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MUHAMMAD ALI KHALIDMUHAMMAD ALI KHALID
MUHAMMAD KASHIFMUHAMMAD KASHIF
MUHAMMAD AON ABBASMUHAMMAD AON ABBAS
MUHAMMAD ZAINMUHAMMAD ZAIN--ULUL--ABIDINABIDIN
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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
Theextent of barriers to entry
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Perfect Competition: Large number of buyers and sellers
Homogenous product :
A consumer can easily find substitutes for theproduct of anygiven firm
Sellers are price takers (not price setter)
Perfect knowledge
Freeentry and exit
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Examples of perfect competition:
Financial markets stock exchange, currencymarkets, bond markets.
Agriculture
Wheat
Fruit stall
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Advantages of Perfect Competition:
High degree of competition helps allocateresources to most efficient use
Normal profit made in the longrun
Firms operate at maximum efficiency
Consumers benefit
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(a) Profit case (b) Zero profit case (c) Loss caseQuantity
Quantity Quantity
D
MC
A P = MR=AR
B AC
E
Profit
MC
AC
MC
AC
Loss
P = MR=AR
P=MR=AR
Price PricePrice
c
A
BD
cAD
Q Q QOOO
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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
L
ocation
Freeentry and exit Firm are price setter Perfect knowledge
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Examples: Restaurants
Private schools
Plant hire firms Insurance brokers
Health clubs
Hairdressers
Estate agents
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AC
MC
MR AR
Q
P
ACprofit
When P > AC, the firm earns
an abnormal profit inShort-run
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ACMC
MR AR
Q
ACP loss
When P < AC, the firm incurs a
loss in Short-run.
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P=AC
Price
OutputQ1
ARMR
AC
MC
F
When P =AC, the firm earns a normal profit in
Long-run.
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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.
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Advantages of monopoly: May be appropriate if natural monopoly Encourages R&D Encourages innovation
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Quantity
Price
ARMR
MC
P
Q
AC
AC
Profits
When P > AC, the firm earns
an abnormal profit in
Short-run
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ACMC
MR AR
Q
ACP loss
When P < AC, the firm incurs a
loss in Short-run.
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AC
MC
MR AR
Q
AC= P
When P =AC, the firm earns a normal
profit in Long-run.
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Oligopoly: Few firms and many buyers Barriers to entry and exit Products could behighly differentiated Nonprice competition Price stability within the market - kinked demand curve? High degree of interdependence between firms
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Examples of oligopolistic structures: Shoe
Cement
Mobile Milk
Soft Drinks
Tea
Newspaper Fertilizer
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A few large producers : firms aregenerallylarge and together they dominate the industry.
Eitherhomogeneous or differentiated products:the products are standardized, or differentiatedwithheaving advertising.
Price maker: The firm can set its price and
output levels to maximize its profit.
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Q0
P0
Quantity
Consider how a firm mayperceive its demand curveunder oligopoly.Price
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Q0
P0
Quantity
The firm may expect rivalsto respond if it reducesits price, as this will be seen
as an aggressive move
so demand in responseto a price reduction is likelyto be relatively inelastic.
The demand curve willbe steep below P0.D
Price
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but for a price increaserivals are less likely toreact,
so demand may berelatively elasticabove P0
so the firm perceivesthat it faces a kinkeddemand curve.
D
Q0
P0
Quantity
Price
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Given this perception, thefirm sees that revenue willfall whether price is increased
or decreased,
so the best strategy is to keepprice at P0.
Price will tend to be stable,even in the face of an increasein marginal cost.
D
Q0
P0
Quantity
Price
MC1
MC2
MR