AMITY

We nurture talent
 MArkets

Sonia Singh

2
 What is market ?

“ Market is a set of conditions through which buyers and

sellers come in contact with each other for the purpose of
exchange of goods and services for value.”
 Market classification

On the basis of area

- Local Market
- Regional Market
- National Market
- International Market
On the basis of Nature of transactions
- Spot Market
- Future Market
On the basis of Volume of business
- Wholesale Market
- Retail Market
On the basis of Time
- Very short period Market
- Short period Market
- Long period Market
On the basis of Status of sellers
- Primary Market
- Secondary Market
- Terminal Market
On the basis of Regulations
- Regulated Markets
- Unregulated Markets
On the basis of Competition

- Pure and perfect competition

- Monopoly
- Oligopoly
- Monopolistic
Features of the four market structures
 Perfect
Competition
Pure
Monopoly

More competitive (fewer imperfections)

 Perfect Pure
Competition Monopoly

Less competitive (greater degree of

imperfection)
 Pure
Perfect
Monopoly
Competition

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degree of

monopoly power exercised by the firm.
 Perfectly Competitive Market Structure

•Many buyers and sellers

•Each buys and sells only a tiny fraction of the total

amount exchanged in the market

•Standardized or homogeneous product

•Buyers and sellers are fully informed about the price

and availability of all resources and products

•Firms and resources are freely mobile  over time

they can easily enter or leave the industry
•Individual participants have no control over the
price

•Price is determined by market supply and

demand  the perfectly competitive firm is a
price taker  it must “take” or accept, the
market price

•Firm is free to produce whatever quantity

maximizes profit
 Market Equilibrium and the
Firm’s Demand Curve in Perfect
Competition
 Exhibit: 1 Market price of wheat of $5 per bushel is determined in the left panel by the
intersection of the market demand curve and the market supply curve. Once the market
price is established, farmer can sell all he or she wants at that market price  price taker

(a) Market Equilibrium (b) Firm’s Demand

Price per bushel

Price per bushel

$5 $5 d

D
Bushels of Bushels of
0 1,200,000 wheat per day 0 5 10 15 wheat per day
•The firm maximizes economic profit by finding
the rate of output at which total revenue exceeds
total cost by the greatest amount

•Total revenue is simply output times the price per

unit

•Exhibits 2 and 3 provide us with the needed

information
 Marginal Revenue Equals Marginal Cost

•Golden rule of profit maximization:

•Marginal revenue, MR, is the change in total revenue from
selling another unit of output
•Since the firm in perfect competition is a price taker,
marginal revenue from selling one more unit is the market
price  MR = P
•Marginal cost is the change in total cost resulting from
producing another unit of output
•Generally, a firm will expand output as long as marginal
revenue exceeds marginal cost and will stop expanding
output before marginal cost exceeds marginal revenue
 Economic Profit in the Short Run

•Because the perfectly competitive firm can sell any

quantity for the same price per unit, marginal
revenue is also average revenue
•Average revenue, AR, equals total revenue
divided by quantity  AR = TR / q

•Regardless of the rate of output, the following

equality holds along the firm’s demand curve
•Market price = marginal revenue = average
revenue
 Minimizing Short-Run Losses

•Sometimes the price that the firm is required to

“take” will be so low that no rate of output will yield an
economic profit
•Faced with losses at all rates of output, the firm has
two options
•It can continue to produce at a loss, or
•Temporarily shut down
•It cannot shut down in the short run because by
definition the short run is a period too short to
allow existing firms to leave or new firms to enter
Exhibit 4: Minimizing Losses
 Exhibit 6: Summary of Short-Run Output Decisions
At p1, the firm will Marginal cost
shut down rather than Break-even
operate because price point
is below average 5
variable cost at all p5 d5
Dollars per unit

