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MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge 1 oI 1
Perfect And Imperfect Markets
A market is said to be perfect when all the potential sellers and buyers are promptly
aware of the prices at which transactions take place and all the made by other sellers
and buyers, and when any buyer can purchase from any seller and conversely. Under
such a condition, the price of a commodity will tend to be the same (after allowing for
cost of transport including import duties) all over the market. Thus the prevalence of
the same price for the same commodity at the same time is the essential characteristic
of a perfect market.
In contrast, in imperfect market, no single price rules because there is no awareness
among buyers or sellers either due to producers influence or buyers unawareness.
Meaning Of Short-Run And Long-Run
The long run and the short run do not refer to a specific period of time such as 3 months
or 5 years. The difference between the short run and the long run is the flexibility
decision makers have.
In economics, the long run is the conceptual time period in which there are no fixed
factors of production as to changing the output level by changing the capital stock or
by entering or leaving an industry. The long run contrasts with the short run, in which
some factors are variable and others are fixed, constraining entry or exit from an
industry.
Short Run is a period of time within which the firm can vary its output by varying only
the amount of variable factors, such as labour and raw materials. In the short run, fixed
factors, such as capital equipment, top management personnel, etc., cannot be
varied. In other words, in the short run, the firm cannot build a new plant or abandon an
old one. If the firm wants to increase production in the short run, it can do so only by
overworking the existing plant, by hiring more workers and buying more raw materials. It
cannot increase its output in the short run by enlarging the size of its existing plant or
building a new plant of a larger size. The short run is a period of time in which only
variable factors can be varied, while fixed factors remain the same.
Long Run On the other hand, long rum is a period of time during which the quantities
of all factors, variable: as well as can be adjusted.
Thus, in the long run, output can be increased by increasing capital equipment or by
increasing the size of the existing plan; or by building a new plant of a greater capacity.
Equilibrium Of The Firm: General
Equilibrium of the Firm is the point at which the firm has no incentive either to expand or
contract its output. A firm would not change its level of output when it is earning
maximum profits.
. MurkeL SLrucLures
Puge z oI 1 By uIzun SuIeem & RusIId Husun
Perfect Competition
Definition
In perfect competition every purchaser and seller is so small relative to the entire market
that he can not influence the market price by increasing or decreasing his purchases or
output.
Essential Conditions
The essential conditions for the existence of conditions for perfect competition are:
Large Number Of Buyers And Sellers As a result of large number of buyers
and sellers, no single buyer or seller is able to influence the price because the output
of a single firm or the quantity demanded by a single buyer is a very small proportion
of the total market.
Homogenous Product The products produced by all firms are standard or
identical because any difference would allow the producer to charge different
price.
Free Entry Or Exit There are no restrictions, legal or otherwise on the firms to enter
or exit from the market as any restriction would deter competition.
Perfect Information The buyers and sellers are fully aware of the price
prevailing in the market and quality of products hence the same price prevails
throughout the market.
Transport Costs Are Zero Or Very Insignificant If the same price is to exist
throughout a market, it is necessary that the transport cost should be zero or
insignificant.
Perfect Mobility Of The Factors Of Production The mobility is essential in
order to allow the firms to adjust their supply to demand. If the demand exceeds
supply, additional factors will move into the industry and vice versa.
. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge oI 1
Short Run Equilibrium Of The Firm Under Perfect Competition
The equilibrium of a firm under perfect competition and in the long run is depicted by
the following diagram:
Under perfect competition the same price prevails in the market and hence sale of
each additional unit produces the same revenue and therefore MR=AR=P (Price). MC is
the marginal cost curve which depicts the increase in cost on account of production of
each additional unit. With the sale of each additional unit the total profit of the firm
would increase till such time that the MC remains below the Marginal Revenue Curve
i.e. PL. The profit will be the maximum when the MC Curve cuts PL from below because
after this point each additional unit will cost more than the revenue it would generate.
At this stage Marginal Cost would be equal to Marginal Revenue and the firm would be
producing OM units.


