Ch t 9

Chapter
Market
M
k t St
Structure:
t
P
Perfect
f tC
Competition,
titi
Monopoly and Monopolistic Competition

Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

Less
s Com
mpetitiive

Mo
ore Co
ompetiitive

Market Structure

Perfect Competition
Large number of buyers and sellers
Buyers and sellers are price takers
Product
P d t is
i h
homogeneous
Perfect mobilityy of resources
Economic agents have perfect

knowledge
Free entry and Exit
E
Example:
l St
Stock
kM
Market,
k t Forex
F
Mkt.
Mkt

Monopolistic Competition

Many sellers and buyers

Differentiated product
Selling costs (Advt exp.)
Perfect
P f t mobility
bilit off resources
Example: Fast-food
Fast food outlets
outlets,
branded consumer goods etc

Oligopoly
g p y
Few sellers and many buyers
Product may be homogeneous or

differentiated
Entry into the industry is possible
possible, but
it is difficult.
Barriers to resource mobility
Example: Automobile manufacturers

Monopoly
Single seller and many buyers
No close substitutes for product
Barriers to entry impossible or very

difficult
Significant barriers to resource
mobility
bilit

Perfect Competition:
Price Determination

Price, Average Revenue and Marginal Revenue of a

Firm under Perfect Competition
Quantityy
Q

Price

TotalRevenue

Average Marginal
Revenue(31) Revenue(TR)

(1)

(2)

(3)

(4)

(5)

1
2
3
4
5
6
7
8
9

50
50
50
50
50
50
50
50
50

50
100
150
200
250
300
350
400
450

50
50
50
50
50
50
50
50
50

50
50
50
50
50
50
50
50
50

Perfect Competition:
Price Determination
QD = 625 5P
Q
QS = 175 + 5 P
QD = QS = 625 5 P = 175 + 5 P
450 = 10P
P = $45

QD = 625 5 P = 625 5(45) = 400

QS = 175 + 5P = 175 + 5(45) = 400

Perfect Competition:
Short Run Equilibrium
Short-Run
Firms Demand Curve = Market Price
= Marginal Revenue
Equilibrium level of output: P= MR = MC
Firms Supply Curve is that part of Marginal
Cost curve, where Marginal Cost > Average
Variable Cost

Perfect Competition:
Short Run Equilibrium
Short-Run

Perfect Competition:
Long Run Equilibrium
Long-Run
Quantity is set by the firm so that :

Price = Short run Marginal Cost = Short run

Average Total Cost
At th
the same quantity,
tit in
i long-run:
l
g run Marginal
g
Cost = Long
g run
Price = Long
Average Cost, OR
P = SMC = SAC = LMC = LAC

Perfect Competition:
Long Run Equilibrium
Long-Run

Economic
Profit = 0

Competition in the
Global Economy
Domestic Supply

World Supply
pp y
Domestic Demand

Exchange Rates & Competitiveness in the

Global Economy
Foreign Exchange Rate
Price of a foreign currency in terms of the
domestic currency

Depreciation of the Domestic Currency

Increase in the price of a foreign currency
relative to the domestic currency

Appreciation of the Domestic Currency

Decrease in the p
price of a foreign
g currency
y
relative to the domestic currency

Competition in the Global Economy:

Determination of Exchange Rates
R = Exchange Rate = Dollar Price of Pounds

Supply of Pounds

Demand for Pounds

Monopoly

Single seller that produces a product

with no close substitutes
Existence of Barriers to Entry
Sources of Monopoly
Control of an essential input to a product
Patents
P t t or copyrights
i ht
Economies of scale: Natural monopoly
Government franchise: Post office

Monopoly
Sh t R E
Short-Run
Equilibrium
ilib i
Demand curve for the firm is the market
demand curve
Firm produces a quantity (Q*) where
marginal revenue (MR) is equal to
marginal cost (MC)
Exception: Q*
Q = 0 if average variable
cost (AVC) is above the demand curve
at all levels of output

Monopoly
Short Run Equilibrium
Short-Run
Q* = ?
P* = ?

Monopoly
Long Run Equilibrium
Long-Run
Q* = 700
P* = $9

Consumer Surplus
p
a. Consumer surplus
p
is the area below the demand

curve and above the price. The reason is that this is

the difference between what people value the good
and what the good actually costs. If a product costs $5,
and a consumer values it at $10, their consumer
surplus is $10-$5 = $5. If a product costs $5, and one
person values it at $10, one at $9, one at $8, one at
$7, and one at $6, the total consumer surplus is
$5+$4+$3+$2+$1. This sum is the area under the
demand curve and above the price. (People who value
the good at less than $5 don't buy it, and so don't
receive consumer surplus. The area under the total
demand curve is what the consumer surplus would
have been if price was $0.
b. Producer surplus is the area above the supply
curve and below the price. The reason is that this is
the difference between how much producers make and
how much producers would have been willing to sell
the good for. If a good costs $5 and one producer
would have been willing to sell it for $0, one at $1, one
at $2, one at $3, and one at $4, the total producer
surplus is $5+$4+$3+$2+$1. (In competitive
markets, the area under the total supply curve
would
ld be
b the
th total
t t l costt off producing
d i
an infinite
i fi it
amount of goods.
a and b don't necessarily have the same area.

Social Cost of Monopoly

p y

Example - 1
ABC Concrete is a Monopoly supplier of concrete.
concrete Its total
revenue function and total cost function are as follows:
TR = 480Q 8Q2 ; TC = 400+ 8 Q2 .
a) What are the profit maximising quantity and price?
b) What would be the profit maximising quantity and price, if the
firm made its output decision using the decision rule employed
by firmss in a pe
perfectly
ect y co
competitive
pet t e market?
a et

Example - 2

Monopolistic
p
Competition
p

Many sellers of differentiated (similar but not

identical) products

Limited monopoly power

D
Downward-sloping
d l i d
demand
d curve

Selling costs

Increase in market share by

y competitors
p
causes decrease in demand for the firms
p
product

Monopolistic Competition
Short Run Equilibrium
Short-Run

Monopolistic Competition
Long Run Equilibrium
Long-Run
Profit = ??

Monopolistic Competition
Long Run Equilibrium
Long-Run
Cost with selling
g expenses
p

Cost without selling expenses

Example - 3
India Software Solutions Ltd.
Ltd operates in a monopolistically
competitive market. The demand equation faced by the
company is given by: P = 350 Q . Companys long-run total
cost equation is given by: TC = 355Q 2Q2 + 0.05Q3 .
(a) What are the equilibrium output and price for the company?
(b) Compute the economic profit of the company,
company in equilibrium.
equilibrium

1 1

Quadratic Formula

b 2 4 ac

1 1