CFA Level I- Economics
description
Transcript of CFA Level I- Economics
![Page 1: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/1.jpg)
CFA Level I- Economics
![Page 2: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/2.jpg)
Study Session 4“Microeconomic Analysis”
13.Demand & Supply Analysis: Introduction14.Demand & Supply Analysis: Consumer Demand15.Demand & Supply Analysis: The Firm16.The Firm & Market Structures
![Page 3: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/3.jpg)
Definition of Market
Group of buyers
&sellers
Aware of each other
Able to agree on a
price
For Exchange of Goods
and Services
www.fintreeindia.com
![Page 4: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/4.jpg)
Four Types of Market Structures
Perfect Competition
Monopolistic Competition
Oligopoly Mono-poly
www.fintreeindia.com
![Page 5: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/5.jpg)
www.fintreeindia.com
Factor that determine
market Structure
Number of Sellers in Market
Degree of product differentiation
Power of sellers in determining Price
Barriers to entry and exit
Degree of non Price Competition
![Page 6: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/6.jpg)
Four Types of Market Structures
Perfect Competi
tion
Monopolistic Competition
Oligopoly Mono-poly
www.fintreeindia.com
![Page 7: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/7.jpg)
Product Differentiation
Barriers to Entry
Pricing Power of Firm
Non price Competition
No. of Sellers
Perfect Competiton
Many
Homogen-eous
Very Low
None
None
![Page 8: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/8.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 9: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/9.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 10: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/10.jpg)
Demand Analysis
• There is a negative relationship between Price and Quantity Demanded
• Convention in CFA curriculum: use absolute values
• Ep =
www.fintreeindia.com
- (% change in Qd)
(% change in Price)
Price Elasticity of demand
![Page 11: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/11.jpg)
Demand Analysis
Price elasticity depends on:1. Availability of substitutes2. Share of consumers budget spent on item3. Length of the time considered
www.fintreeindia.com
Price Elasticity of demand
ElasticEp > 1
InelasticEp < 1
Unitary ElasticEp = 1
![Page 12: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/12.jpg)
Demand Analysis
www.fintreeindia.com
Price Elasticity of demand
ElasticEp > 1
InelasticEp < 1
Unitary ElasticEp = 1
Increase in Price
Result in lower TR
Increase in price
Result in Higher TR
Change in price will have no
impact on TR
![Page 13: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/13.jpg)
Demand Analysis Two extreme case of price elasticity of demand
www.fintreeindia.com
Qty
Price
Qty
Price
Demand Curve
Demand Curve
Perfectly Elastic Demand Ep = Infinity
Perfectly inelastic Demand Ep = Zero
A perfectly Competitive firm is a
Price Taker
![Page 14: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/14.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 15: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/15.jpg)
Demand AnalysisIncome Elasticity
When Consumer income increases demand increases
Ey =
For normal goods- It’s positiveInferior goods - Negative
www.fintreeindia.com
(% change in Qd)
(% change in Y)
![Page 16: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/16.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 17: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/17.jpg)
Demand AnalysisCross Price Elasticity
Shows change in demand for product A for a change in price for Product B
Ex =
For Substitutes – PositiveFor Complements – Negative
www.fintreeindia.com
(% change in QdA)
(% change in Pb)
![Page 18: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/18.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 19: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/19.jpg)
Demand AnalysisConsumer Surplus
• Difference between value and price
www.fintreeindia.com
![Page 20: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/20.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 21: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/21.jpg)
Supply Analysis
• Supply curve of Individual firm – positively Sloped
• Industry Supply curve – Positively Sloped
• As price increases, quantity supplied increases
www.fintreeindia.com
![Page 22: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/22.jpg)
Supply Analysis
a firm’s short-run supply curve is the portion of the firm’s
short-run marginal cost curve above average variable cost. A firm’s long-run supply curve is the portion of the firm’s
long-run marginal cost curve above average total cost.
![Page 23: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/23.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 24: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/24.jpg)
Optimum Price and Output
Optimum price and output is calculated by equating demand and supply function
Important for Exams: It is possible in a perefectly competitive market , that the demand schedule of the entitre market is downward sloping
In Perefectly Competitive markets, for a Individual firm:
Price = Average Revenue = Marginal Revenue
www.fintreeindia.com
![Page 25: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/25.jpg)
Optimum Price and Output Certain Basic concepts: Both MC and ATC curves are U Shaped
Demand Curve is also called as MR Curve
In perfect competition MR = P = AR
Profit is maximised when MR = MC
So for a perefectly competitive firm MR = P = AR = MC, hence economic Profit = Zero
www.fintreeindia.com
![Page 26: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/26.jpg)
Average Total Cost
Quantity
PriceMarginal Cost
The point where, ATC and MC are same, ATC is lowest
Firms Demand
![Page 27: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/27.jpg)
www.fintreeindia.com
Perfect Competiton
1. Demand Analysis
Price Elasicity
Cross price
Elasticity
Income Elasticity
Consumr Surplus
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 28: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/28.jpg)
Four Types of Market Structures
Perfect Competi
tionMonopol
istic Competi
tion
Oligopoly Mono-poly
www.fintreeindia.com
![Page 29: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/29.jpg)
Product Differentiation
Barriers to Entry
Pricing Power of Firm
Non price Competition
No. of Sellers
Monopolistic Competition
Many
Homogen-eous
Very Low
None
None
Many
Differenti- ated
Low
Some
Advt + product Differen.