Explanation:




. MurkeL SLrucLures
Puge q oI 1 By uIzun SuIeem & RusIId Husun
Super Normal Profit/ Abnormal Profit
In the condition of super normal profit average total cost ATC is lower than the market
prices and the gap between ATC and market price represent profit area.
Super normal profit can be explained with the help of diagram.

In the above diagram x-axis represent the total output of the firm while revenue and
cost are marked on y-axis. We can extract the following from the diagram:
OM = Output of firm
OP = Price per unit received by selling the units.
OT = Cost per unit
OTQM =Total cost
OPEM = Total revenue
Profit = Total revenue Total cost
Profit = OPEM OTQM
Profit Area = TPEQ
Point E showing the equilibrium point where MC cuts marginal revenue and average
cost curve from below. We can say that in this condition (TR > TC) total revenue is
greater than total cost.

. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge oI 1
Condition Of Losses
Under the condition of loss, the average total cost ATC is greater than market price and
gap between ATC and market price represents losses.
The position of firms loss can be illustrated with the help of diagram.

In the above diagram x-axis represent the total output of the firm while revenue and
cost are marked on y-axis. We can extract the following from the diagram:
OM = Output of firm
OP = Price per unit received by selling the units.
OT = Cost per unit
OTQM =Total cost
OPEM = Total revenue
Profit = Total cost Total revenue
Profit = OTQM OPEM
Profit Area = PTQE
Point E showing the equilibrium point where MC cuts marginal revenue and average
cost curve from below. We can say that in this condition (TC > TR) total cost is greater
than total revenue.
. MurkeL SLrucLures
Puge 6 oI 1 By uIzun SuIeem & RusIId Husun
Long Run Equilibrium Of The Firm Under Perfect Competition
The equilibrium of a firm under perfect competition and in the long run is depicted by
the following diagram:
Under conditions of perfect competition, the same price prevails in the market and
hence sale of each additional unit produces the same revenue and therefore
MR=AR=P(Price) . PL is the line which represents MR as well as AR. LMC is the marginal
cost curve which depicts the increase in cost on account of production of each
additional unit. With the sale of each additional unit the total profit of the firm would
increase till such time that the LMC remains below the Marginal Revenue Curve i.e. PL.
The profit will be maximum when the LMC Curve cuts PL from below at which stage
LMC would be equal to Marginal Revenue. At this stage the firm would be producing
OM units.

In the long run, the firms are able to increase/decrease their output by varying their
equipments. Therefore, in the long run no firm is in a position to earn super normal
profits. If price increases and the firms start earning super profits, other firms enter the
market or present firms increase their output. If price decreases and there are below
normal profits, firms exit the market. Therefore, in the long run, the price always reverts
back to the position where all firms are earning normal profits.
Explanation:




. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge ; oI 1
Monopoly
Characteristics
When there is monopoly, there is only a single producer or seller
He controls the entire market.
There are no substitutes for his product.
He controls the entire supply and he can fix the price.
He is the firm and he also constitutes the industry. It is a one-firm industry.
Thus, under monopoly, the distinction between the firm and industry disappears.
The average revenue (AR) curve slopes downwards to right as in monopolistic
competition, but it is less elastic in monopoly than in monopolistic competition.
In monopoly, there is no need to differentiate products because no close substitutes
are available.
It is one product, homogeneous
Equilibrium Of Monopoly
A monopolist will reach
equilibrium point at which his
money profits are maximum.
Since in a monopoly a single
firm constitutes the whole
industry, there is no need for a
separate analysis of the
equilibrium of the firm and of
the industry.
A firm under monopoly faces a
downward sloping demand
curve or average revenue (AR)
curve. Therefore, if the
monopolist lowers the price of his product, the quantity demanded increases, and, if he
raises the price, the quantity demanded decreases.
In other words, if the monopolist wants to sell a larger output, he has to reduce the price
of his product. In that way, it is not only price of the additional units that falls but the
price of his total output goes down.
. MurkeL SLrucLures
Puge 8 oI 1 By uIzun SuIeem & RusIId Husun
The question now arises: which particular price-output combination on his demand
curve will the monopolist choose? This depends not only on the demand conditions but
also on the cost situation.
Monopolist will expand production until marginal revenue is greater than marginal cost,
monopolist earns maximum profit at the point MR = MC.
Monopolist is at equilibrium when:
MR=MC cnd MC cuts MR jrom belou
No Profit/ No Loss Or Normal Profit
In short run the monopoly firm also faces the normal profit situation which can easily
explained by the diagram.

