
Demand and cost functions of a monopolist
are
P = 800 – 10Q
TC =300Q + 2.5Q2
1.What is the Profit maximizing output and
price for the monopolist?
2.What is the economic profit earned by the
Monopolist?
• A certain town in particular state obtains all of its
electricity from one company, South Electric.
Although the company is a monopoly, it is owned by
the citizens of the town, all of whom split the profits
equally at the end of each year. The CEO of the
company claims that because all of the profits will be
given back to the citizens, it makes economic sense
to charge a monopoly price for electricity .
• Do you agree with the CEO? Give reasons
The Deadweight Loss
• Because a monopoly sets its price above
marginal cost, it places a wedge between the
consumer’s willingness to pay and the
producer’s cost.
– This wedge causes the quantity sold to fall short
of the social optimum.
The Market for Drugs
Costs
and
Revenue
Price
During
patent
life
Price rafter
patent
Marginal
cost
expire
s Marginal Demand
revenue
Monopoly
price
Marginal
revenue Demand
Price
Consumer
surplus
Monopoly Deadweight
price loss
Profit
Marginal cost
Marginal Demand
revenue
– Second degree
– Second degree
– Second degree
MC
8
6
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX
– competition
Price Discrimination
• Profit maximising prices and output under
price discrimination
– competition
– profits
• 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
MR 1 = 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.
Monopolistic Competition
Assumptions of monopolistic competition
•Large no. of firms
•Easy Entry
•Product differentiation
•Selling costs
Short-run equilibrium of the firm
under monopolistic competition
£ MC
AC
Ps
ACs
AR D
MR
O Qs Q
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
Long-run equilibrium of the firm
under monopolistic competition
£
LRMC
LRAC
PL
ARL DL
MRL
O QL Q
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
Long run equilibrium of the firm under perfect and
monopolistic competition
£
LRAC
P1
P2
DL under perfect
competition
DL under monopolistic
competition
O Q1 Q2 Q
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
• The public interest
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
• The public interest
– comparison with perfect competition
Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
• The public interest
– comparison with perfect competition
– comparison with monopoly
• Q= 200-5P
• TC= 400+4Q
• At what price should this firm sell its product?
• If this is a monopolistically competitive firm,
what do you think would start to happen in
the long-run?
• Suppose in the long-run, the demand shifted
to Q=100-5P. What should the firm do?
Oligopoly
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– interdependence of firms
Current price
and quantity
give one point
on demand curve
P1
O Q1 Q
£ Kinked demand for a firm under oligopoly
D
P1
D
O Q1 Q
Oligopoly
• Non-collusive oligopoly: the kinked demand
curve theory
– Assumptions of the model
1. If a firm raises prices, other firms won’t follow and the firm loses a lot of business. So
demand is very responsive or elastic to price increases.
2. If a firm lowers prices, other firms follow and the firm doesn’t gain much business. So
demand is fairly unresponsive or inelastic to price decreases.
– stable prices
£Stable price under conditions of a kinked demand curve
MC2
P1 MC1
a
D AR
b
O Q1 Q
MR
Oligopoly
• Non-collusive oligopoly: the kinked demand
curve theory
– assumptions of the model
– stable prices
– limitations of the model
Oligopoly
• Non-collusive oligopoly: the kinked demand
curve theory
– assumptions of the model
– stable prices
– limitations of the model