Price and Output

Decisions under
Different Markets

by
Balaji K
 Overview
 Classification of Markets
 Perfect Competition
 Monopoly
 Price output determination under Monopoly
 Monopolistic Competition
 Duopoly and Oligopoly

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Classification of Markets

 On the basis of area

 On the basis of time
 On the basis of Nature of Transactions
 On the basis of Volume of Business
 On the status of Sellers
 On the basis of Regulation
 On the basis of Competition

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 Concepts to refresh
 What is AC and MC?

 What is MR and MC?

 Fixed Vs Variable Cost?

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Perfect Competition-Features
 Large numbers of Buyers and Sellers
 Homogeneity of Products
 Free entry and Exit
 Absence of Government Regulation
 Perfect Mobility of Factors of Production
 Perfect Knowledge
 Absence of Transport Cost

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Price output determination under
Perfect Competition
 Market price is determined based on the
interaction of supply and demand.
Price in Demand Supply In State of Pressure
Rs in Units Units Market on Price
2 1000 9000 S>D Downward
4 3000 7000 S>D Downward
6 5000 5000 S=D Neutral
8 7000 3000 D>S Upward
10 9000 1000 D>S Upward

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Perfect Competition-Features
 The Industry is the price maker and
the firm is the price taker

 In this case Equilibrium price means

AR =MR

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Equilibrium of the Competitive firm
in the Short run
When MR=MC the equilibrium Output and
Price is determined.
For survival the firm has to cover atleast
the variable cost .
Therefore the price in the short run is
equal to variable cost.
If the price is lower than the AVC ,the firm
is compelled to stop Production.

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Profits of the Competitive firm in the
Short run
When MR=MC the equilibrium Output
and Price is determined.
AR greater than AC then Super Normal
Profits for the firm
When AR=AC then Normal Profits for
the firm

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Consolidation of Perfect
Competition
1)At op4 price of the firm will neither cover AFC
nor AVC and hence it has to wind up its
Operations.It is regarded as Shut Down point.
2)At op1 price ,oq1 quantity is the equilibrium
output.E1 indicates the price or AR=AVC only.It
does not cover FC.The firm is ready to suffer
loss in the nitial stage hoping that the price may
go up in the near future to earn profits.

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Consolidation of Perfect
Competition
3)At op2 price ,oq2 quantity is the equilibrium output
.E2 indicates the price =AR=AC.At this point
MR=MC.At this level of output TAR=TAC hence,the
firm is earning only normal profits.It is break even
point of the firm.The distance between two
equilibrium points E2 and E1 indicates loss
minimisation zone.
4) At op3 price and oq3 is the output produced by the
firm .At E3,MR=MC.But AR is greater than AC.For
oq3 output ,the total cost is oq3AB.the total revenue
is oq3E3p3.Hence ,p3E3AB is super normal profit
region
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Equilibrium of the Competitive firm
in the Long run
When MR=MC the equilibrium Output
and Price is determined.
The firm should produce that level of
output at Which MR=MC and MC
Curve Cuts MR curve from Below

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Equilibrium of the Competitive firm
in the Long run
When AR is greater than AC there will be
super normal Profits and this lead to entry
of new firms
Result
Expansion in output
Increase in supply
Fall in Price
Fall in ratio of profits

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 k Y ou
Th a n

Complements (-) vs Substitutes (+)

defined by sign of cross price elasticity

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