E-LESSON-9 MICRO ECONOMICS-1 ENG

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B.A.English 2 All right are reserved with CU-IDOL Micro economics-I Course Code: BAQ108 Semester: First e-Lesson: 9 SLM Unit: 9 www.cuidol.in Unit-9(BAQ108)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION Students will be able to identify four different In this unit we are going to learn types of market structures. about market structure in economics. Students will understand the differences between each type of market structure. Under this you will learn and understand the various types of markets and its characteristics www.cuidol.in Unit-9(BAQ108) INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL

TOPICS TO BE COVERED 4 Introduction of Market Structure Types of Markets Short run and long run analysis. Difference between three market structure. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Market Structure 5 A market is a set of buyers and sellers who through their interaction, both real and potential, determine the price of a good or a set of goods. The concept of a market structure is understood as those characteristics of a market that influence the behaviour and results of the firms working in that market. The main aspects that determine market structures are: the number of agents in the market, both sellers and buyers; their relative negotiation strength, in terms of ability to set prices; the degree of concentration among them; the degree of differentiation and uniqueness of products; and the ease, or not, of entering and exiting the market. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Types Of Market 6  Perfect or Pure Market  Imperfect Market www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Perfect Market 7 Perfect Market is a market situation which consists of a very large number of buyers and sellers offering a homogeneous product. Under such condition, no firm can affect the market price. Price is determined through the market demand and supply of the particular product, since no single buyer or seller has any control over the price. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Perfect Competition is built on 8 two critical assumptions:  The behaviour of an individual firm  The nature of the industry in which it operates.  The firm is assumed to be a price taker  The industry is characterized by freedom of entry and exit www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Perfect Competition 9 Perfect Competition cannot be found in the real world. For such to exist, the following conditions must be observed and required: 1. A large number of sellers 2. Selling a homogenous product 3. No artificial restrictions placed upon price or quantity 4. Easy entry and exit All buyers and sellers have perfect knowledge of market conditions and of any changes that occur in the market Firms are “price takers” www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Characteristics 10  There are very many small firms  All producers of a good sell the same product  There are no barriers to enter the market  All consumers and producers have ‘perfect information’  Firms sell all they produce, but they cannot set a price. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Curves in Perfect Competition 11 www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Short-Run Analysis 12  The firm’s objective is to produce the level of output that will maximize profit  Some inputs are variable and therefore fixed costs arise regardless whether the firm is operating or not  Since the firm is a price taker, it has no control on the price of a product www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Short-Run Equilibrium Under 13 Perfect Competition Market www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Long-Run Analysis 14 All inputs and costs of production are variable The firm can build most appropriate scale of plant to produce the optimum level of output www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Imperfect Market 15  In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.  Forms of imperfect competition include:  Monopoly  Oligopoly  Monopolistic competition www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Monopoly 16  The word is dervied from a Greek word ‘monos’ which means ‘one’ and ‘polein’ means to ‘sell’  There is only one seller of goods or services  A monopoly should be distinguished from a cartel. (Cartel refers to a market situation in which firms agree to cooperate with one another to behave as if they were a single firm and thus eliminate competitive behavior among them.) www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Sources 17  There is only one producer or seller of goods and only one provider of services in the market.  New firms find extreme difficulty in entering the market. The existing monopolist is considered giant in its field or industry.  There are no available substitute goods or services so that it is considered unique.  It controls the total supply of raw materials in the industry and has no control over price.  It owns a patent or copyright.  Its operations are under economies of scale. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Characteristics 18  Single firm. The monopolist is the single producer in the market. Thus, under monopoly firm and industry are identical.  No substitute. There are no closely competitive substitutes for the product. So the buyers have no alternative or choice. They have either to buy the product or go without it.  Anti-thesis of competition. Being a single source of supply, monopoly is a complete negation of competition.  Price-maker. A monopolist is a price-maker and not a price-taker. In fact, his price fixing power is absolute. He is in a position to fix the price for the product as he likes. He can vary the price from buyer to buyer. Thus, in a competitive industry, there is single ruling price, while in a monopoly, there may be price differentials.  Downward sloping supply curve. A monopoly firm itself being the industry, it faces a downward-sloping demand curve for its product. That means it cannot sell more output unless the price is lowered.  Entry barriers. A pure monopolist has no immediate rivals due to certain barriers to entry in the field. There are legal, technological, economic or natural obstacles, which may block the entry of new firms.  