1. PRICING & OUTPUT DECISION
- Market Structure

2. Chapter Organization Introduction to Market Structure
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly

3. Market Structure Determinants of market structure
Freedom of entry and exit
Nature of the product-homogeneous, differentiated
Control over supply/output
Control over price
Barriers to entry

4. Classification of market based on nature of competition
Perfect competition
Imperfect Competition
Monopoly
Pure
Perfect
Oligopoly
Monopolistic

5. Perfect Competition Assumptions Large number of Buyers & Sellers.
Homogeneous product.
Free entry & exist to industry.
No govt. regulation.
Price takers
Perfect Knowledge of market conditions.
Perfect mobility of factors of production.

6. A perfectly competitive market is where agents in the market (buyer&seller) are price taker.
Price taking behaviors: agents believe that the market price is given and their actions do not influence the market price.
Examples of Perfect Competition
- Financial markets - (stock exchange, currency market), agriculture

7. FIRM-PRICE TAKER

8. Equilibrium of firm in short run
(A) TR and TC approach TC TR C R X XA XB

9. (B) MR and MC approach P MC P0 e
P=AR=MR X Xe

10. Profit Maximization for a Perfectly Competitive Firm
All firms maximization for a Perfectly Competitive Firm
MR = MC
Since the perfectly competitive firm is a price taker, marginal revenue equals price.
MR = P
Therefore, profits will be maximized where
MR (= P) = MC or P = MC

11. Profit Maximization
All firms can maximize profits (or minimize losses) by comparing marginal revenue (MR) with marginal cost (MC)
If MR > MC, profits are increasing
If MR < MC, profits are decreasing
Therefore, profits must be maximized where MR=MC

12. Since the perfectly competitive firm is price taker, marginal revenue equals price.
MR= P
Therefore, profits will be maximized where
MR (=P) = MC or P = MC

13. Is the firm making a profit?
For a price taker, price is also equal to the average revenue and we need to compare average total cost with price in order to tell whether the firm is making a profit.
If P > ATC , the firm is making a profit that is , it is selling its output at mere than its cost.

14. If P < ATC, the firm is losing money
Price ,Cost, Revenue MC
ATC E D
Loss C
P=AR = MR F
Quantity

15. If P > ATC, the firm is having super normal profits
Price ,Cost, Revenue MC
ATC P0 E
P=AR = MR
Super Normal Profit A B Xe
Quantity

16. If P = ATC, the firm is having normal profits.
Price ,Cost, Revenue
ATC MC C B
P=AR = MR
Quantity

17. Shut down point

18. What if the Firm is Losing Money?
If a firm is losing money, it has to decide whether to operate at a loss or shut down.
If a firm shuts down, its loss will be equal to the amount of its total fixed costs.
But, if a firm can cover its variable costs, it should continue to operate even though it’s losing money.

19. The Shut-Down Condition
If P < AVCmin , the firm should shut down. Why? Because it’s not covering its variable costs.
If P > AVCmin , the firm should continue to operate at a loss.
Why? Because it will cover its variable costs
The minimum of average variable cost is called the shutdown price.

20. Short run equilibrium of industry

21. Long Run Equilibrium - Firm

22. Long Run Equilibrium- Industry