Managerial Economics Market Structures PPT
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The document discusses market structures and perfect competition. It defines a market and provides quotes defining a market. It then discusses the characteristics of perfect competition, including large numbers of buyers and sellers, homogeneous products, and perfect information. Equilibrium for a firm under perfect competition occurs where marginal cost equals marginal revenue and the marginal cost curve cuts the marginal revenue curve from below.
Managerial Economics Market Structures PPT
- 2. The term market is derived fromthe latin word “Marcatus” which means merchandise or trade Market is a place where buyers and sellers meet together for the exchange of title of goods Definition: “Market is a area or atmosphere of petential exchange” ------ Phillip Kotler “Market is not a geographical meeting place but as any getting together of buyers and sellers,in person, by mail, telephone, telegraph and inter net or any other means of communication” ------ Prof. Mitchel
- 4. Price Demand Supply 50 100 200 40 120 180 30 150 150 20 200 110 10 300 50
- 6. A laarge number of buyers & sellers Homogeneous product Free entry and Exit Perfect Knowledge Indifference Non Existence of Transport costs Perfect mobility of resources. Equilibrium of a firm under perfect competition It is a position where thefirm has no incentives either to expand or contrast its output. There are two condition for attaining euqlibrium by a firm. 1. Marginal cost must be equal to marginal revenue (MC=MR) 2. Marginal Cost curve should cut the marginal curve from the below
- 7. Marginal cost is the additional cost incurred for producing a additional product Marginal revenue is the addtional revenue when it sell one additional unit of output When a firm increases its output so long as its marginal cost become equal to marginal revenue When marginal cost is greater than marginal revenue the firm reduces its production. It is only point at the where MC=MR, the firm attains equlibrium Secondly marginal cost curve should cut the marginal curve from the below. If marginal curve cut the marginal curve from the above the firm is having scope to increase the output as the marginal cost curve slope downwards
- 8. It is only with the upwards slopping maraginal curve, the firm attains equilibrium. The reason is that marginal cost curve when raisingcuts the marginal revenue curvefrom the below
- 9. PL and MC represents Price level and Marginal Cost PL also represents marginal revenue, Average revenue and demand As marginal revenue, Average revenue and demand all are same in perfect competition to price level MC curve is U shapes curve cutting MR at R and T At point R MC curve cut the MR curve from the below. So it is not equilibrium. The downward slopping of MC curve indicates that the firm can reduces its cost of production by increasing output As the firm increases its output it will reach equilibrium at T. Here two conditions are satisfied. If the firm increases it output beyound this stage the MC is excess the MR. So losses occurs. So producer is not ready to increase the output after this point. So it is called equilirium point.
- 11. In the short period the attains equilibrium with abnormal profits or minimum losses When marginal cost and average cost is less than the price the firm will get abnormal profits In the following diagram SRAC & SRMC are the short run average cost and marginal cost. PL is the initial price line At the point I the firm earns normal profits as its MC, MR, AC and AR are equal. When price increases to P1 L1 the firm attain equilibrium at point Q1R1. Then total profit is P1 Q1R1S1 . When firms attain abnormal profits new firms enter in to the industry. Out come increases and price line come down to normal position. Similarly at the point R2 the average cost is more than the average revenue
- 12. The firm incur losses per unit euqal to Q2R2 The total loss is equal to the area P2Q2R2S2 This will lead to exclusion of some of firms from the industry thus supply will come down and the industry equilibrium
- 13. In the long run the firm attains equilibrium when long run average cost and marginal costs are equal to the long run average revenue and marginal revenue. The firm and the industry enjoy only normal profits The reason is that sufficient time available for adjusting the supply according to the supply The condition is AC=MC=AR=AC
- 14. Under perfect market there are large number of buyers and sellers with homogenous products No single seller can fix price and no buyer can influence the price An individual seller is only price maker not price maker. In perfect market the problem is only one thing i.e price making. No one can fix price the seller should adjust the output Marshall classified the time four kinds Very short period Short period Long period Very long period or secular period
- 15. The price determination in the short period called market price Market price is the determination by equilibrium between demand and supply Under this period goods are classified into 1. perishable products 2. non perishable products 1. perishable products Perishable products like Milk, Flowers, Vegetables etc These products supply will not increase in short span of time. And cannot be decreased also
- 17. 2. Non-perishable products Non-perishable products like Cloths, pens, watches In very short period the supplt of non-perishable products cannot increased. Bur price decreases, their supply can decrease by preserving some stock If price falls too much the whole stock will be held back from the market and carried over to next market period The price below which the seller will refuse to sell is called reserve price
- 19. Short period is a period which supply can be increased by alterning variable factors In this period fixed cost is constant The supply is increased when price raises and vice versa so the supply curve slopes upwards from left to right
- 20. In a given diagram MPS is a market period supply curve DD is the initial demand curve. It interesect MPS curve at E The price is OP and output is OM In the very short period supply remains fixed at OM Suppose demand increases the demand curve shift upwards and becomes D1D1 The price will rise from OP to OP1 d,the firm will expand its output The firm can vary some variables because of excess profit This result in new supply curve SPS It interesect D1D1 curve at E4, then the price will fall from OP1 to OP4. If demand decreases DD curve shifts downwards and becomes D2D2d. It intersects MPS curve at E2. The price will fall to OP2. This what will happend in the market period
- 21. But in the short period the supplt curve is SPS. D2D2 curve intersects SPS curve at E3. The equilibrium price becomes OP3. The short period price is higher than market period price.