![Page 30: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/30.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 31: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/31.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 32: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/32.jpg)
Demand Analysis
Each product sold in monopolistic competition is different
Demand curve for each firm is downward sloping to the right
At higher prices- Demand is more elatic
At lower prices- demand is less elastic
www.fintreeindia.com
![Page 33: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/33.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 34: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/34.jpg)
Supply Analysis
Supply curve – not represented by marginal cost curve
Imp: In monopolistic competition there is no well defied supply schedule
www.fintreeindia.com
![Page 35: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/35.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 36: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/36.jpg)
Optimal price and output
• Output is determined where MR = MC
• But the price is charged based on market demand schedule.
www.fintreeindia.com
![Page 37: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/37.jpg)
Quantity
Price
Short run ATCShort run MC
Demand CurveMR
![Page 38: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/38.jpg)
Optimal price and output
• Is imperfect competition a bad thing?
www.fintreeindia.com
![Page 39: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/39.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 40: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/40.jpg)
Factor affecting long run equilibrium
• An increase in demand will increase economic profits in the short run under all market structures.
• Positive economic profits result in entry of firms into the industry unless barriers to entry are high.
• Negative economic profits result in exit of firms from the industry unless barriers to exit are high.
![Page 41: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/41.jpg)
Factor affecting long run equilibrium
Important concept for Exams:
Unlike long run equilibrium in perefect competition, in monopolistic competition, equilibrium position is at a higher level of average cost than the level of output that minimizes cost.
![Page 42: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/42.jpg)
www.fintreeindia.com
Monopolistic Competiton
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
4. Factors affecting long
run equilibrium
![Page 43: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/43.jpg)
Four Types of Market Structures
Perfect Competi
tion
Monopolistic Competition
Oligopoly
Mono-poly
www.fintreeindia.com
![Page 44: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/44.jpg)
Product Differentiation
Barriers to Entry
Pricing Power of Firm
Non price Competition
No. of Sellers
Oligopoly
Many
Homogen-eous
Very Low
None
None
Many
Differenti- ated
Low
Some
Advt + product Differen.
Few
Homogen-eous
High
Some or
considerable
Advt + product Differen.
![Page 45: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/45.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 46: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/46.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 47: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/47.jpg)
Demand Analysis
There are three basic pricing startegies in oligopily
1. Pricing interdependence2. cournot assumptions3. Nash Equilibrium
www.fintreeindia.com
![Page 48: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/48.jpg)
Demand Analysis
1. Pricing interdependence Competitors will match a price reduction but ignore a
price increase Therefore given a price:
If Price Decreased Price elasticity Less If price Increased price elasticity is Higher Which results in a Kinked Demand Curve
www.fintreeindia.com
![Page 49: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/49.jpg)
Quantity
Price
Demand Curve
![Page 50: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/50.jpg)
Demand Analysis
2. Cournot Assumption Each firm will determine it’s profit maximising
production level, Assuming, that other firms output will not change.
Two Implications: Output is greater than monopoly, but lower than
perfect competition. Price is lower than monopoly, but not as low as with
perfect competition.
www.fintreeindia.com
![Page 51: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/51.jpg)
Demand Analysis
3. Nash Equilibrium Nash Equilibrium presents when two or more
participant, in a non –cooperative game have no incentive to deviate from their respective strategies
none of the oligopolist can increase its profits by unilaterally changing its pricing strategy.
www.fintreeindia.com
![Page 52: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/52.jpg)
Nash Equilibrium in Duopoly Market
www.fintreeindia.com
B High Price- 600
A High Price- 1000
B Low Price-700
A High Price- 600
B Low Price-140
A Low Price- 100
B High Price-0
A Low Price- 160
![Page 53: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/53.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 54: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/54.jpg)
Supply Analysis
• No well defined supply curve
• Level of output where MC = MR
• Price will determined based on Demand Curve
• Generally a firm with more than 40% market share is called as dominant firm in oligopoly
www.fintreeindia.com
![Page 55: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/55.jpg)
Supply Analysis
• Without collusion, dominant firm will beome price maker
• It has also been seen that supremacy comes from Cost leadership
• And therefore price followers rather charge a price higher than dominant firm, if they charge a lower price, it follows the risk of a price war.
www.fintreeindia.com
![Page 56: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/56.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 57: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/57.jpg)
Optimum Price and output
• There’s no single optimum point
• In case of kinked demand curve, the kink is the optimim point but model fails to identify the point
www.fintreeindia.com
![Page 58: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/58.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 59: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/59.jpg)
Factors affecting long run equilibrium
Long run economic profits are possible
History has proven that pricing wars should be avoided.
www.fintreeindia.com
![Page 60: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/60.jpg)
www.fintreeindia.com
Oligopoly
1. Demand Analysis
Pricing interdepend
ence
Nash Equilibri
um
Cournot Equilibri
um
2. Supply Analysis
3.Optimum price and
output
4. Factors Affecting Long
run Equilibrium
![Page 61: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/61.jpg)
Four Types of Market Structures
Perfect Competi
tion
Monopolistic Competition Oligopoly
Mono-poly
www.fintreeindia.com
![Page 62: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/62.jpg)
Product Differentiation
Barriers to Entry
Pricing Power of Firm
Non price Competition
No. of Sellers
Monoply
Many
Homogen-eous
Very Low
None
None
Many
Differenti- ated
Low
Some
Advt + product Differen.