At a point where firm total revenue is equal to total cost firm is achieving normal profit.
In other words in this situation firm just covering all its lost.
In diagram the distance OM show equilibrium production and MS show average
revenue and average cost. Now:
The area of rectangle OPSM = TR = Total Revenue
The area of rectangle OPSM = TC = Total Cost
Because a single rectangle show the total cost and total revenue so,
TR = TC
. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge q oI 1
Condition Of Losses:
In short run the monopoly firm faces the situation of losses which can easily explained
by diagram.

In diagram on x-axis the quantity produced and on Y axis revenue and cost curves are
measured. The AR & MR curve show average and marginal revenue respectively. AC
and MC are average and marginal cost curves of a firm respectively.
At point E, MR = MC and condition of equilibrium is fulfilling.
From equilibrium point E, a perpendicular is drawn which cuts x-axis , and
OP = Price per unit
OT = Cost per unit
OM = Output of the firm
OPSM = Total revenue
OTQM = Total cost
Total Revenue < Total Cost
PTSQ = Profit area

. MurkeL SLrucLures
Puge 1o oI 1 By uIzun SuIeem & RusIId Husun
Difference Of Perfect Competition And Monopoly
Number Of Sellers - In conditions of perfect competition there are a large
number of sellers in the market. The individual sellers compete to sell their products in
the market, but in a monopoly there is only a single firm which sells the product.
Entry And Exit Of Firms- In perfect competition, new firms can freely enter the
industry and inefficient firms can exit if they suffer losses. Under conditions of
monopoly, there are several barriers which are difficult to overcome for prospective
new entrants.
Options Available To Buyers - In a market characterized by perfect
competition, the buyers have the option to purchase from any firm in the market.
Under conditions of monopoly, the buyers must purchase from the only seller who
dominates the market.
Earning Of Normal And Super-Normal Profits - In perfect competition, a
firm may earn super-normal profits in the short-run. In the long-run, the firm can earn
only normal profits as new firms would enter the market and force the prices to fall.
Under conditions of monopoly, a firm can earn super-normal profits in the short-run
as well as in long-run due to the existence of barriers which prevent entry of new
firms.
Price Discrimination - A firm under perfect competition cannot sell at
discriminatory prices as the prices are given and an individual seller cannot
influence the price. A monopolist can increase the total revenues by discriminating
among the buyers and charging higher prices from buyers whose demand is
inelastic and lower prices from customers whose demand is elastic.
Price Of Products And Level Of Output - Under conditions of perfect
competition, the prices are lower and the output is larger. A monopolist often
charges higher prices from the customers and can manipulate the level of output to
obtain maximum revenues.
Consumer Welfare - Consumer welfare is considered to be at maximum level
under conditions of perfect competition as every individual firm strives to produce at
its optimum level. On the other hand, a monopolist is in a position to manipulate his
output even at sub-optimum levels, and therefore consumers have to pay higher
prices than under conditions of perfect competition.
. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge 11 oI 1
Price Discrimination
The term price discrimination refers to a situation in which a firm sells the same product
at different prices in different markets. Price differentiation exists when sales of identical
goods or services are transacted at different prices from the same provider
Necessary Conditions For Price Discrimination
A pricediscriminating monopolist can charge different prices for the same product to
different customers in the following situations:
If it is not possible for the customers to transfer any unit of the product purchased
from the cheaper market to the market in which the product is sold at a higher
price. If the markets can be segregated, it would not be possible for the buyer in the
high market to enter into the cheaper market to take advantage of the low price.
If the demand curve in both the markets are different. The customers may have
strong preferences and prejudices for certain brand names, labels, packages,
