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					Market Structures &
Firm Equilibrium
Perfect Competition, Monopoly &
Monopolistic Competition
Importance of Markets

   Market Structure → Business Conduct
    or industry behavior→ Corporate
    performance in terms of price, product
    or profit
What is a Market

   Market is a place where buyers and
    sellers interact.

Benham says: Market is any area over
 which buyers and sellers are kept in
 close touch with each other, either
 directly or through dealers, that the
 price obtainable in one part of market
 affects the prices in other parts.
Criteria for market
   Classification by area
   Nature of transaction – spot vz future
   Volume of business – wholesale vz
   Time period – very short, short vz long
   Status of sellers – primary vz
   Regulated vz unregulated market
Market Structures
This is the competitive environment in which
  buyers and sellers operate. This influences
  pricing of product

Determinants of market structure
  – Number of buyers and sellers
  – Freedom of entry and exit
  – Nature of the product – homogenous (identical),
  – Control over supply/output
  – Control over price
  – Barriers to entry
    Classification of Market forms
Market     No. of   product    Control barrier
structur   firms               over    s
e                              price
Perfect    large    homogenous none    none

Monopolis large     differentiated some    Easy
tic                                        entry
Oligopoly few       differentiated large   No easy
Monopoly one        unique         Very    barriers
Market Structure

                                         Less Competitive
More Competitive

                   Perfect Competition
Perfect Competition
There are large number of independent sellers
   of a commodity, each too small to affect
   the price
a. All firms sell homogenous products
b. Perfect mobility of resources & firms can
   enter or leave the industry without much
c. Firm is a price taker
d. Economic agents have perfect knowledge

Examples: stock market, agricultural

   Single seller and many buyers
   No close substitutes for product
   Significant barriers to resource
    – Control of an essential input
    – Patents or copyrights
    – Economies of scale: Natural monopoly
    – Government franchise: Post office
Monopolistic Competition

      Many sellers and buyers
      Differentiated product
      Perfect mobility of resources
      Example: Fast-food outlets

    Few sellers and many buyers
    Product may be homogeneous or
    Barriers to resource mobility
    Example: Automobile
Perfect Competition:
Price Determination
Perfect Competition:
Price Determination
 QD  625  5P QD  QS QS  175  5P

          625  5P  175  5P
               450  10P
                 P  $45
     QD  625  5P  625  5(45)  400
     QS  175  5P  175  5(45)  400
Profit Maximisation – Short
Marginal approach
 In perfect competition, the firm can sell any
  amount at prevailing market price. Hence
  AR=MR. The demand curve is horizontal or
  infinitely elastic.
 How much quantity is to be produced in the
  short run ?
  A firm expands its output until
  MR = rising MC
Total profits are maximised when difference
  between TC and TR is greatest
 Perfect Competition:
 Short-Run Equilibrium
Firm’s Demand Curve = Market Price

                     = Marginal Revenue

Firm’s Supply Curve = Marginal Cost
where Marginal Cost > Average Variable Cost
Perfect Competition:
Short-Run Equilibrium
Short run profit

   The firm maximises profits when P
    exceeds AC, where MR=P=rising MC
   If price = AC, the firm is breaking
   If price > AVC but smaller than AC,
    the firm minimises losses
   If price is smaller than AVC, the firm
    minimises total losses by shutting
Long run equilibrium

   If firms in a perfectly competitive
    industry are making short run profits,
    more firms enter the industry
   This increases market supply of
    commodity and reduce the market
    price until all profits are competed
    away and firms just break even
   In long run, firms produce where P =
    lowest LAC
Perfect Competition:
Long-Run Equilibrium
Perfect Competition:
Long-Run Equilibrium
Quantity is set by the firm so that short-run:
Price = Marginal Cost = Average Total Cost