- 22. In the long period all costs are variable. So supply will be increased only when price is equal to average cost. In the long run normal price is euqal to minimum average cost of the industry The long run price will be based on the three stages Increasing returns and decreasing costs Constant costs and constant returns Diminishing returns and increasing cost
- 23. Increasing returns and decreasing costs At this stage, average cost falls due to an increase in the output So the supply curve at this stage will slope downwards from left to right In the diagram , MPS represents market period supply curve. DD is demand curve DD cuts LPS, SPS and MPS at point E At point E the supply is OM and the price is OP. If demand increases from DD to D1D1 market price increases to OP1. in the short period it is OP2. in the long period supply increases considerably to OM3. so price hjas fallen to OP3 which less than the price of market period
- 25. Constant returns and Constant costs At this stage, average cost does not change eventhough the out increases. Hence long period supply curve is horizontal to X axis. LPS is horizontal to X axis MPS represents market period supply curve, and SPS representas short period supply curve. At point E the output is OM and price is OP. If demand increases from DD to D1D1 market price increses to OP1. In short period supply increases and hence the price will be OP2.In the long period supply is adjusted fully to meet increased demand. The price remains constant at OP because costs are constant at OP market is a perfect market
- 26. Constant returns and Constant costs
- 27. Decreasing returns and Increasing costs If the industry is subject to increasing costs the supply curve slopes upwards from left to right like an ordinary supply curve. The determination of long period normal price in increasing cost industry can be explained with the help of following daigram. In the diagram LPS represents long period market supply curve. The industry is subject to diminishing returns or increasing costs. So, LPS slopes upwards from left to right, SPS is short period supplt curve and MPS is Market period supply curve. DD is demand curve. It cuts all the supplt curve at E.
- 28. Decreasing returns and Increasing costs Here the price is OP and output is OM. If demand increases from DD to D1D1, in the market period supply will not change but price increases to OP1. in the short period, price increases to OP2 as the supply increased from OM to OM2. in the long period supply increases to OM3 and price increases to OP3. but this increase in price is less than the price increase in a market period or short period
- 30. The word monopoly is made up of two syallables, MONO and POLY. Mono means single and Poly means Seller Single person or a firm No close substitute Large number of buyers Price Maker Supply and Price Downward slopping Types of Monopoly Legal Monopoly Private Monopoly Government Monopoly Voluntary Monopoly Limited Monopoly Unlimited Monopoly Single Price Monopoly Discriminating Monopoly Natural Monopoly
- 31. Monopoly refers to a market situation where there is only one seller. He has complete control over the supply of a commodity. He is therefore in a position to fix any price. Undere monopoly there is no difference between firm and industry This is becuase the entire industry consists of a single firm The monopoly can fix the price or supply any one but he cannot fix both If he fixes the price, his output will be determined by the market demand for his commodity. If he fixes the output to be sold, the price for the commodity will be determined by its market.
- 32. The market demand curve of monopist is downward slopping. Its corresponsing marginal revenue curve is also downward slopping But the MR curve always lies below the average revenue curve.
- 33. The monopolist firm attains equilibrium when its marginal cost becomes equal to the marginal revenue. The always desiress to make maximum profits. He makes maximum profit when MC=MR He goes on increasing his output if his revenue exceeds his costs. But when the costs exceed the revenue, the monopolist firm incur losses. Hence the monopolist curtails his production. He produces up to that point where additional cost is equal to the additional revenue.The point is called equilibrium
- 34. The monopolists firm attains equilibrium when its marginal cost becomes equal to the marginal revenue. In the diagram quantity is on X axis and cost and revenue on Y axis. AC and MC are the avg cost and marginal cost curves and AR and MR are Avg revenue and Marginal revenue. AC and MC are U shaped curves. It attains equilibrium when its MC=MR. Under monopoly two conditions are satisfied at point E. At point E, MC=MR. The firm is in equilibrium. The equilibrium output is OM
- 35. In the diagram Avg Revenue=MQ or OP Average Cost =MR Profit per unit=AR-AC (MQ-MR)=QR Total Profit=QR X OM Profit per unit X Quantity QR X SR= PQRS
- 36. But it is not always possible for a monopolist to earn super normal profits. If the demand and cost situations are not favourable, the monopolist may realise short run losses Through the monopolist is a price maker, due to wead demand and high costs, he suffers a loss equal to PABC If AR>AC (Abnormal Profits) If AR=AC (Normal Profits) If AR < AC (Loss) In the long run the firm has time to adjust his plant size or to use existing plants so as to maximise profits