Average total cost

output rates.
If the price is p3, the 4
p4 d
firm will produce q3 to Average variable cost 4
3
p3 d3
minimize its loss while
at p4, the firm will 2
p2 d2
1
produce q4 to earn p1 d1
just a normal profit:
break-even point
At p2, the firm is Shutdown The short-run supply
point curve is the upward-sloping
indifferent: shutdown
point portion of the marginal
If the price rises to 0q cost curve beginning at
1 q2 q3 q4 q5 point 2.
p5, the firm will earn a
short-run economic Quantity per period
profit by producing q5
 Short-Run Firm Supply Curve

•As long as the price covers average variable cost,

the firm will supply the quantity resulting from the
intersection of its upward-sloping marginal cost curve
and its marginal revenue, or demand curve

•Thus, that portion of the firm’s marginal cost curve

that intersects and rises above the lowest point on its
average variable cost curve becomes the short-run
firm supply curve
 Exhibit 7: Aggregating Individual Supply to Form Market Supply
(a) Firm A (b) Firm B (c) Firm C (d) Industry, or market, supply

SA SB SC SASBSC  S
Price per unit

p' p' p' p'

p p p p

0 10 20 0 10 20 0 10 20 0 30 60
Quantity per period Quantity per period Quantity per period Quantity per period

At a price below p, no output is supplied

At a price of p, each firm supplies 10 units: a market supply of 30 units
At a price of p', each firm supplies 20 units: a market supply of 60 units
The short-run industry supply curve is the horizontal sum of all firms’ short-run supply
curves: horizontal summation of the firm level marginal cost curves
 Exhibit 8: Relationship Between Short-Run Profit Maximization
and market equilibrium

Price per unit

(a) (b) Industry, or market
Firm MC = s ΣMC = S

ATC
AVC
$5 d $5
Profit
4
D

Bushels of wheat per day 0 1,200,000 Bushels of wheat per day

0 5 10 12

•If there are 100,000 identical wheat farmers, their individual supply curves are summed horizontally
to yield the market supply curve, panel b, where market price of $5 is determined.
•At this price, each farmer produces 12 bushels per day, as in panel a, for a total quantity supplied of
1,200,000 bushels per day
•Each farmer earns an economic profit of $12 per day as shown by the shaded rectangle.
Monopoly
Monopoly is a well defined market structure where there is
only one seller who controls the entire market supply, as
there are no close substitutes for that product.
Features of monopoly
- Monopolist is the single producer of the product in the
market
- under monopoly firm and industry are identical
- No close competitive substitutes
- It’s a complete negation of competition
- A monopolist is a price maker and not a price taker.
 Bases of monopoly
- Natural factors
- Control of raw material
- Legal restrictions
- Economies of large scale production
- Business Reputation
- Business combines
 Types of monopoly
- Pure & Imperfect Monopoly
- Legal monopoly
- Natural monopoly
- Technological monopoly
- Joint monopoly
- Simple & discriminating monopoly
- Public & private monopoly
 Monopoly Equilibrium
The monopolist can control both price and supply of the product. But
at any point of time she can fix only one of them. Either she can fix
the quantity of output and let the market demand determine the price
of the product; or she can fix the price of the product and let the
market demand determine the quantity which she can sell at the given
price.
Having profit maximising objective, she adopts the rationale of
equating MC with MR and fixes the level of output which gives her
the maximum profits or where the losses are minimum. Thus when
equilibrium output is decided, the price is automatically determined in
relation to the demand for the product.
A monopolist may be earning profits or incur losses in
the short run.
Features of Monopoly price
- It is not the highest possible price.
- This price does not bring the highest average profit to the seller
- Monopoly price is often associated with the output, the AC of which
is still falling.
- Under perfect competition, the price charged is equal to MC but in
monopoly the price is above MC.

