MUHAMMAD ALI KHALID MUHAMMAD KASHIF MUHAMMAD AON ABBAS MUHAMMAD ZAIN-UL-ABIDIN ZAIN-UL-

Market structure:

The number of firms in the industry The nature of the product produced The degree to which the firm can influence the price Profit levels Firms behaviour pricing strategies, non-price competition, output levels The extent of barriers to entry

Perfect Competition:

Large number of buyers and sellers Homogenous product : A consumer can easily find substitutes for the product of any given firm Sellers are price takers (not price setter) Perfect knowledge Free entry and exit

Examples of perfect competition:

Financial markets stock exchange, currency markets, bond markets. Agriculture Wheat Fruit stall

Advantages of Perfect Competition:

High degree of competition helps allocate resources to most efficient use Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit

Price

MC

Price

MC

Price

MC

AC AC D Profit A B E P = MR=AR D AC A P = MR=AR

c
D

A Loss B P=MR=AR

O
(a) Profit case

Quantity

O
(c) Loss case

Q
Quantity

(b) Zero profit case Quantity

Imperfect or Monopolistic Competition:

Many firms and buyers Products differentiated/ Non-homogeneous goods:

Products differentiated from their competitors Branding Packaging and marketing Conditions of Sale Service Provided Location

Free entry and exit Firm are price setter Perfect knowledge

Examples:

Restaurants Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents

When P > AC, the firm earns an abnormal profit in Short-run

MC AC P AC

profit

MR Q

AR

When P < AC, the firm incurs a loss in Short-run.

MC AC

AC P

loss

MR Q

AR

When P =AC, the firm earns a normal profit in Long-run.

MC Price AC F P=AC

MR Q1

AR

Output
13

Monopoly:
One firm and many buyers  Firm is price setter (not price taker)  Imperfect knowledge  Barriers to entry and exit  Consumer choice limited  Examples are WAPDA, RAILWAY, GAS, WATER,


CABLE TV, OGDC.

Advantages of monopoly:

May be appropriate if natural monopoly Encourages R&D Encourages innovation

Price

When P > AC, the firm earns an abnormal profit in Short-run

MC

AC

Profits
AC

MR
Q

AR

Quantity

When P < AC, the firm incurs a loss in Short-run.

MC AC

AC P

loss

MR Q

AR

When P =AC, the firm earns a normal profit in Long-run.

MC AC AC= P

MR Q

AR

Oligopoly:

Few firms and many buyers Barriers to entry and exit Products could be highly differentiated Nonprice competition Price stability within the market - kinked demand curve? High degree of interdependence between firms

Examples of oligopolistic structures:

Shoe Cement Mobile Milk Soft Drinks Tea Newspaper Fertilizer

A few large producers : firms are generally

large and together they dominate the industry. Either homogeneous or differentiated products: the products are standardized, or differentiated with heaving advertising.

Price maker: The firm can set its price and

output levels to maximize its profit.

Price
P0

Consider how a firm may perceive its demand curve under oligopoly.

Q0

Quantity

22

Price
P0

The firm may expect rivals to respond if it reduces its price, as this will be seen as an aggressive move so demand in response to a price reduction is likely to be relatively inelastic. The demand curve will be steep below P0.
Quantity

D Q0

23

Price
P0

but for a price increase rivals are less likely to react, so demand may be relatively elastic above P0 so the firm perceives that it faces a kinked demand curve.
Quantity

D Q0

24

Price
P0 MC2

Given this perception, the firm sees that revenue will fall whether price is increased or decreased, so the best strategy is to keep MC1 price at P0. Price will tend to be stable, even in the face of an increase in marginal cost.
Quantity MR

D Q0

25