market morphology

MARKET MORPHOLOGY

WHAT ALL IS THERE IN A MARKET ?

POSSIBILITIES

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Features of Perfect Competition

Very large number of sellers Very large number of buyers Homogeneous product No barrier to entry or exit Complete knowledge No interference by government No transport cost/ No selling

cost

Price and output determination in SR

All firms are price-takers; not price makers

Price is determined in the industry by market forces

Firms follow marginal equivalency rule

Firms can earn abnormal, normal profit or incur loss

Price and output determination LR

In long run; firms have freedom of entry and exit.

Hence , no possibility of abnormal profit or loss; only one possibility i.e. NORMAL PROFIT

P = AR = MR = AC = MC

OPTIMUM OUTPUT Vs. EQUILIBRIUM OUTPUT

A firm’s optimum output is that output where its per unit cost is the lowest. Such firm is called technically efficient.

A firm’s equilibrium output is that output where it maximizes profit. Such firm is called economically efficient

In PC in LR, optimum Q = equm. Q PC ensures best utilization of

resources

MONOPOLISTIC COMPETITION

Large number of sellers; large number of buyers

Product differentiation Freedom of entry and exit Selling cost Excess capacity

Price and Output determination

In Short Run – what are possibilities ?

In long run - what happens?

SELLING COSTS

Total cost = Production cost + Selling cost

How much should a firm spend on advertisement?

Why is selling cost considered a waste of monopolistic competition?

MONOPOLY One seller; many buyers Unique product No freedom of entry and exit Firm is the industry Monopolist is a price-maker in a

limited sense AR and MR curves are downward

sloping P = AR > MR

HOW ARE MONOPOLIES FORMED?

Possible reasons

Government action

Control over ‘vital’ raw material

Unique technology

Driving competitors out by efficiency

Price and output determination in simple monopoly

In short run, a monopolist may earn abnormal profit, or normal profit or incur loss; but in reality, the most likely case would be that a monopolist earns abnormal profit.

In long run, a monopolist always earns abnormal profit.

Comparing monopoly with perfect competition

Given same costs, a monopolist will charge a higher price than a perfectly competitive firm; and sell a smaller output than perfectly competitive firm

Pm > Pc Qm < Qc

OLIGOPOLY

Few discernable sellers; many buyers

Homogeneous or heterogeneous product

Restricted entry/exit Interdependence Indeterminate Solution

OLIGOPOLY MODELS

COLLUSIVE

NON- COLLUSIVE

COLLUSIVE MODELS

CARTELS

PRICE LEADERSHIP

NON COLLUSIVE MODELS

PRICE RIGIDITY MODEL

COURNOT MODEL

CHAMBERLIN MODEL

Market No. of sellers Entry barrier to

sellers

Nature of product

Perfect competition

Many, small, independent

None Homogeneous

Monopoly One Huge Unique

Monopolistic competition

Many; virtually

independent

None Differentiated

Oligopoly Few; interdependent

Substantial Either

EXAMPLESPC MC Oligopoly Monopoly

1. Agri-goods

2. Street food

1. Ready-made knitwear

2. Pens3. Soap

1. Automobile2. Soft drinks

1. Windows operating system

2. Public utilities