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A presentation for Managerial Economics
Market : The market is a place where buyers and sellers meet each other to effect a business transaction In economic sense, market is a system in which buyers and seller bargain for price of product, settle the price and transact their business, i.e. buying and selling of products. Perfect Competition: It is a form of market, in which large number of sellers sells a homogenous product to buyers. Firm produces only a small portion of the total output produced by the whole industry. An industry comprise group of different firms producing the same products. Price fixed by the industry, no firm can affect the price by its individual efforts.
Firm is only a price taker and not a price maker. They can sell output only at the price fixed by the industry. In such cases price of the commodity is the same at every place.
Features of Perfect Competition : 1. Large Number of Buyers and Sellers : • There are large number of buyers and sellers under perfect competition. • The price of the commodity is determined by the combined actions of all the sellers or firms and buyers in the market. 2. Homogenous Product:
Most essential features of perfect competition. goods.
• All the firms must sell completely homogenous or identical 3. Free entry and Free exit of firms: • Complete freedom for items to enter into or leave whenever they choose to do so. • Fresh product can enter the market if some product incurred loses and leave the market. 4. Absence of Artificial Restrictions:
• There should be non-existence of any artificial restrictions on the demands , supplies ,prices of goods and factors of production in the market. • There must be no governmental or institutional fixation of the prices of goods and factors of production. 5. Perfect knowledge of the Market to Both Buyers and Sellers:
There must be perfect knowledge on the part of buyers and sellers about market condition.
• No necessary to spent on advertisement as buyers knows the worth of each product. 6. Perfect Mobility: • In perfect competition goods, sources as well as resources are perfectly mobile between firms. • Factors of production can move easily for smooth functioning of the market. 7. Non Existence of Transport Costs and Selling Costs: • Perfect competition assumes that the various firm work so close to each other that there are no transport costs as well as the selling costs because everyone is selling an identical product. Imperfect Competition:
In the 20th century ,markets all over the world have become imperfect on account of several factors. Buyers and Sellers do not possess perfect knowledge and the products sold are no more homogenous. The number of buyers and sellers is also small. Depending on the number of sellers operating in the market ,imperfect competition is further classified : 1. Monopoly. 2. Duopoly 3. Oligopoly. 4. Monopolistic Competition. 5. Monopsony OLIGOPOLY
Meaning Oligopoly is a situation a few large firms compete against each other and there is an element of interdependence in the decision – making of these firms. Each firm in the oligopoly recognizes this interdependence.” Any decision one firm makes will affect the trade of the competitors and so result in
countermoves. As a result, one’s competitor’s behavior depends on one’s own behavior, and this must be taken account of when decisions are made.” A major policy change on the part of one firm will have obvious and immediate effects on its competitors. The competitors are taken likely to react with their counter – policies. So, a game of moves and countermoves begin between the rivals. To play this game, the oligopolists have to be equipped with the both the aggressive and defensive marketing weapons. The element of interdependence of firms has made the formulation of systematic analysis of oligopoly very difficult. The interdependence makes predictions difficult and, thus, makes it very cumbersome to reach at any optimal decisions. Due to the following reasons an oligopoly situation may invite collusion among firms in the industry: 1. Collusion reduces degree of competition, and thus enables firms to increase profits by acting monopolistically: 2. Collusion may help in restricting entry of new firms into the industry. 3. Collusion, by reducing competition, reduces the uncertainty associated with rivals moves and countermoves.
Main Features of Oligopoly
1. Small number of large numbers The number of sellers dealing in a homogeneous or differentiated product is small and each seller and seller is catering to a significant part of the market demand. Due to the extent of influence of each seller, his policies have a noticeable impact on market-mainly on the industry price and output. We can find this kind of market situation in automobile industry, electronic industry etc. 2. Interdependence Unlike perfect competition and monopoly, the oligopolist is not dependent to take his decisions. The oligopoly firm has to take into consideration the actions and reactions of his rivals while determining its price
and output policies. The cross – elasticity of demand is very high between the products of the oligopolists because the products are close substitutes.
3. Existence of price rigidity Since any change in price by an oligopolist invites countermoves from its rivals, the firm in oligopoly normally sticks to its price. If a firm tries to reduce the price, its rivals also do so and, thus, will not allow it to take any advantage nof price reduction. If a firm which has reduced the price. Hence, the firm would not try to either to reduce or raise the price. So price rigidity will prevail. 4. Presence of monopoly element So long as products are differentiated the firms enjoy some monopoly power, as each product will have some loyal customers. Also, when firms collude with each other they can work together to rise the price and earn some monopoly income. 5. Advertising Given high cross – elasticity of demand for products and price rigidity in oligopoly, the only way to open to the
oligopolist is to rise his sales by either advertising his product or improving the quality of his product. Advertisement expenditure is used as an effective tool in his direction – this expenditure is aimed primarily at shifting the demand in favor of the product. Usually, advertisement as well as variations in design or quality of the product are both used simultaneously to maintain and increase the market share of an oligopoly firm.
Bases for classification Product differentiation : On the basis of product differentiation, oligopoly may be classified into perfect and imperfect oligopoly. If the product the industry are homogeneous, the oligopoly is called the perfect or pure oligopoly. While if the firm in the industry produce differentiated products which are close substitutes, we call this situation as imperfect or differentiated oligopoly. It is rare to find pure oligopoly situations.
Entry of firms : On the basis of possibility of entry of new firms, we may classify the oligopoly situation as open or closed.
In case of the former, the new firms are free to enter the industry, while in case of the latter a few large firms dominate the market and new firms do not have a free entry into the industry. Price leadership : The oligopoly situation can be classified as partial or full oligopoly, depending upon the presence or absence of a price leader. Partial oligopoly refers to a situation where one large firm dominates the industry and the other firms follow the leader with regard to the policy of bthe price fixation. Full oligopoly, on the other hand, exists where no firm is dominant enough to take the role of a price leader. Agreement between firms : A situation where the firms, instead of competing with each other, follow a common price policy, is called collusive oligopoly. The collusion may be in the nature of an agreement or an understanding between the firms. The former is called open collusion, while the latter is a tacit collusion. On the other hand, the firms may be acting independently: that is, there is no agreement or
understanding between oligopoly firms. Such a situation is known as non – collusive oligopoly.