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Price and output determination under different market structures

Perfect competition

Perfect competition is the world of price takers. A perfect competitive firm sells a homogenous product (one identical to the product sold by the others in the industry) it is so small relative to its market price, it simply takes the price as given. When a farmer sells a homogenous product like wheat, he sells a large pool of buyers at the market price of Rs 1000/100 kg

characteristics

A very large number of relatively small buyers and sellers. A single buyers or sellers actions cannot therefore, have any perceptible influence on market price. The firm is thus, a price taker and quantity adjuster. All sellers are selling homogenous product. The firms are free to enter or leave the industry. That is, the long run inefficient firms would have left the industry and new but efficient firms would enter, so that the firms in the industry have almost similar level of efficiency.

The firms of production must be free to enter or leave the industry i.e in the perfectly competitive market there should be perfect mobility of factors. Each buyer and seller operates under conditions of certainty, being endowed with complete knowledge of prices, quantities, cost and demand.

Firms equilibrium
Is said to be in equilibrium when it is of no advantage to increase or decrease its output. Industry equilibrium: the equilibrium of an industry is a situation where all the individual firms are in equilibrium and hence do not change the level of their output and 2) when there is no incentive for the outside firms to come in and join the industry, or when there is no tendency for the existing firms to leave the industry.

Equilibrium of a perfectly competitive firm : short run case

In perfect competition each firm is relatively insignificant so that is raises the price of its product above the going price. It will be unable to sell anything whereas the firm gains nothing by cutting the price below the market price because it can sell any amount at the prevailing price.

Graph industry and firm

Equilibrium two conditions


1. MR = MC 2. MC curve cuts MR curve from below Three situations Super normal profit Normal profit Loss

Long run equilibrium

Three features

An entry attracting price An exit inducing price The break even price

Thus the long run equi of a perfect market obtains when all the firms are zero profit equi. At this point the every firm produces at the lowest point on its LAC curve. In the long run all the firms need not to have identical cost curves but the minimum point on their LAC curves must occur at the same cost per unit.

Competition in the input markets as well a in the commodity market will result in all firms having identical average cost and zero economic profits when the industry is in long run equilibrium.

Price and output determination un pure monopoly

A pure monopoly exists if one and only one firm produce and sells a particular commodity in the market. and there no close substitutes, Railways

Main features

One seller having no rivals or direct competitors No other seller can enter the market for whatever reason, legal, technical or economic Restriction on the entry of new firms The monopolist is a firm as well as an industry, Monopolist is a price maker.

Causes for the origin of the monopoly

The origin of monopoly may be legal or technological or both. Following are the main reasons which lead to monopoly. Patent rights for the product or product processes give legal monopoly rights to firms Govt polices such as granting licenses or imposing foreign trade restrictions like quotas etc, result in limiting the number of sellers.

Ownership and control of some strategic raw materials. Exclusive knowledge of technology by the firm.

Shapes of demand curve.

Short run equilibrium


Two conditions MC = MR MC cuts MR curve from below.

Long run equilibrium

Long period is a period which is long enough to fully adjust the supply to the changes in demand of a product. In this period, all factors of production are variable. Volume as well as capacity of production can be changed. Monopolist firm in the long run is also in equilibrium at a point where MR= LMC.

In the short run, we observed that a firm can earn profits as well as losses. But in the long run, a monopolist firm earns only profits. If price is less than long run average cost, the monopolist would like to close down the unit rather than suffer the loss. Monopoly firm in the long run is not contented with normal profits alone rather it is in the position to earn supernormal profits. In long run, monopoly firm can exploit the situation.

Price discrimination

Price discrimination refers strictly to the practice by a seller of charging of different prices from different buyers for the same good. The idea of monopolist behind price discrimination is to get from each buyer whatever profit that could be squeezed on the basis of the buyers intensity of demand and supply of his product. It is a technique followed by the monopolist to make the buyers to buy according to their ability.