Unit 3 Unit 3 Objectives and equilibrium Objectives and equilibrium

of the firmof the firm

contentscontentsKamolika- Market structure,

perfect competionLochani- Monopoly n

monopolistic structureManish-OligopolyLeena-Types of oligopolyKritika-Output determination

under various market structure

Market Structure:- Perfect Market Structure:- Perfect competitioncompetition

Market structure Market structure Perfect competitionMonopolyOligopolyMonopolistic compitition

Perfect competitionPerfect competition

There are many buyers and sellers of product.

The product is homogeneous.Perfect mobility of resources.Economic agents have perfect

knowledge of market condition.

Characteristics of P. C.Characteristics of P. C.Large no. of buyers and sellers.Free entry and exit of firms.Government non intervention.Product homogeneity.Perfect knowledge of market

condition.Absence of transport costs

element.

MONOPOLY ANDMONOPOLISTIC

COMPETITON

MONOPOLY :- Monopoly is that market from in which a single producer control the entire supply of a single commodity which has no close substitute.

There must be only one seller or producer.

The commodity produced by producer must have no close substitutes.

Monopoly can exist only when there are strong barriers to entry.

There is a single producer or seller of the product.

There are no close substitutes for the product. If there is a substitute, then the monopoly power is lost.

No freedom to enter as there exist strong barriers to entry.

The monopolist may use his monopolistic power in any manner to get maximum revenue.

•FEATURES:-

MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION

Monopolistic competition refers to competition among a large number of seller producing close but not perfect substitutes.

Perfect competition & monopoly are rarely found in the real world.

DEFINATION:-DEFINATION:-

Edward. H. Chamberlin… Monopolistic competition is

more realistic than either pure competition or monopoly. It is a blending of competition & monopoly.

“There is competition which is keen though not perfect , between many firms making very similar product”.

FEATURESFEATURES

1. Large number of seller

2. Product differentiation

3. Free entry & exit of firms

4. Selling cost

5. Group equilibrium

6. Nature of demand curve

OLIGOPOLYOLIGOPOLY

DEFINATIONThis term is derived from two Greek words , ’ oligi ’ , which means a few and ‘polien’, which means ‘to sell’ . Oligopoly is defined as the market structure in which there are a few sellers of the homogeneous or differentiated products , who intensively compete against each other and recognize interdependence in their decision making .Actual number of sellers under oligopoly depends on the size of the market . If there are only two sellers , it is called dupoly .Fellned calls oligopoly as competition among few sellers .J .M . Clark terms it as ‘workable competition’.Oligopoly is also often referred to as incomplete competition,limited competition,multiple monopoly, incomplete monopoly,ExAluminium,cement,automobiles,tyres,cigarettes.

Features of Oligopoly

Under oligopoly , few large sellers dominate the dominate the market for a product .Each seller has sizeable influence on the market .Every firm possesses a large degree of monopoly power(when products are differentiated ) and accounts for a large part of market’s total demand . It uses all resources at its disposal to counter the actions of rival firms to ensure its survival and growth in the market . Thus , each firm acts as a strategic competitor.

1. Few Dominant Firms

As the number of firms is small size each(sizeable) firms has to consider the possible reaction of the rivals, while taking business decisions as to its price , outputs or promotion. This will enable the firm to know how the buyers of its product will react to any such change . When on one hand ,every firm is in a position to influence the price , output and profit s of other firms in the market . On the other hand , it cannot fail to take into account the reaction of other firms to its price and output policy. Therefore there is a good deal of interdependence of the firms under oligopoly .

2.MUTUAL INTERDEPENDENCE

IndeterminateIndeterminate demand demand curvecurveThe element of interdependence of firms has

made the systematic analysis of oligopoly very difficult . The mutual interdependence also make predictions and hence optimal decision very difficult due to the atmosphere of uncertainty no firms under oligopoly is in a position to visualize consequences of its price outputs with any degree of accuracy.

Emergence of OligopolyNow, let us examine why does oligopolistic tendency arise in the market . There are various reasons for the emergence of oligopoly

1.Huge Capital Investment

Industries like cement ,steel , chemical etc require huge capital investments well as recurring expenses. The cost and time that new firm will have to face make the entry unviable and unattractive . Consequently , only a few big firms continue to operate in the market .Consequently , only a few big firms continue to operate in the market . Few small firms produce enough to meet the entire demand at lower cost than a large number of firms dividing the total output.

2.Absolute Cost Advantage

A small number of firms may secure absolute advantage in cost over all others , which permits them to operate profitably even at a low price at which the others cannot survive .

3.Product Differentiation

A few firms in some cases obtain an advantage of product differentiation. Buyers develop brand loyalties and then prefer these products to other varieties of the same product .

4. Mergers

Modern business firms are now learning to eliminate competition through mergers . As the number of firms decline ,profits rise and oligopolies are established.

TYPES OF OLIGOPOLYTYPES OF OLIGOPOLY1. Product Differentiation:- On the basis of

product differentiation or nature of the product and marketed, oligopoly may be classified pure oligopoly and differentiated oligopoly.

2. Entry of Firms:- on the basis of ease of entry of competitors in the market, oligopoly clasified as open or closed.

3. Leadership :- on the basis of presence of price leadership ,the oligopoly situation may be classified as partial or full.

4. Agreement :- oligopoly may be classified into collusive and non-collusive oligopoly on the basis of agreement and understanding among the firms.

5. Coordination :- an oligopoly situation may be classified organised and syndicated oligopoly.

Price n output decisions under Price n output decisions under different Market structuredifferent Market structure

Market structureMarket structureMarket means any organisation whereby buyers

and sellers of a good r kept in close touch with each other

-Stonier n HagueIt means a general field within which d force

determining d price of particular product operate -Ely

Classification of MarketClassification of MarketOn the basis of Area (local,national n

international)On the basis of Time (very short, short,very

long,long)On the basis of nature of transaction (spot

market n future market)On d basis of volume of buisness(wholesale n

retail market)

price determination under perfect price determination under perfect competitioncompetitionMarshal laid emphasis on d role of time element

in d determination of price he distinguish 3 periods in which equilibrium between demand n supply was brought about

1) Market period 2) short run equilibrium 3) long run equilibrium

Price output determination Price output determination under Monopolyunder MonopolyMarginal cost should be equal to marginal

revenueThe marginal cost curve should cut marginal

revenue curve 4m below

Degrees of price Degrees of price descriminationdescrimination1) Price descrimination of the first degree2) Price descrimination of the second degree3) Price descrimination of the third degree