Hum- 1205

Lecture 2

Farhana Afroj, Lecturer, Humanities Department, KUET. 1

 Lecture Outline:

• Markets
• Characteristics of Different kinds of Market
• Short run Equilibrium under perfect competition market
• Short run Equilibrium under Monopoly market
• Types of Oligopoly Market

Farhana Afroj, Lecturer, Humanities Department, KUET. 2

 MARKET

• Market refers to a whole region where buyers and sellers of a

commodity are in contact with each other to effect purchase and sale of
the commodity.
• Determinants of market structure:
• The number of seller
• The number of buyer
• The Nature of the product
• The condition of entry and exit from the market

Farhana Afroj, Lecturer, Humanities Department, KUET. 3

Farhana Afroj, Lecturer, Humanities Department, KUET. 4
 Characteristics of different kinds of Market Structure:
Basis Perfect Monopoly Monopolistic Oligopoly
Competition Competition
1. Number of Very large Single seller Large number of Few sellers
Sellers number of seller seller
2. Products Homogeneous No close Differentiated May be
seller substitute products homogeneous or
heterogeneous
3. Price Policy Firm is price Firm is price Firm is price Price is rigid due
taker maker with maker to some to fear of price
constraint extent war
4. Entry of new Free entry Very difficult Free entry Restricted entry
farms entry
5. Profit in the Normal profits Can earn Normal profits Can earn
long run only (AR = AC) abnormal profits only (AR = AC) abnormal profits
(AR > AC) (AR > AC)
Farhana Afroj, Lecturer, Humanities Department, KUET. 5
Basis Perfect Monopoly Monopolistic Oligopoly
Competition Competition
6. Control over No control over Full control over Few control over Interdependence
price market price market price market price exists for pricing
policy
7. Demand Perfectly elastic Less elastic More elastic Indeterminate
curve (STEEPER (FLATTER demand curve
downward downward (or Kinked)
sloping) sloping.
8. Selling costs Not required Very negligible High selling cost High selling cost
is involved is involved
9. Market Perfect Imperfect Imperfect Imperfect
knowledge knowledge knowledge knowledge knowledge
10. Mobility of Perfect mobility Imperfect Imperfect Imperfect
factors mobility mobility mobility

Farhana Afroj, Lecturer, Humanities Department, KUET. 6

 Perfect competition Market
• A perfect competition market is one in which number of buyers and sellers is large, all
engaged in buying and selling a homogeneous product without any artificial restriction and
possessing perfect knowledge of market at a time.

Why Firm is price taker in perfect competitive market??

• A price taker is a farm that can not have any say in setting its own. It simply has to accept
the market price.
• In perfect competition Market price is determined by the interaction of market demand and
market supply. Individual farms don't have any influence on the market price
• Two main reasons:
1. As, there is no difference between its products, therefore no one will pay extra for a
farms product.
2. If a Farm were to succeed in setting a higher price, more firm would enter the market
attracted by higher profit. This would increase supply and drive down the price of the
firms product. Farhana Afroj, Lecturer, Humanities Department, KUET. 7
 Short-run equilibrium of perfectly competitive market
Here, P= Price, X= Quantity, SMC= Short run marginal cost,
SATC=Short run average total cost, MR= Marginal Revenue
The firm is in equilibrium when it produces the output that maximizes
the difference between total receipts and total costs.

• There are two conditions for the equilibrium-

• MC=MR (This is called necessary condition)
• MC cuts MR from below (This is called sufficient condition)
Thus, the first condition for the equilibrium of the firm is that marginal cost be equal to
marginal revenue. However, this condition is not sufficient, since it may be fulfilled and yet
the firm may not be in equilibrium. we observe that the condition MC = MR is satisfied at
point e‘ and e. To the left of e profit has not reached its maximum level because each unit of
output to the left of Xe brings to the firm a revenue which is greater than its marginal cost.
The second condition for equilibrium requires that the MC be rising at the point of its
intersection with the MR curve. This means that the MC must cut the MR curve from below,
i.e. the slope of the MC must be greater than the slope of the MR curve.
Farhana Afroj, Lecturer, Humanities Department, KUET. 8
 Monopoly Market
• The Monopoly is a market structure characterized by a single seller, selling the unique
product with the restriction for a new firm to enter the market. Simply, monopoly is a
form of market where there is a single seller selling a particular commodity for which
there are no close substitutes.
Example:
• Production of nuclear power plant
• Bangladesh railway has monopoly in Railroad transportation

Farhana Afroj, Lecturer, Humanities Department, KUET. 9

• Graphical Equilibrium of Monopoly Market:
• The monopolist maximizes his short-run profits if
the following two conditions are fulfilled. Firstly,
the MC is equal to the MR.
• Secondly, the slope of MC is greater than the slope
of the MR at the point of intersection.

The equilibrium of the monopolist is defined by point ɛ, at which the MC intersects the MR
curve from below. Thus, both conditions for equilibrium are fulfilled. Price is P M and the
quantity is XM. The monopolist realizes excess profits equal to the shaded area AP M CB. Note
that the price is higher than the MR.
The monopolist is faced by two decisions: setting his price and his output. However, given the
downward-sloping demand curve, the two decisions are interdependent.
The monopolist will either set his price and sell the amount that the market will take at it, or
he will produce the output defined by the intersection of MC and MR, which will be sold at
the corresponding price, P. The monopolist cannot decide independently both the quantity and
the price at which he wants to sell it.Afroj, Lecturer, Humanities Department, KUET.
Farhana 10
 Monopolistic Competition Market

• Monopolistic competition is a middle ground between monopoly and

perfect competition (a purely theoretical state) and combines elements of
each. In a monopolistic competitive market the number of sellers is large but
each seller has a product differentiated from those of his rivals. What one
firm produces is not quite like what any other firm produces.

Farhana Afroj, Lecturer, Humanities Department, KUET. 11

 Oligopoly
• An oligopoly is an industry which is dominated by a few firms. In this market,
there are a few firms which sell homogeneous or differentiated products. Also, as
there are few sellers in the market, every seller influences the behavior of the
other firms and other firms influence it.

Farhana Afroj, Lecturer, Humanities Department, KUET. 12

1. non-collusive oligopoly appears when firms within an oligopoly market compete with each
other.
2. Collusive oligopoly: Collusion is a form of oligopoly market in which some firms enter into
mutual agreements to avoid competition. They form a cartel and fix the output quota and
market price. The leading firm in the market is accepted by the cartel as the price. Collusions
are two types-
a) Cartels: A cartel is a formal agreement between a group of producers of a good or service
to control supply or to regulate or manipulate prices.
b) Price leadership: There are three types of Price Leadership: –
• Dominant Price Leadership: – It refers to a type of leadership in which only one organization
dominates the entire industry. Under key price leadership, other organizations in the industry
cannot influence prices. The dominant organization uses the power of its monopoly to maximize
its profits and other organizations have to adjust their output with the fixed price.

Farhana Afroj, Lecturer, Humanities Department, KUET. 13

• Barometric Price Leadership: – It refers to a leadership in which one
organization first announces a change in prices and believes other organizations
will accept it. The organization does not dominate others and is not required to be
a leader in the industry. This type of organization is known as a barometer. This
barometric organization only initiates the reaction to the changing market
situation, which other organizations can follow if they find a decision in their own
interest.
• Aggressive Price Leadership: – A leadership refers to one in which an
organization establishes its dominance by threatening organizations to follow its
leadership. In other words, a leading organization establishes leadership by
following aggressive pricing policies and forces other/organizations to follow the
prices set by it.

Farhana Afroj, Lecturer, Humanities Department, KUET. 14