1. Market Analysis

2. The Degree of Competition
Classifying markets
number of firms
freedom of entry to industry
nature of product
nature of demand curve
The four market structures
perfect competition
monopoly
monopolistic competition
oligopoly

3. Features of the four market structures

4. Features of the four market structures

5. Features of the four market structures

6. Features of the four market structures

7. Features of the four market structures

8. Features of the four market structures

9. The Degree of Competition
Classifying markets
number of firms
freedom of entry to industry
nature of product
nature of demand curve
The four market structures
perfect competition
monopoly
monopolistic competition
oligopoly
Structure  conduct  performance

10. Perfect Competition Assumptions Short-run equilibrium of the firm
firms are price takers
freedom of entry
identical products
perfect knowledge
Short-run equilibrium of the firm
price, output and profit

11. Short-run equilibrium of industry and firm under perfect competitionAC MC P O
(b) Firm
Q (thousands) S D AR
D = AR
= MR Pe AC O Qe
Q (millions)
(a) Industry

12. Loss minimising under perfect competitionAC MC P S AC
D1 = AR1
= MR1
AR1 Qe P1 D O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

13. Perfect Competition Assumptions Short-run equilibrium of the firm
firms are price takers
freedom of entry
identical products
perfect knowledge
Short-run equilibrium of the firm
price, output and profit
The short-run supply curve of the firm

14. Deriving the short-run supply curveMC D1
= S D2 a
D1 = MR1 D3 P1 b
D2 = MR2 P2 c
D3 = MR3 P3 O O
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

15. Perfect Competition Long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR

16. Long-run equilibrium under perfect competition
Profits return
to normal
New firms enter
Supernormal profits
LRAC P S1 D Se P1
AR1 D1 PL
ARL DL O O QL
Q (millions)
Q (thousands)
(a) Industry
(b) Firm

17. Long-run equilibrium of the firm under perfect competition
LRAC
Long-run equilibrium of the firm under perfect competition
(SR)MC
(SR)AC
AR = MR DL
LRAC = (SR)AC = (SR)MC = MR = AR O Q

18. Perfect Competition Benefits of perfect competition
price equals marginal cost
prices kept low
firms must be efficient to survive

19. In a perfectly competitive market supply and demand functions are
Qs = 1000P + 500
Qd = 5000 – 500P
If variable cost function of a firm is TVC = 103Q – 0.5Q2
Profit maximizing output for the firm
Economic profit?

20. XYZ Ltd., operating in a perfectly competitive market, sells a stationery item at Rs.10 per unit. The cost function is given as
TC = 4, Q Q2
1.The profit maximizing output for the firm?

21. Softy Cereals Inc. (SCI) produces and markets Tasties, a popular ready-to-eat breakfast cereal. The
demand and supply functions of Tasties are as follows:
QD = 150– 3P
QS = P.
If excise tax of Rs.3 is imposed on Tasties, what is the proportion of tax that will be borne by the consumers ?

22. Demand and supply functions for a product are:
Qd = 10,000 – 4P
Qs = 2, P
If the government imposes a sales tax of Rs.100 per unit, what will be the new equilibrium price?

23. Monopoly Defining monopoly Barriers to entry economies of scale
economies of scope
product differentiation and brand loyalty
lower costs for an established firm
ownership/control of key factors
ownership/control over outlets
legal protection
mergers and takeovers
aggressive tactics
intimidation

24. Monopoly The monopolist’s demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
Equilibrium output, where MC = MR

25. Profit maximising under monopolyMC MR O Qm Q

26. Monopoly The monopolist’s demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
Equilibrium output, where MC = MR
Equilibrium price, found from demand curve

27. Profit maximising under monopolyMC AC AR AR AC MR O Qm Q

28. Monopoly The monopolist’s demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
Equilibrium output, where MC = MR
Equilibrium price, found from demand curve
Profit
Measuring profit

29. Profit maximising under monopolyMC
Total profit AC AR AR AC MR O Qm Q

30. Monopoly The monopolist’s demand curve Equilibrium price and output
downward sloping
MR below AR
Equilibrium price and output
Equilibrium output, where MC = MR
Equilibrium price, found from demand curve
Profit
Measuring profit
Supernormal profit can persist in long run

31. Monopoly
Disadvantages of monopoly
high prices / low output: short run

32. Equilibrium of industry under perfect competition and monopoly: with the same MC curve
AR = D MR
Monopoly P1 O Q1 Q

33. Equilibrium of industry under perfect competition and monopoly: with the same MC curve
MC ( = supply under
perfect competition)
Comparison with
Perfect competition P1 P2
AR = D MR O Q1 Q2 Q

34. Monopoly Disadvantages of monopoly high prices / low output: short run
high prices / low output: long run

35. Monopoly Disadvantages of monopoly high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate

36. Monopoly Disadvantages of monopoly high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate

37. Monopoly Disadvantages of monopoly Advantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly

38. Monopoly Disadvantages of monopoly Advantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
economies of scale

39. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MCmonopoly P1
AR = D MR O Q1 Q

40. Equilibrium of industry under perfect competition and monopoly: with different MC curves
MC ( = supply)perfect competition
MCmonopoly P2 P1 x P3
AR = D MR O Q2 Q1 Q3 Q

41. Monopoly Disadvantages of monopoly Advantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
Advantages of monopoly
economies of scale
profits can be used for investment

42. Demand functions of a monopolist in two effectively segmented markets are:
Qa = 1,000 – 50Pa
Qb = 800 – 25Pb
Total cost function of the monopolist is TC = Q.
If the monopolist does not practice price discrimination, what is the sales maximizing price ?

43. Price Discrimination
A firm sells in two markets and has constant marginal costs of production equal to $2 per unit. The demand and demand and marginal revenue equations for the two markets are as follows:
Market Market 2
P1 = 14 – 2Q P2 = 10 – Q MR1 = 14 – 4Q MR2 = 10 – 2Q2
Using third-degree price discrimination, what are the profit-maximizing prices and quantities in each market? Show that greater profits result from price discrimination than would be obtained if a uniform price were used.