Few
Homogen-eous
High
Some or
considerable
Advt + product Differen.
One
Uniqueproduct
Very High
considerable
Advertising.
![Page 63: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/63.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 64: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/64.jpg)
Introduction Sources of monopoly power
Patent Control over critical resources used for prodn
Government controlled authorisation ( Natural monopolies)
Network effect
www.fintreeindia.com
![Page 65: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/65.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 66: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/66.jpg)
Demand Analysis Demand curve for a monopoly firm is downward sloping
www.fintreeindia.com
![Page 67: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/67.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 68: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/68.jpg)
Supply Analysis
A monopoly does not have a well defined supply curve
Output- Profit maximising – MR= MCPrice- Derived from demand curve
( Same as Monopolistic competition and Oligopoly)
www.fintreeindia.com
![Page 69: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/69.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 70: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/70.jpg)
Optimal price and output
Relationship between MR and price elasticity MR = P (1 – 1/Ep)
Since for a monopoly MR = MC, we can extend the equation by saying
MR = MC = P (1 - 1/Ep)
If a Monopolist know its MC ( lets asssume 50), if it observes price elasticity to be ( 1.5), then he can caluclate the optimum price to be charged. 150
www.fintreeindia.com
![Page 71: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/71.jpg)
Optimal price and output Regulated monopoly
1. In perfect competition P = MR = MC, but for a regulated monopoly it will be unfair to set a price of perefect competition
Because its LRAC will be higher than perfect competition
Solution:- subsidize the difference between LRAC and P of Competitive firm for each unit sold
2. Set a price where LRAC equals AR( regualatory solution is between pure a monoply and perfect competition)
![Page 72: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/72.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 73: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/73.jpg)
Price DiscriminationAnd Consumer Surplus
• First Degree price Discrimination– When a monopolist extracts entire consumer Surplus
• Second Degree Price Discrimination–Monopolist uses quantity purchased to establish how
much consumer values the product– So he will sell small quantities at less prices– Large qunatities at higher prices
• Third Degree price Discrimination- -- Customers are seggregated by demographic or other traits
![Page 74: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/74.jpg)
Two part Tariff pricing
Lets say, a consumers demand for a yoga Club is Qd = 30 – 5p, the MC per visit to the club is $2 . Calculate maximum monthy membersheep fees to be
charged to the consumer?
www.fintreeindia.com
![Page 75: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/75.jpg)
www.fintreeindia.com
Monopoly
1. Demand Analysis
2. Supply Analysis
3.Optimal price and Output
5. Factors affecting long run equilibrium
4.Price Discrimination& Consumer Surplus
![Page 76: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/76.jpg)
Factors affection Long Run Equilibrium
Unregulated monopoly can produce economic profits in the long run
For regulated monoply , P can be kept at MC but it should be supported by subsidy
National ownership of monoply is another solutionFranchise the monopolistic firm through bidding war
Monopolist are not always inefficient- beacuase regulation , economies of scale, or threat of entry- might give consumers better price than perfect competition
www.fintreeindia.com
![Page 77: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/77.jpg)
Factors affection Long Run Equilibrium
Unregulated monopoly can produce economic profits in the long run
For regulated monoply , P can be kept at MC but it should be supported by
subsidy National ownership of monoply is another solution Franchise the monopolistic firm through bidding war
www.fintreeindia.com
![Page 78: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/78.jpg)
Four Types of Market Structures
Perfect Competi
tion
Monopolistic Competition Oligopoly Mono-
poly
www.fintreeindia.com
Identification of market structure
![Page 79: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/79.jpg)
• Compute price elasticity
Highly elastic- intense competition
Highly inelastic high Concentration
Identification of market structure
![Page 80: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/80.jpg)
• A concentration ratio for N firms is calculated as the percentage of market sales
accounted for by the N largest firms in the industry and is used as a simple measure of market structure and market power.
Two Disadvantages:1. Does not quantify market power2. Tends to be unaffected by mergers
Identification of market structure
![Page 81: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/81.jpg)
• Herfindahl-Hirschman Index • Measure of concentration is calculated as the sum of
the squared market shares of the largest N firms in an industry and better reflects the effect of mergers on industry concentration.
Disadvantages:1. Does not quantify market power
Identification of market structure
![Page 82: CFA Level I- Economics](https://reader035.fdocuments.net/reader035/viewer/2022081419/568162ca550346895dd35765/html5/thumbnails/82.jpg)
Thank You!www.fintreeindia.com
- Presented by Utkarsh Jain