business economics demand and supply.pptx

7/27/2019 Business economics demand and supply.pptx

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Session 10: Market Structure Analysis - I

Session Date: 23.02.2013

Business Economics


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EPGDIB(VSAT) 2012-13

Business Economics/Session 10

Preview Questions

1. How do changes in market demand and supply factors

influence an individual firms profits?

2. How does competition influence an individuals firmsprofits?


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Demand - Supply Framework

Changes in Demand factors results changes in

market prices

Demand expansion causes price hikes

Demand contraction leads to price falls

Changes in Supply factors results changes in market

prices

Supply expansion leads to price falls

Supply contraction leads to price increases


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Demand Analysis: A Review

P

Q

Demand curve defines how consumers respond to changes in price

Revenue implications of demand curve is given in TR and MR curvesTR

MR Q

QMR


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Supply Analysis: A Review

P

Q

Cost implications of increasing supply is given by supply curve

MC curve above the AVC is the supply curve which defines the

incremental cost for increasing supply by one unit

MC curve is derived from the production and cost relationships


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Profit Maximization

Demand and Supply factors together determine profits earned

Profit Maximisation= TR - TC

d( )dQ

= d(TR)dQ

- d(TC)dQ

=

MR MC- = 0

MR

=

= MC

MR > MC P & Q

MR < MC P & Q

Any change in demand andsupply condition will

influence profits earned by

the firm

TR

TC

TC

TR

Q* Q

( )


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Market Structure

Changes in Demand & Supply condition translates

into changes in behaviour by various firms

This behaviour is also influenced by how firmrelate to other firms in the market.

Issues Why does competition between products differ

What determines competition

Competition

G ( SA )


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Basic Characteristics of VariousMarket Structures

Market

Structure

Number of

Producers

Type of

Product

Barriers to

entry

Power of

Firm over

Price

Non-price

competition

Perfect

Competition

Many Standardized Low None None

Monopolistic Many Differentiated Low Some Advertising

and Product

differentiation

Oligopoly Few Standardized

or

Differentiated

High Some Advertising

and Product

differentiation

Monopoly One Unique

Product

Very High Considerable Advertising

EPGDIB(VSAT)


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Perfect Competition

MonopolisticOligopoly

Monopoly

Com

petitionred

uces

Comp

etitionIncreases

Market Structure and Competition

EPGDIB(VSAT)


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Many buyers and sellers

Buyers and sellers are price takers

Product is homogeneous

Perfect mobility of resources

Economic agents have perfect knowledge

Perfect Competition : Assumptions

EPGDIB(VSAT)


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Competitive Market : Pricing

Decisions

Who sets price

How much freedom do firms have in the setting theprice

Depends on the demand and supply curves

EPGDIB(VSAT)


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Competitive Market : Nature of

Demand Curve

1. Demand curve : Industry level

Downward sloping as P, Q

Slope depends on the nature of the product i.e.price elastic (luxury), price inelastic goods(Necessities)

Q

PAR

Contd

EPGDIB(VSAT) 2012 13


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2. Demand curve : Firm level

Price taker : Single firm cannot influence marketprice.

Can sell any Q at a given Price ( P )

Product is standardized large number ofsubstitutes available. Hence, demand curve isperfectly elastic.

P

Q

AR

Competitive Market : Nature of

Demand Curve



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Determination of EquilibriumQuantity and Price : Short run

1. Industry level

Interaction between Demand and Supply factorsdetermines P* and Q*

Market demand = OQ*. Firms to decide how much of

OQ* to supply

P

QQ*

P*

D S



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Relationship between P, AR, MR

P Q TR AR MR

5 1 5 5 -

5 2 10 5 5

5 3 15 5 5

5 4 20 5 5

5 5 25 5 55 6 30 5 5

)(Q

TR)(

Q

TR



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2. Firm level Industry equilibrium price is the Firms given price

Profits maximized at MR = MC

AR = MR = P

QFQF*QIQ

*

P*

MCPFPID S

Determination of EquilibriumQuantity and Price : Short run



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3. Firms Profits

Firm A Firm B Firm C

.

QA*

P = MR

MC

AC

MC

AC

*QB

.

MCAC

P =AR =MR

QC*

Depends on firms cost structure



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Units of

output per

period

Price

(dollars)

Total

revenue

(dollars)

Total

variable cost

(dollars)

Total cost

(dollars)

Total

profit

(dollars)

0 20 0 0 24 -24

1 20 20 4 28 -82 20 40 6 30 10

3 20 60 10 34 26

4 20 80 16 40 40

5 20 100 26 50 506 20 120 46 70 50

7 20 140 76 100 40

8 20 160 138 162 -2

Cost and Revenue, Perfectly

Competitive Firm



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Competitive Market :

Long Run Equilibrium

Entry / Exit conditions being easy, Profits induce entry of more firms into the industry market

supply expand shifts Losses induce exit of firms from the industry market

supply contracts.

Equilibrium P = AC = MC only normal profits

..

.

MC AC

*Q2 Q1*

PI

P2

P3

SI

S2

S3

Q*

PI

P2

P3

1. Shifts in Supply Curve



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Single seller and many buyers

No close substitutes for product

Significant barriers to resource mobility

Control of an essential input

Patents or copyrights

Economies of scale: Natural monopoly

Monopoly : Market Characteristics



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Monopoly Market

Does a Monopolist have complete freedom insetting price?

P P P

Q Q Q

D1

D2 D3



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Monopoly Market : Pricing

1. Nature of Demand Curve

Slope of the demand curve determined by thenature of the product

P

Q

Demand curve for firm same as industry

Downward sloping demand curve

firm can fix either price or quantity

D



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2. Equilibrium Price and Quantity

Supernormal profits at P* & Q*

Operates on the falling part of AC curve excesscapacity conditions. (gurvi@less of cost)

.

P

Q

AC

MCP*

Q*

MR

Profits maximized at MR = MC




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Profits earned depends on

Cost structure and cost efficiency of a monopolist

Nature of the product Price elastic products induces a monopolist to

operate efficiently

.

MR

AC

MC

P*

Q*

MC

AC

MR

P*

Q*

3. Can a Monopoly firm be an efficient producer?




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Cost structure determines the profits of a Monopolist

Entry / Exit conditions difficult

.

MR

AC

MCP*

Q*

MC

AC

MR

P*

Q*

.

4. Does a Monopolist always earn profits?




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Production efficiency and profit margin R & D and Product development patents

gurvi@Monopoly -Profits maximized at MR = MC

Equilibrium P = AC = MC only normal profits

P = AR=MR

ACMC

P*

Q*

MC

AC

MR

P*

Q*

Competitive and Monopoly

Markets

.

business economics demand and supply.pptx

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