market structure by muhammad kashif

8/3/2019 Market Structure by Muhammad Kashif

1/25


2/25

MUHAMMAD ALI KHALIDMUHAMMAD ALI KHALID

MUHAMMAD KASHIFMUHAMMAD KASHIF

MUHAMMAD AON ABBASMUHAMMAD AON ABBAS

MUHAMMAD ZAINMUHAMMAD ZAIN--ULUL--ABIDINABIDIN


3/25


4/25

Market structure: The number of firms in the industry

The nature of the product produced The degree to which the firm can influence the price

Profit levels

Firms behaviour pricing strategies, non-price competition,output levels

Theextent of barriers to entry


5/25

Perfect Competition: Large number of buyers and sellers

Homogenous product :

A consumer can easily find substitutes for theproduct of anygiven firm

Sellers are price takers (not price setter)

Perfect knowledge

Freeentry and exit


6/25

Examples of perfect competition:

Financial markets stock exchange, currencymarkets, bond markets.

Agriculture

Wheat

Fruit stall


7/25

Advantages of Perfect Competition:

High degree of competition helps allocateresources to most efficient use

Normal profit made in the longrun

Firms operate at maximum efficiency

Consumers benefit


8/25

(a) Profit case (b) Zero profit case (c) Loss caseQuantity

Quantity Quantity

D

MC

A P = MR=AR

B AC

E

Profit

MC

AC

MC

AC

Loss

P = MR=AR

P=MR=AR

Price PricePrice

c

A

BD

cAD

Q Q QOOO


9/25

Imperfect or Monopolistic Competition:

Many firms and buyers Products differentiated/ Non-homogeneous goods:

Products differentiated from their competitors Branding Packaging and marketing

Conditions of Sale

Service Provided

L

ocation

Freeentry and exit Firm are price setter Perfect knowledge


10/25

Examples: Restaurants

Private schools

Plant hire firms Insurance brokers

Health clubs

Hairdressers

Estate agents


11/25

AC

MC

MR AR

Q

P

ACprofit

When P > AC, the firm earns

an abnormal profit inShort-run


12/25

ACMC

MR AR

Q

ACP loss

When P < AC, the firm incurs a

loss in Short-run.


13/25

13

P=AC

Price

OutputQ1

ARMR

AC

MC

F

When P =AC, the firm earns a normal profit in

Long-run.


14/25

Monopoly:

One firm and many buyers

Firm is price setter (not price taker)Imperfect knowledge

Barriers to entry and exit

Consumer choice limited

Examples are WAPDA, RAILWAY, GAS, WATER,CABLE TV, OGDC.


15/25

Advantages of monopoly: May be appropriate if natural monopoly Encourages R&D Encourages innovation


16/25

Quantity

Price

ARMR

MC

P

Q

AC

AC

Profits

When P > AC, the firm earns

an abnormal profit in

Short-run


17/25

ACMC

MR AR

Q

ACP loss

When P < AC, the firm incurs a

loss in Short-run.


18/25

AC

MC

MR AR

Q

AC= P

When P =AC, the firm earns a normal

profit in Long-run.


19/25

Oligopoly: Few firms and many buyers Barriers to entry and exit Products could behighly differentiated Nonprice competition Price stability within the market - kinked demand curve? High degree of interdependence between firms


20/25

Examples of oligopolistic structures: Shoe

Cement

Mobile Milk

Soft Drinks

Tea

Newspaper Fertilizer


21/25

A few large producers : firms aregenerallylarge and together they dominate the industry.

Eitherhomogeneous or differentiated products:the products are standardized, or differentiatedwithheaving advertising.

Price maker: The firm can set its price and

output levels to maximize its profit.


22/25

22

Q0

P0

Quantity

Consider how a firm mayperceive its demand curveunder oligopoly.Price


23/25

23

Q0

P0

Quantity

The firm may expect rivalsto respond if it reducesits price, as this will be seen

as an aggressive move

so demand in responseto a price reduction is likelyto be relatively inelastic.

The demand curve willbe steep below P0.D

Price


24/25

24

but for a price increaserivals are less likely toreact,

so demand may berelatively elasticabove P0

so the firm perceivesthat it faces a kinkeddemand curve.

D

Q0

P0

Quantity

Price


25/25

25

Given this perception, thefirm sees that revenue willfall whether price is increased

or decreased,

so the best strategy is to keepprice at P0.

Price will tend to be stable,even in the face of an increasein marginal cost.

D

Q0

P0

Quantity

Price

MC1

MC2

MR

market structure by muhammad kashif

Documents