TOPIC

: CONCEPTS OF PERFECT COMPETITION & PRICE AND OUTPUT DECISSIONS UNDER MONOPOLY.

FACULTY

: FYBMS B.

PROF. IN CHARGE : PROF. PANDAY

SEMESTER

: SEMESTER -2.

Perceus Patel (GL) Amey Sankhe Ashwin V. Vinit Paul Ashwin Paul Devarshi Patel Abhishek Roy Pranav Nikumb Ranak Trivedi Vinay Kumar

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MEANING AND FEATURES OF PERFECT COMPETITION Meaning :Perfect competition is a market situation where the number of firms are large and the products are homogenous .

FEATURES
In perfect competition there are large number of buyers and sellers, however they have no influence or bearing on market prices of goods and services produced by the firms. In perfect market, products of an industry are homogenous. All attributes will be perfectly identical. Further there will be an identical price for the product.

 Firms are free to enter and free to exit to and from a perfect market. Thus there are neither entry barriers nor exit barriers.

Loss making firms can therefore exit and reallocate their resources to profitable uses. Buyers and sellers possess perfect knowledge and information about the market. The perfect market is free from government intervention. Buyers and sellers are free to express their choice and preferences.

PERFECT COMPETITION AND EQUILIBRIUM OF THE INDUSTRY

Under the conditions of perfect competition, industry refers to a set of firms producing identical or homogeneous products.
The industry is in equilibrium when the industry demand of goods is equal to industry supply of goods. The process of adjustment between market demand and market supply is known as market mechanism or price mechanism.

 The industry under the conditions of perfect competition would be in equilibrium when the market demand is equal to the market supply. The short run equilibrium of the industry will be established when the short period market demand= short period market supply.

SHORT RUN EQUILIBRIUM OF THE INDUSTRY

If it is assumed that all the firms in the industry have identical cost functions, then it would mean that if it is a short run then all the firms would be making equal profits/losses.

LONG RUN EQUILIBRIUM OF THE INDUSTRY

The long run equilibrium of the industry is a stable equilibrium like still water. The long run market price will be less than that of the short run market price. Prof.Lipsey stated that the competitive firm attains long run equilibrium only when it is producing at the minimum point of its long run avg. cost curve. ( P = LAR=LAC=LMR=LMC)

PRE CONDITIONS OF MONOPOLY

There is a single seller or producer in the market in the concerned product category. Close substitutions or substitutes for the product produced by a monopoly firm should not be available in the market. There are strong entry barriers to the industry, such a market is known as a MONOPOLY MARKET .

AVERAGE & MARGINAL REVENUE CURVES UNDER MONOPOLY

The monopoly firm is also the industry. The average revenue curve or marginal curve would therefore be downward sloping. A monopolist can sell a larger output only at lesser price. Therefore he can either determine the price or the output. He is not in a position to decide both the price as well as the output. If he decides the price of the product the equilibrium output will be automatically decided by the average revenue or the demand curve. Similarly if he determines the output , the price will be determined by the demand curve.

SOURCES OF MONOPOLY
Monopoly is the market in which there are many buyers but only one seller.
The creation and existence of entry barriers to a given industry is the SOURCE OF MONOPOLY power.

Control over key raw materials Legal restrictions Efficiency achieved on account of large scale output

Entry barriers

PRICE AND OUTPUT DECISIONS UNDER MONOPOLY

The objective of a rational firm is to maximise profits irrespective of the market form. The firm, industry and the market are combined together to constitute the monopoly firm. There is hardly any difference in the short run and the long run equilibrium of a monopoly firm except for the fact that any firm under any market form undertakes expansion programme in the long run.

THE SHORT RUN EQUILIBRIUM OF A MONOPOLY FIRM

The monopoly firm maximises its profits by equating its marginal revenue with the marginal cost(MR=MC)

Thus a monopoly firm will continue to increase output as long as the marginal revenue earned by producing an additional unit of output is greater than marginal cost of the extra unit of output.
The profits of a monopoly firm will be maximised when marginal revenue = marginal cost.

THE LONG RUN EQUILIBRIUM OF A MONOPOLY FIRM

The long run is only a sum of a series of short runs . Like a firm in any other market form, the monopoly firm also plans expansion in the long run in order to increase its long term profits.

The expansion of the firm will be determined by the such factors such as the size of the market, expected business profit, legal restrictions on the output, etc.
Monopoly firm can enjoy pure business profits or super normal profits also in the long run because of absence of competition.

PRICE DISCRIMINATION UNDER MONOPOLY

Price discrimination refers to selling identical or differentiated products to different categories of consumers at different prices. Price is discriminated in 2 ways:1.By charging different prices for the same product 2.By not setting the prices of the products according to their cost differences. Price discrimination can be practiced under the following circumstances:1. Nature Of The Commodity. 2. Tariff Barriers And Territorial Differences. 3. Legal Sanction. 4. Consumer Prejudices, Tastes and Preferences. 5. Ignorance And Carelessness Of The Consumers.

DEGREES OF PRICE DISCRIMINATION

The degree of price discrimination refers to the extent to which a seller can separate the market and take advantage in terms of higher revenue. Price discrimination can be classified into three degrees, namely : 1. First degree price discrimination, 2. Second degree price discrimination and 3. Third degree price discrimination.

FIRST DEGREE PRICE DISCRIMINATION

Considered as limit of price discrimination Monopolist has complete knowledge of every buyer
Monopolist is aware of the price the buyer is willing to pay

SECOND DEGREE PRICE DISCRIMINATION

It is attempted when size of market is large Known as block pricing method
Possible when number of consumer is large, demand curve is identical & single rate is applied.

THIRD DEGREE PRICE DISCRIMINATION

Monopolists sets different prices in different markets on basis of price elasticity of demand. Can be effectively practiced in two or more markets. To fix price in different market, monopolists equate marginal cost with marginal revenue.