Price-cum-output determination. Since a monopolist has a complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Curve in Monopoly 19 www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Meaning of Price Discrimination 20 A monopoly firm which adopts the policy of price discrimination is referred to as a discriminating monopoly. Price discrimination implies the act of selling the output of the same product at different prices in different markets or to different buyers. In a broad sense, price discrimination occurs in two ways: (i) by charging different prices for the same product, and (ii) by not setting prices of different varieties of products or different products in relation to their cost differences. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Forms of Price Discrimination 21  Personal discrimination. Generally, depending upon the economic status of buyers, different prices may be charged to different buyers in providing similar services. For example, a surgeon may charge a high operation fee to a rich patient and a lower fee to a poor one.  Age discrimination. Price discrimination may be based on the basis of age of the buyers. Usually, buyers are grouped into children and adults. Thus, for instance, a barber may charge lower rates for children’s haircuts than those for adults. In railways and bus transport services, it is a commonly adopted form of price discrimination that persons below 12 years of age are charged at half the rates.  Sex discrimination. In selling certain goods, producers may discriminate between male and female buyers by charging low prices to females. For instance, a tour organising firm may provide seats to ladies at concessional rates.  Locational or territorial discrimination. When a monopolist charges different prices in different markets located at different places, it is called locational or geographical discrimination. For instance, a film producer may sell distribution rights to different film distributors in different territories at different prices. Similarly, a firm may discriminate between domestic markets and export markets for its products. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Forms of Price Discrimination 22  Special service or comforts. Price discrimination may also be resorted to on the basis of special facilities or comforts. Railways, for instance, charge different fares for the first class and second class travel. Similarly, cinema houses keep different admission rates for stalls, upper stalls, dress circle and balcony. Likewise, restaurants charge different rates for special rooms and general tables. In a hospital also, charges for special wards and general wards are different.  Use discrimination. Sometimes, depending on the kind of use of the product, different rates may be charged. For instance, an electricity distribution company may charge low rates for domestic consumption of electricity while still lower rates for industrial use as compared to the higher rates for light and fan.  Time discrimination. On the basis of the time of service, different rates may be charged. For instance, cinema houses charge lower rates of admission for morning and matinee shows than for regular shows. Similarly, the telephone company charges half-rates for trunk-calls at night.  Nature of commodity discrimination. Sometimes, because of the nature of a commodity, price discrimination may be made, for instance, freight charges by the railways are different for coal and iron for the same distance www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Forms of Price Discrimination 23  Size discrimination. On the basis of size or quantity of the product, different prices may be charged. For instance, an economy size toothpaste tube is relatively cheaper than a small size tube. Similarly, a product is sold in the retail market at a higher price than in the wholesale market by the producer.  Quality variation discrimination. On the basis of some qualitative differences, different prices may be charged for the same product. For instance, a publisher may sell a deluxe edition of the same book at a higher price than its paperback edition. Quality variation may be in the form of material used, the nature of packing, colour, style, etc. Thus, jellies packed in tins are sold at a lower price than in bottles. A tailor charges higher stitching charges for a safari bush shirt than for an ordinary shirt. A particular print or colour saree may be priced higher than other sarees of the same cloth. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Oligopoly 24  The word is dervied from the Greek word “oligo” which means ‘few’ and “polein” means ‘to sell’.  Small number of sellers, each aware of the action of others  All decisions depend on how the firms behave in relation to each other In oligopoly, conjectural interdependence is present, that is, the decision of one firm influences and are influenced by the decision of other firms in the market. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Characteristics 25  There are a small number of firms in the market selling differentiated or identical products.  The firm has control over price because of the small number of firms providing the entire supply of a certain product.  There is an extreme difficulty for new competitors to enter the market. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Types 26 1. Pure or Perfect Oligopoly • If the firms produce homogeneous products 2. Imperfect or Differentiated Oligopoly • If the firms produce differentiated products 3. Collusive Oligopoly • If the firms cooperate with each other in determining price or output or both 4. Non-collusive Oligopoly • If firms in an oligopoly market compete with each other www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Monopolistic Competition 27  Market situation in which there are many sellers producing highly differentiated products.  Monopolistic competition is also perfect competition plus product differentiation.  Product differentiation gives each monopolistic competitor some market power, since each competitor can raise price slightly without losing all its customers. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Characteristics 28  A large number of buyers and sellers in a given market act independently.  There is a limited control of price because of product differentiation.  Sellers offer differentiated products or similar but not identical products.  New firms can enter the market easily. However, there is a greater competition in the sense that new firms have to offer better features of their products.  Economic rivalry centres not only upon price but also upon product variation and product promotion. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Curve in Monopolistic 29 Competition www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

