File Name: price and output determination under perfect competition .zip
- Price Determination
- Determination of Short-Run Price under Perfect Competition
- 9.2 Output Determination in the Short Run
Perfect Competition which may be defined as an ideal market situation in which buyers and sellers are so numerous and informed that each can act as a price taker, able to buy or sell any desired quantity affecting the market price. According to A.
Price Determination under Monopoly. Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitute. From this definition there are two points that must be noted:.
Thus single firm constitutes the industry. The distinction between firm and industry disappears under conditions of monopoly. This ensures that there is no rival of the monopolist. Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low.
A firm under monopoly faces a downward sloping demand curve or average revenue curve. Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue.
In other words, under monopoly the MR curve lies below the AR curve. The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost. The producer will continue producer as long as marginal revenue exceeds the marginal cost. At the point where MR is equal to MC the profit will be maximum and beyond this point the producer will stop producing. It can be seen from the diagram that up till OM output, marginal revenue is greater than marginal cost, but beyond OM the marginal revenue is less than marginal cost.
Therefore, the monopolist will be in equilibrium at output OM where marginal revenue is equal to marginal cost and the profits are the greatest. In the short run, the monopolist has to keep an eye on the variable cost, otherwise he will stop producing. In the long run, the monopolist can change the size of plant in response to a change in demand. In the long run, he will make adjustment in the amount of the factors, fixed and variable, so that MR equals not only to short run MC but also long run MC.
The key points of comparison of price determination under Perfect Competition and Monopoly is as below:. Perfect Competition. See figure 1. There may be super normal profit in the short run but they will be swept away in the long run, as new firms entered into the industry. See Figure 2. Price discrimination may be a personal, b local, or c according to trade or use:. Some monopolists used product differentiation for price discrimination by means of special labels, wrappers, packing, etc.
For example, the perfume manufacturers discriminate prices of the same fragrance by packing it with different labels or brands. Certain consumers usually have the irrational feeling that they are paying higher prices for a good because it is of a better quality, although actually it may be of the same quality.
Sometimes, the price differences may be so small that consumers do not consider it worthwhile to bother about such differences. This happens particularly when the good in question is a direct service. A good may be sold in one town for Re. Similarly, the monopolist can charge higher prices in a city with greater distance or a country levying heavy import duty. The market is divided into sub-markets. The sub-market will be arranged in ascending order of their elasticities, the higher price being charged in the least elastic market and vice versa.
Price Determination under Price Discrimination:. In the following diagrams, the monopolist has divided his total market into two sub-markets, i. In the above diagram c it is shown that the equilibrium of the discriminating monopolist is established at output OM at which MC cuts CMR. The output OM is distributed between two markets in such a way that marginal revenue in each is equal to ME. In the above diagram, it is also shown that in Market B in which elasticity of demand is greater, the price charged is lower than that in Market B where the elasticity of demand is less.
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Determination of Short-Run Price under Perfect Competition
Perfect competition is a market structure that leads to the Pareto-efficient allocation of economic resources. Market structure is determined by the number and size distribution of firms in a market, entry conditions, and the extent of product differentiation. The major types of market structure include the following:. Perfect competition leads to the Pareto-efficient allocation of economic resources. Because of this it serves as a natural benchmark against which to contrast other market structures. However, in practice, very few industries can be described as perfectly competitive.
In perfect competition, the price of a product is determined at a point at which the demand and supply curve intersect each other. In addition, at this point, the quantity demanded and supplied is called equilibrium quantity. Let us discuss price determination under perfect competition in the next sections.
9.2 Output Determination in the Short Run
Price Determination under Monopoly. Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitute. From this definition there are two points that must be noted:. Thus single firm constitutes the industry. The distinction between firm and industry disappears under conditions of monopoly.
A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers, and society. The single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it.
Short-run price is determined by short-run equilibrium between demand and supply. Supply curve in the short run under perfect competition is a lateral summation of the short-run marginal cost curves of the firm. Also, the short-run supply curve of the industry always slopes upward, since the short-run marginal cost curves of individual firms slope upward. If the price does not cover fixed cost, the firms will continue producing provided the price stands above the average variable cost.
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. A very large number of relatively small buyers and sellers.
Price and Revenue
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