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Overview

Classification of Markets

Perfect Competition

Monopoly

Price output determination under Monopoly Monopolistic Competition

Duopoly and Oligopoly

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Classification of Markets

On the basis of area

On the basis of time

On the basis of Nature of Transactions

On the basis of Volume of Business

On the status of Sellers

On the basis of Regulation

On the basis ofCompetition

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Concepts to refresh

What is AC and MC?

What is MR and MC?

Fixed Vs Variable Cost?

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PerfectC

ompetition-F

eatures Large numbers of Buyers and Sellers

Homogeneity of Products

Free entry and Exit

Absence of Government Regulation

Perfect Mobility ofFactors of

Production

Perfect Knowledge

Absence of Transport Cost

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Price output determination under

Perfect Competition Market price is determined based on the

interaction of supply and demand.

Price in

Rs

Demand

in Units

Supply In

Units

State of

Market

Pressure

on Price

2 1000 9000 S>D Downward

4 3000 7000 S>D Downward

6 5000 5000 S=D Neutral

8 7000 3000 D>S Upward

10 9000 1000 D>S Upward

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PerfectC

ompetition-F

eatures The Industry is the price maker and

the firm is the price taker

In this case Equilibrium price means

AR =MR

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Equilibrium of the Competitive firm

in the Short runWhen MR=MC the equilibrium Output

and Price is determined.

For survival the firm has to cover atleastthe variable cost .

Therefore the price in the short run is

equal to variable cost.If the price is lower than the AVC ,the

firm is compelled to stop Production.

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Profits of the Competitive firm in

the Short runWhen MR=MC the equilibrium Output

and Price is determined.

AR greater than AC then Super NormalProfits for the firm

When AR=AC then Normal Profits for

the firm

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Consolidation of Perfect

Competition1)At op4 price of the firm will neither cover

AFC nor AVC and hence it has to wind up

its Operations.It is regarded as Shut Down

point.

2)At op1 price ,oq1 quantity is the equilibrium

output.E1 indicates the price or AR=AVC

only.It does not coverFC

.The firm is readyto suffer loss in the nitial stage hoping that

the price may go up in the near future to

earn profits.

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Consolidation of Perfect

Competition3)At op2 price ,oq2 quantity is the equilibrium output

.E2 indicates the price =AR=AC.At this point

MR=MC.At this level of output TAR=TAC hence,the

firm is earning only normal profits.It is break evenpoint of the firm.The distance between two

equilibrium points E2 and E1 indicates loss

minimisation zone.

4) At op3 price and oq3 is the output produced by the

firm .At E3,MR=MC.But AR is greater than AC.For

oq3 output ,the total cost is oq3AB.the total revenue

is oq3E3p3.Hence ,p3E3AB is super normal profit

region

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Equilibrium of the Competitive firm

in the Long runWhen MR=MC the equilibrium Output

and Price is determined.

The firm should produce that level ofoutput at Which MR=MC and MC

Curve Cuts MR curve from Below

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Equilibrium of the Competitive firm

in the Long runWhen AR is greater than AC there will

be super normal Profits and this lead

to entry of new firmsResult

Expansion in output

Increase in supplyFall in Price

Fall in ratio of profits

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Complements (-) vs Substitutes (+)

defined by sign of cross price elasticity