30 Basis Perfect Competition Monopoly Monopolistic Competition Oligopoly 1. Number of Sellers Very large number of Single seller Large number of sellers Few Big sellers sellers No Close Substitutes Closely related but Products are homo- 2. Nature of Product Homogeneous Products differentiated Products geneous under Pure Oligopoly and differentiated under Differentiated Oligopoly 3. Entry and Exit of Freedom of entry and exit Entry of new firms and exit Freedom of entry and exit Restrictions on entry of Firms of old firms is restricted new firms 4. Demand Curve Perfectly elastic demand Downward sloping Downward sloping demand Indeterminate demand 5. Price 6. Selling Costs curve demand curve (less (but more elastic) curve elastic) Uniform price as each firm Firm is a price- maker. So, Firm has partial control over Price rigidity due to fear of is a price-taker price discrimination is price due to product price war possible. differentiation. No selling costs are Only informative selling High selling costs are spent Huge selling costs are incurred costs are incurred incurred 7. Level of KnowledgePerfect Knowledge Imperfect Knowledge Imperfect Knowledge Imperfect Knowledge www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Oligopoly 31  oligopoly is an important form of imperfect competition.  oligopoly markets are characterized by markets dominated by a small number of large firms.  oligopoly is also often referred to as “competition among the few”.  the simple case of oligopoly is duopoly which prevails when there are only two producers or sellers of a product.  when products of few sellers are homogeneous , we talk about pure oligopoly.  on the other hand, when products of the few sellers are differentiated but close substitutes of each other, differentiated oligopoly is said to prevail. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Characteristics of Oligopoly 32 Small number of sellers Interdependence Barriers to entry Indeterminateness of demand curve facing an oligopolist Importance of advertising and selling cost www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Price Leadership 33  Under price leadership, one firm sets the price (price changes) others follow it.  Not outright collusion but implicit understanding  The price leader assumes that firms will follow a price increase. It assumes that firms may follow a reduction in price, but will not go lower in order not to trigger a price war www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Types 34 Three Types of Price Leadership:  (i)Price leadership by a low cost firm.  (ii) Price leadership by the dominant firm  (iii) Barometric price leadership (by old, experienced, largest or most respected firm assumes the role of a custodian who protects the interest of all) www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Multiple Choice Questions 1. The Behavioural Rule of Profit Maximisation is to equal : 35 (a) MR with MC (b) TR with TC (c) MR with TC (d) TC with Output Quantity 2. A monopoly Firm is : (a) Price-taker (b) Price-maker (c) Price-destroyer (d) All these 3. Monopoly power is expressed in changing : (a) a high price much above cost (b) A high price equal to high cost (c) A dumping price (d) A normal profit making price 4. Monopoly power can be required through: (a) Technical progress (b) Trade Marks (c) Wage control (d) Patronising Politicians 5. Price Discrimination implies : (a) Charging different prices to different buyer (b) Charging different prices to for different products (c) Charging different prices to the same customer Answers: 1.(a) 2.(b) 3.(a) 4.(a) www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Summary 36  Market Structure :-Market structure refers to the nature and degree of competition in the market for goods and services. The structures of market both for goods market and service (factor) market are determined by the nature of competition prevailing in a particular market.  Oligopoly: Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products. It is difficult to pinpoint the number of firms in ‘competition among the few.’ With only a few firms in the market, the action of one firm is likely to affect the others. An oligopoly industry produces either a homogeneous product or heterogeneous products.  Monopolist competition:-Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

Frequently Asked Questions 37 Q.1. State the feature of Monopoly? Ans. 1)Single Seller of a product. 2)Entry Restrictions 3)No close substitute 4)Price Maker Q.2.What is meant by Price Discrimination ? Ans :Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller think they can get the customer to agree to . Q.3 Differciate between the various types of market structure ? Ans- There are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly. For more refer to SLM Q4. Define monopolistic competition. State the main features of such a market situation. Ans: Monopolistic competition characterizes an industry in which many firms offer products or services that are similar but not perfect substitutes. There are large numbers of sellers, there s product differentiation, freedom of entry and exist. www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL

38 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-9(BAQ108) All right are reserved with CU-IDOL