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 Structure  conduct  performance

Perfect Competition Assumptions Short-run equilibrium of the firm 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 AC MC P O £ (b) Firm Q (thousands) S D AR D = AR = MR Pe AC O Qe Q (millions) (a) Industry

Loss minimising under perfect competition AC MC P £ S AC D1 = AR1 = MR1 AR1 Qe P1 D O O Q (millions) Q (thousands) (a) Industry (b) Firm

Perfect Competition Assumptions Short-run equilibrium of the firm 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 £ MC D1 = S D2 a D1 = MR1 D3 P1 b D2 = MR2 P2 c D3 = MR3 P3 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 perfect competition Profits return to normal New firms enter Supernormal profits LRAC P £ S1 D Se P1 AR1 D1 PL ARL DL O O QL Q (millions) Q (thousands) (a) Industry (b) Firm

Long-run equilibrium of the firm under perfect competition LRAC Long-run equilibrium of the firm under perfect competition (SR)MC £ (SR)AC AR = MR DL 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 Profit maximizing output for the firm 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 intimidation

Monopoly The monopolist’s demand curve Equilibrium price and output downward sloping MR below AR Equilibrium price and output Equilibrium output, where MC = MR

Profit maximising under monopoly MC £ MR O Qm Q

Monopoly The monopolist’s demand curve Equilibrium price and output downward sloping MR below AR Equilibrium price and output Equilibrium output, where MC = MR Equilibrium price, found from demand curve

Profit maximising under monopoly £ MC AC AR AR AC MR O Qm Q

Monopoly The monopolist’s demand curve Equilibrium price and output 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 monopoly £ MC Total profit AC AR AR AC MR O Qm Q

Monopoly The monopolist’s demand curve Equilibrium price and output 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

Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ AR = D MR Monopoly P1 O Q1 Q

Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ MC ( = supply under perfect competition) Comparison with Perfect competition P1 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 Advantages 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 Advantages 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 Advantages 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.