settings/location of point of sales/service outlets.
How A Firm Can Increase Its Profits By Using Price
Discrimination
Price discrimination is profitable only if elasticity of demand in one market is different
from elasticity of demand in the other market.
The monopolist charges a higher price in the market where elasticity is low and charges
a lower price where elasticity is high.
The marginal revenue in the market with high elasticity of demand is greater than the
marginal revenue in the market where elasticity is low.
The monopolist therefore transfers some units of the commodity from the market where
elasticity is low to a market where elasticity is high until the marginal revenues in both
the markets are equal.
The market from which the units are transferred will experience a rise in price and the
market to which the units are transferred will experience a fall in price.
But due to difference in elasticity, marginal revenue (MR) sacrificed will be much lesser
than the MR gained and hence the monopolist would be able to maximize the overall
profitability.
. MurkeL SLrucLures
Puge 1z oI 1 By uIzun SuIeem & RusIId Husun
Conditions For Keeping The Sub-Markets Separate
Under the following conditions it is possible for a monopolist to keep his sub markets
separate to successfully practice price discrimination:
When Consumers Have Certain Preferences Or Prejudices: When the
customers have strong preferences and prejudices for certain brand names, labels,
packages, settings/location of point of sales/service outlets and would not
compromise for low prices in the cheaper markets, monopolists are encouraged to
charge discriminating prices.
Nature Of The Goods: When the nature of the good is such that it is possible for
the monopolist to charge different prices. This happens particularly when the good
in question is a direct service.
When Consumers Are Separated By Distance Or Tariff Barriers: When
consumers are separated by distance or tariff barriers, the monopolist can charge
different prices. A good may be sold at one location for Re. 1 and at another for Rs.
2 as long as the cost of transport or the tariff exceeds the difference in prices.
Government Regulations: Price discrimination also occurs when the
government rules and regulations permit. For instance, according to rules, electricity
rates may be fixed at lower level for industrial purposes and higher for domestic
uses.
Ignorance: Monopolists also take advantage of the ignorance of the customers
and can charge higher prices from customers who are ignorant.
Same Service For Different Purposes: A monopolist, while rendering the
same service to cater for different needs of his customers may charge discriminating
prices. For example railways charge different rates for carrying coal, silk and fruit
even though the same train carries them all.
Special Orders: When consumers have certain preferences or prejudices: When
the customers have strong preferences and prejudices for certain brand names,
labels, packages, settings/location of point of sales/service outlets and would not
compromise for low prices in the cheaper markets, monopolists are encouraged to
charge discriminating prices.
. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge 1 oI 1
Characteristics Of Monopolistic Competition
The main features of monopolistic competition are as under
The Number Of Producers Is Not Large; The products are not
homogeneous; they ere, on the other hand differentiated by means of different
labels attached to them such as different brands of soaps.
Either In Ignorance Or On Account Of Transports Costs Or Lack Of
Mobility Of The Factors Of Production. Same price does not rule in the
market throughout. Rather different prices are charged by different producers
Under Monopolistic Competition The Demand Curve Or Sales
Curve Is Not A Horizontal Straight Line, it is on the other hand, a downward
sloping curve. This means that the seller can sell more by reducing price, whereas
under perfect competition.
The Demand For The Product Is Not Perfectly Elastic; it is responsive to
changes in price. This form of market is a blend of the monopoly and competition
and has been called monopolistic competition
Characteristics Of Oligopoly
Oligopoly is an industry structure in which there are a small number of firms producing a
particular type of product. These firms are usually large and therefore entry of new firms
is generally difficult.
