Final Report

Course Title: Microeconomics-2

Submitted to:

Dr Samreen Babar

Submitted by:

Shiza Sohail 01-114182-016

Hafsah Mustafa 01-114182-021

Hamza Iftikhar 01-114182-004

Adnan Raza 01-114182-017

Bs-Eco 2A

Department of Management Sciences

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Contents
Market Structures: ......................................................................................................................................... 3
 Types of market structures: ............................................................................................................... 3
(1) Perfect competition: .................................................................................................................. 3
(2) Monopolistic Competition: ....................................................................................................... 3
(3) Oligopoly......................................................................................................................................... 3
(4) Monopoly: ....................................................................................................................................... 3
Monopoly ...................................................................................................................................................... 4
Characteristics of Monopoly: .................................................................................................................... 4
Monopolist’s Demand Curve: ................................................................................................................... 4
 Advantages of monopoly .................................................................................................................. 5
 Disadvantages of monopoly: ............................................................................................................. 5
Price Discrimination: ................................................................................................................................ 5

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 Monopoly
Market Structures:
These are the characteristics that interconnect the market and define how the buyers and sellers
interact within a Market. Moreover, it also determines the level of collusion between the firms,
the types of competition that occur, extent of different commodities produced i.e. product
differentiation. Lastly, it also includes the barriers of entry into and exit from the Market.

 Four types of Market structures:

(1) Perfect Competition:

Perfect Competitive firms cannot influence the prices because of many buyers and sellers in the
Market i.e. Price takers.

(2) Monopolistic Competition:

Each firm in the industry enjoys a reasonable distinction despite competition in the Market.

(3) Oligopoly:

There are various large sellers having little control on the prices being set in the market.

(4) Monopoly:

In Monopoly, there is an individual seller having substantial control on the prices along with the
supply of the commodity.

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 Monopoly
Monopoly is a Market structure distinguished by selling a distinctive product in the market by an
individual seller.

Characteristics of Monopoly:
 High barriers to enter or exit from the Market.
 Firms are price makers so they control the output level and price of the commodity.
 Different prices can be charged of the same product i.e. Price discrimination.
 Monopoly concentrates consumer preference.
 Due to large scale production, the average cost per unit of Output decreases, this leads to
the practice of Economies of scale.
 Economies of scope results in a decrease in the Average cost of the firm by
manufacturing commodities at the same time.
 Lower costs for established firms.
 Abnormal or Supernormal profits earned in Long run and Short run. Hence, MR>MC.

Sources of Monopoly Power

 Economies of scale
 Capital requirements
 Technological superiority
 No substitute goods
 Control of natural resources
 Network externalities
 Legal barriers
 Deliberate actions

Monopolist’s Demand Curve:

 Downward slopping
 MR below AR.
 Equilibrium level of Output: MC=MR

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  Advantages of monopoly
 May be appropriate if natural monopoly
 Encourages R&D
 Encourages innovation
 Development of some products not likely without some guarantee of monopoly in
production
 Due to high profits earned, firms indulge in risk taking
 Economies of scale can be gained – consumer may benefit
 Domestic monopolies can become dominant in their own territory and then penetrate
overseas markets, earning a country valuable export revenues. This is certainly the case
with Microsoft.

 Disadvantages of monopoly:
 Exploitation of consumer – higher prices whereas output is relatively low, both in the
long run and short run.
 Lack of incentive for innovation
 Potential for supply to be limited - less choice
 Potential for inefficiency – X-inefficiency – complacency over controls on costs

Price Discrimination:
A pricing strategy that charges customers different prices for the same product or service.
In pure price discrimination, the seller will charge each customer the maximum price that
he or she is willing to pay. In more common forms of price discrimination, the seller

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places customers in groups based on certain attributes and charges each group a different
price.

Price discrimination allows a company to earn higher profits than standard pricing
because it allows firms to capture every last dollar of revenue available from each of its
customers. While perfect price discrimination is illegal, when the optimal price is set for
every customer, imperfect price discrimination exists. For example, movie theaters
usually charge three different prices for a show. The prices target various age groups,
including youth, adults and seniors. The prices fluctuate with the expected income of
each age bracket, with the highest charge going to the adult population.

 Cinemas and theatres cutting prices to attract younger and older audiences
 Student discounts for rail travel, restaurant meals and holidays
 Expensive taxi fares during the night
 Hotels offering cheap weekend breaks and winter discounts

MR

In an elastic market, customers are price conscious hence the demand curve stays
relatively elastic, whereas in an inelastic market, do not respond strongly to changes in
prices leaving the demand curve to be relatively inelastic. The diagram above shows the
shaded area (profit of the combined market: P2X2Y2MC2)

The firm will be better off by selling the product in different markets (Elastic and
Inelastic) that seem to be giving more profits (PXYMC + P1X1Y1MC1) than just from
the combined market i.e. (P2X2Y2MC2)

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Hence,

PXYMC + P1X1Y1MC1 > P2X2Y2MC2