Long run equilibrium of monopoly firm

Price discrimination
Price discrimination implies the act of selling the output of the same
product at different prices in different markets or to different buyers.
Types of price discrimination
- Personal discrimination
- Age discrimination
- Sex discrimination
- Locational or territorial discrimination
- Size discrimination
- Use discrimination
- Time discrimination
Objectives of price discrimination
- To maximise the profits.
- To convert the consumers’ surplus into producer’s profit.
- To capture new markets.
- To keep hold on export markets.
- To exploit the unutilised capacity by widening the size of
market through price discrimination.
- To clear off surplus stock.
- To augment future sales by quoting lower rates at present to the
potential buyers who may develop the taste for the product in
future.
- To weed out the potential competition from the market or
destroy a rival firm.
Conditions necessary for price discrimination
- Separate markets
- Apparent product differentiation
- Prevention of re-exchange of goods
- Non-transferability nature of product
- Let go attitude of buyers
- Legal sanctions
- Buyer’s illusion
When price discrimination is profitable?
Even though circumstances are favourable to practice price discrimination, it
may not always be profitable. It is profitable only when the following two
conditions are prevailing.
- Elasticity of demand differs in each market
- The cost-differential of supplying output to different markets should not be
large in relation to the price differential based on elasticity differential.
• 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
 Equilibrium price and output

MC
ATC
P*

MR AR
Q
Q*
• 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
Monopolistic Competition
“
Monopolistic competition is defined as a market setting in
which a large number of sellers sell differentiated
products”
“ Monopolistic competition is a market situation in which
there is keen competition, but neither perfect nor pure,
among a group of large number of small producers or
suppliers having some degree of monopoly power
because of their differential products” – Prof. E.H.
Chamberlin
 Main Features

• Monopolistic Competition is a Market Structure in which

multiple Producers make similar, but not identical, products.
• The goods are similar enough to be Substitutes for each other.
• The Producers must engage Consumers in areas beyond Price
in order to sell their goods.
• This is referred to as Non-Price Competition.
MultipleParticipants

• In Monopolistic
Competition, multiple
Monopolies co-exist
while producing Goods
that are similar enough
to readily act as
Substitutes for each
other.
SimilarProducts

• In Monopolistic Competition,
the products available in the
Market must be Similar, but
not Identical.
• This allows the Consumer to
select the Good best suited to
their tastes and needs at Prices
comparable to their
Substitutes.
LimitedPriceControl

• In Monopolistic
Competition, Producers
have limited control
over the Prices that they
can charge because
Consumers have a
number of alternatives
readily available to
them.
DifferentiatedProducts

• In Monopolistic
Competition, Producers must
act to separate their good
from those offered by their
competitors.
• They do this by creating both
perceived and actual
differences between their
products to make them more
desirable to select
Consumers.
 Price and output determination under monopolistic competition

- Monopolistic demand curve (AR) is more elastic than monopoly.

- If the group consists less number of firms and great
product differentiation, then the elasticity is comparatively less.
- If the group consists of large number of firms and the product differentiation
is weak, then the elasticity is comparatively more.
- The extent of monopoly power of the firms on the basis of differentiation and
the resultant elasticity of demand decides the super normal profits of the firms
in short run.
- The firms under monopolistic competition normally earn only normal profits
in the long run.
- Some firms may earn super normal profits even in the long run with high
product differentiation / good will etc.
Product differentiation is the major feature of
monopolistic competition
- Product differentiation may broadly be defined as anything that causes
buyer to prefer one product to another. Therefore, in the real sense,
product differentiation exists in the mind of consumer. That is it is not
necessary for the difference to be real-it is only necessary for the
consumer to think it is real.( The role of advertising and brand name )
- The real differentiation among products may arise due to :
 Patents, trademarks and copy rights
 Differences in colour and packaging
 Conditions relating to sale of the product
 Method, time and cost of delivery
 Availability of service
 Guarantees and warranties
Non price competition - selling cost
‘ Expenditure incurred by a firm on advertising and sale
promotion of its products is known as selling cost’. It includes,
 Advertising and publicity expenditure of all sorts
 Expenses of sales department viz, commission and salaries of
sales staff
 Margin granted to dealers
 Expenditure for window display, demonstration of goods, free
distribution of samples etc.
 Examples
• Restaurants
• Plumbers/electricians/local builders
• Solicitors
• Private schools
• Plant hire firms
• Insurance brokers
• Health clubs
• Hairdressers
• Funeral directors
• Estate agents
• Damp proofing control firms
 Monopolistically Competitive
Firm in the Short Run
MC We Marginal
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Cost/Revenue This
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is
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a the
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MR abe
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andsold
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At because
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£0.60

