ECONOMICS

NAME WAQAS ABBAS

ROLL NO CLASS Lecturer Assignment topic

12166 MBA (evening) 2nd semester Hassan Raza Perfect, monopoly, monopolistic competition

NATIONAL UNIVERSITY OF MODERN LANGUAGES ISLAMABAD

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Market:

is a place where the goods are presented for sale in economics market means is an institution or place which bring together buyer and seller for buying and selling goods a and services.

Condition of good market Existence of goods and services Existence of buyers and sellers Contact between buyer and seller Area or region

(A)perfect competition definition

The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers. Explanation/assumption The following features exit in any market then that market will be called perfect competition Large number of seller /producer Large number of buyers Same prouct Firm is a price setter Perfect knowledge about market Perfect mobility of factors of production Free entry and exit

Determination of price and quantity or output in short Run SHORT RUN :- Short run is a period of time in which a firm has some fixed costs which does not vary
with the change in out put of the firm. The change only takes place in variable factors in the short period the number of firms remains the same in the industry. The firm sell the product at the prevailing price in the market. Because under perfect competition no single firm can affect the price of the market.

Equilibrium conditions of firm

Following are two equilibrium conditions of firm

1 Necessary condition
MC=MR

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2 Sufficient condition MC curve cuts MR curve from its below The above equilibrium conditions can be explain with following diagram, Diagram of Perfect Competition

1. ABNORMAL PROFIT OR MAXIMUM PROFIT CASE Definition :- In the short run when the market price exceeds than the average total cost at the best level of out put a firm earn super normal profit. It can be explained by the following diagram

:
SATC = Short run average total cost MC = Marginal cost AVC = Average variable cost Explanation :-. In this diagram out put is measured along OX-axis and revenue / cost on OY. We assume that market price is equal to OP. A firm will sell the out put at OP price. A firm is in equilibrium at point "M" where MR = MC. The firm will produce OK out put and sell it at OP price. The total revenue of the firm is OPMK and total cost is ORNK. The abnormal profit is RPMN

2. NORMAL PROFIT CASE Definition :- Normal profit is the amount which must be paid to the owner of the firm to continue the business.

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Explanation :- A firm is in equilibrium at the point "M". At this point MR = AR = MC = AC =

Price. The firm produces OK out put and sells it at OP price of the market. The total cost is OPMK and total revenue is also OMPK. The firm is earning normal profit because OPMK = OPMK.

3. LOSS MINIMIZING CASE Definition :- When the market price is smaller than the average total cost it is the loss minimizing position of a firm in the short run.

Explanation :- We assume that price in the market is OP. The firm is in equilibrium at point M where
MR = MC. The best level of out put is OK which is sold at OP price. The total revenue is ORNK while the total cost is OPMK. T he loss is OPMK - ORNK = RPMN These shows the loss of the firm and firm is covering the full variable cost and a part of the fixed cost. 4. SHUT DOWN CASE

Definition :- If the market price is smaller than average variable cost, it will be better for a one firm to close down the business to minimize the loss.

Explanation :- It is assumed that market price is OP. The firm is in equilibrium position at the point "M" where MC = MR. The firm sells OK out put but total cost is OPNK. The loss is OPNK - ORMK = RPNM. So it will be better for a one firm to close down the business to minimize the loss. Because the firm is not even covering the average variable cost.

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(B)Monopoly Behavior Definition: A situation in which a single company or group owns all or nearly all of the market for a
given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.

Assumption of monopoly
Only one firm /producers No close substitute of commodity Firm is a price setter Barrier for new entry of firm

Monopoly Diagram Short Run and Long Run

The diagram for a monopoly is generally considered to be the same in the short run as well as the long run. Profit Maximisation occurs where MR=MC. Therefore equilibrium is at Qm, Pm. Features of this diagram

There are barriers to entry in Monopoly. Firms are price makers. The industry demand curve is the same as the firms demand curve. Profits are maximised at output where MR=MC. This means they set a price greater than MC which is allocatively inefficient. In this diagram the firms makes supernormal profits because AR is greater than AC.

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Monopoly Diagram and Welfare Loss to Society.

In a competitive market, output will be at P1 and Q2. In a monopoly, output will be QM and PM. A monopoly causes a fall in consumer surplus and a fall in producer surplus. Some of the consumer surplus is captured by firms. The red triangle shows the net loss of consumer and producer surplus to society.

Long Run Average Costs

It is assumed monopolies have a degree of economies of scale, which enables them to benefit from lower long run average costs. Note: In monopolistic competition the short run equilibrium is different to the long run equilibrium Monopolistic competition : monopolistic competition is a market structure where so many producers competing with each other on basis of differentiation in their products:

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Assumption: So many firms Difference in product Free entry and exit

Difference between short-run and long-run equilibrium in monopolistic competition.

Monopolistic Competition is a market structure featuring few large and many small firms, fairly low entry barriers similar goods and relatively high competition. Over the short-run, firms can usually gain some abnormal profit, but over the long run, other firms entering the market due to the low entry barriers will compete and make the price lower. Short run is a time period in which at least one factor of production is fixed; long run is when all factors of production are variable. Short-Run Equilibrium

The firm will produce quantity Qs at price Ps. The firm produces where marginal cost (MC) and marginal revenue (MR) curves meet, because MC is the cost of producing an one more of the good and MR is the revenue of selling one more good and their meeting point is the most efficient production. This means that the shaded area between Ps, ACs (average cost of producing one good at this quantity) and the AR curve (average revenue curve) is the abnormal profit the firm makes. AR is equivalent to the demand curve and is the average revenue the firm makes per item sold. Producing at this point ensures the highest amount of profit. Thus, equilibrium is created in the short run. In the long run, there are no abnormal profits because of the features of Monopolistic competition. There are a few large firms, but many small firms that will compete for profit and thus drive the price down. Also, low entry barriers mean new firms will enter the market and

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further add competition. Finally, the goods are similar enough to ensure that competition will always remain high. Long Run Equilibrium

In this diagram, the firm produces where the LRMC, or long run marginal cost curve, and the marginal revenue curve meets. The LRMC describes the cost of producing one more of the good when no factors of production are fixed over the long run. That point is, in the long run, equivalent to the LRAC, or long run average cost curve, which shows them average cost of producing one good at this quantity over the long run. Because the LRAC curve is above the AR curve, there is no abnormal profit, as the average cost of the good equals the average revenue of the good. Thus, in the long run, equilibrium is acquired. Essentially, the difference between short and long run equilibrium is that in short run equilibrium, the firm can gain abnormal profits. Over the long run, that is impossible.

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