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8/8/2019 Our Eco Presentation

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PRICE AND OUTPUT

DETERMINATION UNDER

IMPERFECT COMPETITION


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DEFINING MARKET

2

Market :- In economics sense ,

market is a system by which buyers

and sellers bargain for the price of a

product , settle the price and

transact their business buy and

sell a product.


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STRUCTURE OF MARKET

Market

structure

No. of firm and

degree ofproduction diff.

Nature of ind.

Where prevalent

Control

overprice

Method of

marketing

1) Perfect

competition

Large no. of firms

with

homogeneous

product

Financial market

and some farm

products

None Market

exchange or

auction

2 )Imperfectcompetition

a)

Monopolistic

Many firm with

real or perceived

product

differentiation

Manuf. Tea ,shoes

,TV sets etc.

Some

Competitive

advertising

quality rivalry

b) Oligopoly Little or no

product

differentiation

Aluminum, Steel,

cigarette , cars,

Some Competitive

advertising

quality rivalry

c) Monopoly A single producer

, without close

substitute

Public utilities ,

electricity, railway

Consider

able but

usuallyregulated

Promotional

advertising if

supply is large

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IMPERFECT OR MONOPOLISTIC

COMPETITION

MEANING:-

In real life, we experience imperfect

competition, which is in between situation of

perfect competition and monopoly . Imperfectcompetition has been termed as monopolistic

competition.

a state of affairs in which there is large

number of sellers selling non homogeneous orslightly differentiated products in which

there is freedom of entry - exists.4


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DEFINITION

The term monopolistic competition refers tothe market structure in which the sellers do have amonopoly (they are the only sellers) of theirproduct, but they are also subject to a substantialcompetition pressures from sellers or substituteproducts.

-Baumol

Monopolistic competition is a marketsituation in which there are many sellers of

particular product but the product of each selleris in some way differentiated in the minds ofconsumer from the product of other sellers.

- Leftwitch5


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CHARACTERISTICS OF IMPERFECT

COMPETITION

More sellers- There are large no.of sellers of products but

none controls the major portion of the total output

Differentiated Product-various firms under monopolisticcompetition bring differentiated products which are

relatively close substitutes of each other but not perfect

substitutes

Easy Entry or Exit of Firms-there is easy entry and exit of

the firm in monopolistic competition

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CONTD.

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Free Pricing Policy of Firm-In monopolistic

competition , the firms have differenciated

products so it has control over its prices

Nature of revenue curves and cost curves-no

single firm controls more than a small portion of

the total output.. The demand curve of the firm

is neither perfectly elastic nor rigidly inelastic


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o AR and MR are the curve of the firm .the average

revenue tends to be quite elastic because of the

product differentiation and total no of firms operatingin that group


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DIFFERENTIATING BETWEEN :-MONOPOLISTIC COMPETITION & PERFECT

COMPETITION

MONOPOLISTIC

COMPETITION

PERFECT COMPETITION

1. Products are differenciated,

products are generally

differenciated by brandname, trade mark, design

,colour, after sales services

1. Product are homogeneous.

2 .In monopolistic competition,

firms decision making and

behaviour is not absolutelyindependent of each other.

2. Decision making in firms is

independent of other firms..

3. In monopolistic competition,

no of sellers is large but limited

3. No of sellers is very large

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PRICE AND OUTPUT

DETERMINATION IN SHORT RUN

The analysis of short period equillibrium of a

firm under monopolistic competition is based on

the following assumptions:

Large no of sellers who behave independently. Product of each seller is different

The firm has determined demand curve which is

elastic

No new firms enter the industry in short periodsituation

Short run cost curves of each firms differ from

the other..10


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PRICE AND OUTPUT DETERMINATION

IN SHORT RUN

Unit-Cost

&

revenue

D

C

O Q X

Y

N

MR

AR

SACSMC

OUTPUT

P

M


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DIAGRAM EXPLAINATION

The diagram gives short run revenue and cost

curves faced by monopolistic competition

As shown in the figure, firms MR(marginal

revenue) intersects MC(marginal cost) at point N This point fulfills the necessary conditions of

profit maximization at point OQ

Given the demand curve , this output can be sold

at price PQ ,so the price is determined at PQ.

At this output and price ,the firm earns a

maximum monopoly or economic profit equal to

PM per unit of output and a total monopoly profit

shown by the rectangle CDPM12


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CONTD.

The economic profit exists in short run because

there is no or little possibility of new firm

entering in the market..

The rate of profit would not be the same for allfirms under monopolistic competition because of

difference of elasticity of demand of product

There are 3 situations in short run period-

situation of super profit, situation of profit and

situation of loss

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CONTD.

Super Profit making situation: when individual

firms revenue will be greater than its

cost(AR>AC)

Profit making situation: when the firms averagerevenue will be equal to its average cost the

situation is called normal profit(AR=AC)

Loss situation: a firm will earn loss when its cost

is greater than its revenue(AR


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PRICE AND OUTPUT DETERMINATION IN

THE LONG RUN

In the long period the price and output policy of

an individual firm is determined by one general

principal where marginal revenue and marginal

cost are equal to each other

In long period the individual firm as well as the

group as a whole remain stable equillibrium

To achieve the full equillibrium in the long run 2

adjustments have to be made

1. all the quantity offered for sale must be equal

to its demand in the market at a given price

2. entry and exit in response to the general

position of the existing firm15


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Price

Output

M

P

Profit

T

LMCLAC

E

EI

AR(P)

MR

O Q

Y

X

Diagram


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DIAGRAMATIC EXPLANATION

AR and MR are the average revenue and

marginal revenue curve of the firm.

LMC and LAC are the long period marginal cost

curve .every firm equates its marginal cost to itsmarginal revenue

In the diagram , E1 is the point of equillibrium

when the new entry of the firm is restricted then

the firm enjoys super normal profits with the OQ

level of output as OP is the price and EQ or OM

is the cost per unit of product and difference

between the two shows the profit situation. Equal

to the area MPTE 17


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CONTD.

Thus MPTE is the super normal profit of a firm under

long period situation when the entry of the new firm is

restricted but this profit situation will attract other firms

to enter..

In monopolistic competition, following two situations

arise in the long period

1)Free entry of firm 2)Restricted entry of the firm

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