Mayank Jha

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MARKET STRUCTURE WELCOME

Market:

Market Definition:- The term market refers not necessarily to a place but always to a commodity & buyers & sellers, who are in direct competition with other. Example:- canaught place Delhi, Parade Kanpur, etc.

FORMS OF MARKET:

FORMS OF MARKET PERFECT COMPETITION MONOPOLY MONOPOLISTIC COMPETITION OLIGOPOLY

PERFECT COMPETITION:

PERFECT COMPETITION “Perfect competition is a market situation, where there are large number of buyers & sellers. The sellers sell identical product at a single uniform price.” Example:- Hypermarket(Giant, Carrefour, Tesco). Features:- 1. large no. of buyers & sellers. 2. Homogeneous Product 3. Uniform Price 4. Freedom of entry or exit of firms. 5. Perfectly Elastic Demand.

Price & Output Determination Under perfect competition:

Short Run Equilibrium Super normal profit Losses Normal profit Long Run Equilibrium Normal Profit Only Price & Output Determination Under perfect competition

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6 Short Run Equilibrium Supernormal profits economic profits (P > ATC) or (TR > TC) P=MR=AR 2. Normal profits Breakeven or zero profit (P = ATC) or (TR = TC ) P=MR=AR 3. Subnormal profits Economic losses (P < ATC) or (TR < TC) P=MR=AR continue the production if (ATC > P > AVC) Shut down the operation if (ATC > P < AVC)

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Supernormal Profit (Economic Profit) Definition Profit earned by a competitive firm when its total revenue is more than total cost (TR>TC) or price is greater than ATC (P>ATC). Calculation: TR = 5 x 9 = 45 TC = 3 x 9 = 27  = (TR – TC) = (45 – 27) = 18 7

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8 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR=P ATC Economic Profit RM5 RM3 Supernormal Profit/ Economic Profit Minimum point of ATC

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Definition When total revenue is equal to total cost (TR=TC) or price equal to ATC (P=ATC), there are no profit or no losses. Firm has only able to cover its costs. Calculation : TR = 5 x 9 = 45 TC = 5 x 9 = 45  = (TR – TC) = (45 – 45) = 0 9 Breakeven/ Normal Profit

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10 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR ATC RM5 Breakeven/ Normal Profit Minimum point of ATC

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Economic losses/Subnormal profit Definition Losses incurred by a competitive firm when total revenue is less than total cost (TR < TC) or when the equilibrium price falls below ATC (P < ATC. The firm incurs losses because would not able to cover its costs. Calculation : TR = 5 x 6 = 30 TC = 7 x 6 = 42  = (TR – TC) = (30 – 42) = -12

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12 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR ATC Economic Loss RM5 RM7 Economic losses/ Subnormal profit

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long Run Equilibrium Normal profits only Breakeven or zero profit (P = ATC) or (TR = TC)

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14 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR ATC RM5 Breakeven/ Normal Profit Minimum point of ATC

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MONOPOLY Monopoly is a market situation where there is only a single seller with complete control over an industry . Features of monopoly Single seller Price discrimination No close substitutes Unique product Entry is restricted Price maker

Price & Output Determination Under Monopoly:

Price & Output Determination Under Monopoly Short Run Equilibrium:- Super Normal Profit Losses Long Run Abnormal profit only

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17 Short Run Equilibrium Supernormal profits economic profits MC= MR & AR> ATC 2. Normal profits Breakeven or zero profit (MR=MC) or (AR=ATC) 3. Subnormal profits Economic losses (MC=MR) or (AR=ATC) Notes:- MC curve must cutmr curve from below

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A Monopolist Making a Profit Price ATC Quantity P M 0 MR D Q M Profit C M A MC E

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A Monopolist Breaking Even Price MC Quantity 0 D ATC MR E

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A Monopolist Making a Loss Price ATC MC Quantity 0 MR D Q M Loss P M C M B A E

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Breakeven/ Normal Profit long Run Equilibrium Price P M 0 Q M Quantity MC ATC D MR E

Price discrimination:

Price discrimination Price discrimination is a method of pricing adopted by the monopolist in order to earn abnormal profit. It refers to the practices of charging different prices for the different prices for the different unit of the same commodity. Examples:- The family doctor in your neighborhood charges a higher fees from a rich patient compared to the fees charged from a poor patient even though both are suffering from viral fever.

Monopolistic competition:

Monopolistic competition “Monopolistic competition is a market situation where there are many sellers of a particular product, but the product of each sellers is in some way differentiated in the minds of consumers from the product of every seller.” Example:- Soap( Lux , Rexona , Cinthol , Medimix ). Features:- 1. Large no. of sellers. 2. Product Differentiation. 3. Free Entry & Exit of Firms. 4. Nature of Demand curve.

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Price & Output Determination Under Monopolistic competition Short Run Equilibrium:- Super Normal Profit Losses Long Run Abnormal profit only

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25 Short Run Equilibrium Supernormal profits economic profits MC= MR & AR> ATC 2. Normal profits Breakeven or zero profit (MR=MC) or (AR=ATC) 3. Subnormal profits Economic losses (MC=MR) or (AR=ATC)

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A firm Making a Profit Price ATC MC Quantity P M 0 MR D Q M Profit C M A B

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A firm Breaking Even Price MC Quantity 0 D ATC MR

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A firm Making a Loss Price ATC MC Quantity 0 MR D Q M Loss P M C M B A

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A firm is making a Profit Long run equilibrium Price ATC MC Quantity P M 0 MR D Q M Profit C M A B

Oligopoly:

Oligopoly Oligopoly is a situation where a few large firms compete against each other 7 there is an element of interdependence in the decision making of these firms. Example:- Cold drink Industries & automobile industries. Features:- 1. interdependence 2. importance of selling & advertising cost. 3. Presence of monopoly element. 4. kinked demand curve 5.Small no. of large sellers.

TYPES of OLIGOPOLY:

TYPES of OLIGOPOLY 1. Pure Oligopoly:- When a product dealt is homogeneous in nature. Ex:- Aluminum industry 2. Differentiated Oligopoly:- It is based on product differentiation. Ex:- Talcum Powder. 3. collusive & Competitive oligopoly:- When few firms of the oligopolistic market come to a common understanding or act in collusion with each other in fixing price & output, it is collusive oligopoly. When there is a lack of understanding between the firms & they compete with each other it is called competitive oligopoly.

Continue:

Continue 4. Partial or full Oligopoly:- oligopoly is partial when the industry is dominated by one large firm which is considered or looked upon as the leader of the group. The dominating firm will be the price leader. In full oligopoly, the market will be conspicuous by the absence of price leadership. 5. syndicated & organized oligopoly:- syndicated oligopoly refers to that situation where the firms sell their products through a centralize syndicate. Organized oligopoly refers to the situation where the firms organize themselves into a central association for fixing prices, output, quotas, etc.

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KINKED DEMAND CURVE Increase price = elastic Decrease price = inelastic curve Oligopoly Theory If an oligopolistic lowers his price below the prevailing level its competitors will follow him & accordingly lower prices, whereas if he raises the price above the prevailing level, its competitors will not follow its increase in price .

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