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Market Analysis

Market Analysis. 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.

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Market Analysis

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  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 • firms are price takers • freedom of entry • identical products • perfect knowledge • Short-run equilibrium of the firm • price, output and profit

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

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

  13. Perfect Competition • Assumptions • 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. S MC a P1 b P2 c P3 D1 D2 D3 Deriving the short-run supply curve P £ = S D1 = MR1 D2 = MR2 D3 = MR3 O O Q (thousands) Q (millions) (a) Industry (b) Firm

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

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

  17. (SR)MC (SR)AC LRAC DL AR = MR LRAC = (SR)AC = (SR)MC =MR= AR Long-run equilibrium of the firm under perfect competition £ 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 = 4,000 + 4Q + 0.02Q2 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 = 50 +10P. • 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 = 2,000 + 6P • 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 • downward sloping • MR below AR • Equilibrium price and output • Equilibrium output, where MC = MR

  25. MC MR Profit maximising under monopoly £ Qm O Q

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

  27. AC AR AC AR Profit maximising under monopoly £ MC MR Qm O Q

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

  29. Total profit AC AR AC AR Profit maximising under monopoly £ MC MR Qm O Q

  30. Monopoly • The monopolist’s demand curve • 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. MC AR = D MR Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ Monopoly P1 Q1 O Q

  33. P2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ MC ( = supply under perfect competition) Comparison with Perfect competition P1 AR = D MR Q1 Q2 O 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 • 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 • 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 Q2 Q3 O Q1 Q

  41. Monopoly • Disadvantages 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 = 500 + 10Q. • 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 1 Market 2 • P1 = 14 – 2Q1 P2 = 10 – Q2 MR1 = 14 – 4Q1 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.

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