MR D (AR)
Q1
Output / Sales
 Monopolistically Competitive
Firm in the Long Run
MC This is the long run
Cost/Revenue
equilibrium position of a
firm in monopolistic
competition.
AC

AR = AC

AR1
MR1
Q2 Output / Sales
• Short run
– Downward sloping demand – differentiated
product
– Demand is relatively elastic – good substitutes
– MR < P
– Profits are maximized when MR = MC
– This firm is making economic profits
• Long run
– Profits will attract new firms to the industry (no
barriers to entry)
– The old firm’s demand will decrease to DLR
– Firm’s output and price will fall
– Industry output will rise
– No profit (P = AC)
 Oligopoly
 Market structure that is dominated by just a
few firms

 Each must consider the effect of its own actions

on competitors’ behavior  the firms in an
oligopoly are interdependent
 Varieties of Oligopoly

 Homogeneous or differentiated products

 Interdependence: the behavior of any
particular firm is difficult to analyze
 Domination by a few firms can often be traced
to some form of barrier to entry
 High Costs of Entry

 Total investment needed to reach the minimum

size
 Advertising a new product enough to compete
with established brands
 High start-up costs and presence of established
brand names: the fortunes of a new product are
very uncertain
 Models of Oligopolies

 Interdependence: no one model or approach explains

the outcomes

 At one extreme, the firms in the industry may try to

coordinate their behavior so they act collectively as a
single monopolist, forming a cartel

 At the other extreme, they may compete so fiercely that

price wars erupt
 Collusion

 Collusion: an agreement among firms in the

industry to divide the market and fix the price

 Cartel: a group of firms that agree to collude so

they can act as a monopolist and earn monopoly
profits

 Colluding firms usually reduce output, increase

price, and block the entry of new firms
 Differences in Cost

 The greater the differences in average costs across

firms, the greater will be the differences in
economic profits among firms
 If cartel members try to equalize each firm’s total
profit, a high-cost firm would need to sell more
than a low-cost firm
 This allocation scheme violates the cartel’s profit-
maximizing condition of finding the output for
each firm that results in identical marginal costs
across firms
 Number of Firms in the Cartel

 The more firms in the industry, the more

difficult it is to negotiate an acceptable
allocation of output among them

 Consensus becomes harder to achieve as the

number of firms grows
 New Entry Into the Industry

 If a cartel cannot block the entry of new firms

into the industry, new entry will eventually
force prices down, squeezing economic profit
and undermining the cartel

 The profit of the cartel attracts entry, entry

increases market supply and market price is
forced down
 Malpractices

 Perhaps the biggest obstacle to keeping the

cartel running smoothly is the powerful
temptation to cheat on the agreement

 By offering a price slightly below the

established price, a firm can usually increase its
sales and economic profit

 Because oligopolists usually operate with excess

capacity, some cheat on the established price
 Price Leadership

 An informal, or tacit, type of collusion occurs in

industries that contain price leaders who set the
price for the rest of the industry

 A dominant firm or a few firms establish the

market price, and other firms in the industry follow
that lead, thereby avoiding price competition

 Price leader also initiates price changes

 The greater the product differentiation among
sellers, the less effective price leadership will be as
a means of collusion
 There is no guarantee that other firms will follow
the leader
 Some firms will try to cheat on the agreement by
cutting price to increase sales and profits
 Unless there are barriers to entry, a profitable
price will attract entrants
 Price Stability with a Kinked Demand Curve
P

MC1
P* MC2

b AR

Q
Q*
MR
• For any MC between a and b, the profit maximizing price and
output remain unchanged