market analysis 24-1-09
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Market and Competition
Analysis
Market
In the words of Benham: “ Any area over which the buyers and
sellers are in close touch with one another, either directly or through
dealers, that the prices obtainable in one part of the market affects the
prices paid in other parts.”
Equilibrium of the Firm:
A firm is said to be in equilibrium when the following two conditions are satisfied:
when the marginal revenue is equal to its marginal cost (MR = MC).
MC curve cuts the MR curve from below at the point of equilibrium.
Equilibrium of a Firm:
MR
MC
Output
Cost & Revenue
Q
Equilibrium Point
P
Classification
On the basis of market structure
The Four Types of Market Structure
Monopoly
Oligopoly
Monopolistic
Competition
Perfect Competitio
n
Number of Firms?
Type of Products?Many firms
One firm Few
firmsDifferentiated products Identic
al products
Two
firms
Duopoly
Perfect Competition:
Perfect Competition prevails when the
demand for the output of a commodity
is perfectly elastic. This entails first
that the number of sellers is so large
and secondly that buyers are alike in
respect of their choice of rival sellers
so that the market is perfect.
Characteristics:
Large number of relatively small buyers and sellers
Homogeneous products Free entry and exit of firms No agreement between firms Perfect mobility of factors Perfect knowledge of market Both buyers and sellers are price
takers
Equilibrium of a Perfectly Competitive Market:
Short run case - In case of profit
PRICE & COST
OUTPUT
MARKET FIRM
MR/ARE
CA
P
D
S
PROFIT
MC
AC
Equilibrium of a Perfectly Competitive Market:
- In case of loss
PRICE &
COST
OUTPUT
MARKET FIRM
MR/ARP
D
S
MC
AC
E
CALOSS
Long run case
Price & Cost
Output
MC AC
Q
E
P AR=MR
Output(Q)
Price TR MR TC MC ATC
1 10 10 10 30 - 30
2 10 20 10 45 15 22.5
3 10 30 10 55 10 18.33
4 10 40 10 62 7 15.5
5 10 50 10 75 13 15
6 10 60 10 110 35 18.33
7 10 70 10 155 45 22.14
Imperfect Competition:
Imperfect competition is a wide
term, covers all the market situations except perfect competition
It is further divided into: Monopolistic competition Oligopoly Duopoly Monopoly
Monopoly:
When a specific individual or enterprise has
sufficient control over a particular product or service .
Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.
Characteristics of Monopoly:
Single Seller or producer
No Close Substitutes
Firm is Price Maker
Totally Blocked Entry
Monopolies may or may not advertise
Cross elasticity is zero or very small
Full control over the supply
Firm and industry are same
Sources or reasons of monopoly power:
Patent or copyright Control over essential raw
material Grant of franchise by the
government Natural monopoly (economies of
scale) Advertising and brand loyalties
of the established firms
Output(Q)
Price TR MR TC MC ATC
1 9 9 - 8 - 8
2 8 16 9 13 5 6.5
3 7 21 5 17 4 5.6
4 6 24 3 20 3 5
5 5 25 1 25 55
6 3 18 -7 42 177
7 2 14 4 56 148
Output(Q)
Price TR MR TC MC ATC
1 9 9 - 8 - 8
2 8 16 9 13 5 6.5
3 7 21 5 17 4 5.6
4 6 24 3 20 3 5
5 5 25 1 25 55
6 3 18 -7 42 177
7 2 14 4 56 148
Monopoly Output and Price Determination :
Loss occurs when ATC exceeds demand curve :
Output(Q)
Price TR MR TC MC ATC
1 15 15
2 14 28
3 13 39
4 12 48
5 11 55
Monopolistic Competition:
It refers to the market condition in which there is keen competition,
among a group of a large number of small producers or suppliers having
some degree of monopoly power because of their differential products.
Features:
Large number of firms Product differentiation Some influence over the price Non-price competition Product variation Freedom of entry and exit
OLIGOPOLY
The form of market structure in which there are few sellers of a homogeneous or differentiated product.
• Types of oligopoly-
Duopoly – When only 2 sellers exist
Pure oligopoly- When the products are homogeneous.
Differentiated oligopoly-When the products are differentiated or heterogeneous in nature.
Non price competition- When firms compete on factors like –advertising, service but not on price.
COLLUSIVE OLIGOPOLY
In order to avoid uncertainty arising out of interdependence and to
avoid price wars , the firms enter into agreement regarding a
uniform price-output policy.
• They can be formal(open) or tacit (secret). These agreements
lead to collusive oligopoly. These collusions can be of two
types-
Cartels
Price Leadership
a) Market Sharing cartel- It is of two types -
a) a) Market sharing by non price competition-
Only a uniform price is set and the firms are free to produce and sell the amounts of output which will maximize their individual profit.
b) Market sharing by output quota- firms fix the output and sell it at agreed price.
• Price leadership -It is of four types-
Price leadership by low cost firm
Price leadership by dominant firm
Barometric price
Exploitative or aggressive price leadership
KINKED DEMAND CURVE THEORY OF OLIGOPOLY
PRICE K
Quantity
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