At the same quantity, long-run:
Price = Marginal Cost = Average Cost

            Economic Profit = 0
Competition in the
Global Economy

                     Domestic Supply

                     World Supply

                     Domestic Demand
Competition in the
Global Economy
   Foreign Exchange Rate
    – Price of a foreign currency in terms of the
      domestic currency
   Depreciation of the Domestic Currency
    – Increase in the price of a foreign currency
      relative to the domestic currency
   Appreciation of the Domestic Currency
    – Decrease in the price of a foreign currency
      relative to the domestic currency
Competition in the
Global Economy
    R = Exchange Rate = Dollar Price of Pounds

                                   Supply of Pounds

                                    Demand for Pounds
Monopoly: Meaning and
 Monopoly is that form of market structure in
  which there is a single seller of a commodity
  for which there are no close commodity
 Monopoly may be due
- Increasing returns to scale
- Control over raw material supply
- Patents
- Government franchise
e.gXerox corp
Demand and marginal
   Under monopoly, the firm is the
    industry and faces the negatively
    sloped demand curve for the

   If the monopolist wants to sell more of
    the commodity, it must lower its price
    MR is lower than P
    MR curve lies below D curve
Short Run Analysis of
   Profit maximisation is given at that
    output where MR =MC. Depending on
    the level of AC at this output, the
    monopolist can have profits, break
    even or minimise shortrun total losses
Short-Run Equilibrium
                Q* = 500
                P* = $11
Short-Run Equilibrium
    Demand curve for the firm is the
     market demand curve
    Firm produces a quantity (Q*) where
     marginal revenue (MR) is equal to
     marginal cost (MR)
    Exception: Q* = 0 if average variable
     cost (AVC) is above the demand curve
     at all levels of output
Long-Run Equilibrium
                 Q* = 700
                 P* = $9
Long run price and output
under Monopoly
   In long run, all plants are variable and
    monopolist can construct optimal scale
    of plant. Output where P=LMC and
    optimum scale of firm where SATC is
    tangent to LAC curve
   As entry is blocked, profits occur
    also, monopolist does not produce at
    lowest point
Control of monopoly

   Government regulation
   Banning of cartels
   Antitrust laws
Social Cost of Monopoly
Monopolistic Competition

    Many sellers of differentiated
     (similar but not identical) products
    Limited monopoly power
    Downward-sloping demand curve
    Increase in market share by
     competitors causes decrease in
     demand for the firm’s product
Monopolistic Competition -
   Many sellers
   Product differentiation
            Patent right and trade marks
            Quality differentiation
   Non price competition
   Freedom of entry and exit
   Higher elasticity of demand
Product differentiation

   Patents, trademarks, copyrights,
   Difference in quality and durability
   Diff in design, style, colour &
   Factors as courtesy of sales personnel,
    shopping location and shopping hours
   Guarantee and warranty, return
   Method, time and cost of delivery
Non Price Competition
 This refers to
-Sales promotion,
-customer services,
-other schemes to promote sales of a good

ADVERTISING – Informative advertising
                 Competitive advertisement

Advertising & product differentiation alter the
Selling Costs

   Selling costs include the costs on sales
    network, advertisement and sales
    promotion. They are incurred for
    product differentiation

   These costs add to a firm’s cost and
    cause an upward shift in AC and MC
    curves. These costs are incurred as
    long TR>TC
Monopolistic Competition
Short-Run Equilibrium
Profit Maximisation in
monopolistic competition
   The monopolistic competitor faces a
    demand curve which is negatively sloped
    (because of product differentiation) but
    highly elastic (due to close substitutes)
   Profits where MC =MR, provided P exceeds
    AVC. In short run, firms can make profit,
    break even or minimise losses
   In long run, firms are attracted into industry
    by short run profits or leave the industry if
    losses. Till, P = AC
Monopolistic Competition
Long-Run Equilibrium
         Profit = 0
Monopolistic Competition
Long-Run Equilibrium

               Cost with selling expenses

                    Cost without selling expenses

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