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

PERFECT COMPETITION MONOPOLY MONOPOLISTIC

COMPETITION OLIGOPOLY

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.

Short Run Equilibrium1. Super normal profit2. Losses3. Normal profitLong Run EquilibriumNormal Profit Only

Price & Output Determination Under perfect competition

6

Short Run Equilibrium1. 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)

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 = 45TC = 3 x 9 = 27 = (TR – TC) = (45 – 27) = 18

7

8

Cost

and

Rev

enue

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

• 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 = 45TC = 5 x 9 = 45 = (TR – TC) = (45 – 45) = 0 9

Breakeven/ Normal Profit

10

Cost

and

Rev

enue

1 2 3 4 5 6 7 8 9 10

MC

MR=AR

ATC

RM5

Breakeven/ Normal Profit

Minimum point of ATC

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

12

Cost

and

Rev

enue

1 2 3 4 5 6 7 8 9 10

MC

MR=AR

ATC

Economic Loss

RM5RM7

Economic losses/ Subnormal profit

long Run Equilibrium

Normal profits only• Breakeven or zero profit• (P = ATC) or (TR = TC)

14

Cost

and

Rev

enue

1 2 3 4 5 6 7 8 9 10

MC

MR=AR

ATC

RM5

Breakeven/ Normal Profit

Minimum point of ATC

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• Short Run Equilibrium:-• Super Normal Profit• Losses

• Long Run • Abnormal profit only

17

Short Run Equilibrium1. 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

A Monopolist Making a Profit

Price

ATC

Quantity

PM

0MR D

QM

ProfitCM

A

MC

E

A Monopolist Breaking Even

Price MC

Quantity0

D

ATC

MR

E

A Monopolist Making a Loss

Price ATCMC

Quantity0MR D

QM

LossPM

CMB

A

E

Breakeven/ Normal Profitlong Run Equilibrium

Price

PM

0 QM Quantity

MC ATC

D

MR

E

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 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.

Price & Output Determination Under Monopolistic

competition

• Short Run Equilibrium:-• Super Normal Profit• Losses

• Long Run • Abnormal profit only

25

Short Run Equilibrium

1. 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)

A firm Making a Profit

Price

ATC

MC

Quantity

PM

0MR D

QM

ProfitCM

A

B

A firm Breaking Even

Price MC

Quantity0

D

ATC

MR

A firm Making a Loss

Price ATCMC

Quantity0MR D

QM

LossPM

CMB

A

A firm is making a Profit

Long run equilibrium

Price

ATC

MC

Quantity

PM

0MR D

QM

ProfitCM

A

B

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• 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• 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.

KINKED DEMAND CURVE• Increase price = elastic• Decrease price = inelastic

curve

• OligopolyTheory• 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 .

Ask Quries

Thank you