Interdependence: The firms under oligopoly are interdependent in making
decision. They are interdependent because the number of competition is few and
any change in price & product etc by an firm will have a direct influence on the
fortune of its rivals
Importance Of Advertising And Selling Costs: The firms under oligopolistic
market employ aggressive and defensive weapons to gain a greater share in the
market and to maximize sale.
Product Differentiation: Under oligopoly with product differentiation each firm
controls a large part of the market by producing differentiated product.
Price War: If any firm makes a price-cut it is immediately retaliated by the rival
firms by the same practice of price-cut.
. MurkeL SLrucLures
Puge 1q oI 1 By uIzun SuIeem & RusIId Husun
Glossary
Break-Even Point. The output level at which the firm's total revenue equals its
total costs, and its total profits are zero.
Centralized Cartel. A formal organization of oligopolists which achieves the
monopoly solution and is the most extreme form of overt collusion.
Collusion. A formal or informal agreement among oligopolists on what prices to
charge and how to divide the market.
Constant-Cost Industry. An industry whose long-run supply curve is horizontal
because factor prices remain constant as industry output expands.
Decreasing-Cost Industry. An industry whose long-run supply curve is
negatively sloped because factor prices fall as industry output expands.
Differentiated Oligopoly. The form of market organization in which there are
few sellers of a differentiated product.
Differentiated Products. Similar but not identical products having real or
imaginary differences which can be created by advertising.
External Diseconomy. An upward shift in a firm's cost curves as industry output
expands.
External Economy. The downward shift in a firm's cost curves as industry output
expands.
Increasing-Cost Industry. An industry whose long-run supply curve is positively
sloped because factor prices rise as industry output expands.
Kinked Demand Curve. A demand curve with a kink or bend at the prevailing
market price, which is used to rationalize the price rigidity often observed in
oligopolistic markets.
Marginal Revenue (MR). The change in total revenue for a unit change in the
quantity sold. With perfect competition, price (P) is constant, and MR = P.
Monopolistic Competition. The form of market organization in which there
are many sellers of a differentiated product.
. MurkeL SLrucLures
By uIzun SuIeem & RusIId Husun Puge 1 oI 1
Mutual Interdependence. The relationship among the few large sellers of a
product in oligopoly which causes the actions of each to affect the others.
Natural Monopoly. A firm that experiences increasing returns to scale (i.e.,
falling long-run average cost) and is able to supply the entire market at a lower per-
unit cost than two or more firms could.
Non-Price Competition. The competitive techniques of advertising, sales
promotion, customer service, and product differentiation often found in
monopolistically competitive and oligopolistic markets.
Oligopoly. The form of market organization in which there are few/ sellers of a
homogeneous or differentiated product.
Perfect Competition. An industry composed of a large number of firms selling
a homogeneous product and in which firms can easily enter or leave the industry.
Perfectly Competitive Firm's Short-Run Supply Curve. The rising portion
of the firm's marginal cost curve above its average variable cost curve or shutdown
point.
Price Discrimination. The practice of charging different prices for a commodity
A) for different quantities purchased, B) to different classes of consumers, or C) in
different markets.
Price Rigidity. The inflexible or unchanging prices often observed in oligopolistic
markets during relatively long periods of time and in the face of widely changing
cost conditions.
Price War It is a situation in which each competitive firm is determined to sell its
products at a price that is lower than the price of its competitors, usually regardless
of whether the price covers the costs or not.
Pure Monopoly. The form of market organization in which there is a single seller
of a commodity for which there are no close substitutes.
Pure Oligopoly. The form of market organization in which there are few sellers of
a homogeneous product.
Shutdown Point. The output level at which price equals average variable cost.