PERFECT COMPETITION

AND MONOPOLY

ADITYA SHAH (31)

JITESH GUPTA (33)

AKASH GUPTA (62)

DAKSH SAHAY (63)

ROSEL DHUDI (68)

MARKET
Market is a place where buyers and sellers appear to
conduct exchange transactions.
The only requirement of a market is that all potential buyers and
sellers should be in close contact with each other to conduct
exchange transaction.
Basic Features :

Buyers

Sellers

Interaction

Existence of a commodity

Price

CLASSIFICATION OF
MARKET

Perfect
Competition

A Perfectly Competitive
Market

Large

A perfectly competitive market must meet the

following requirements:

number of buyers and sellers.

There are no barriers to entry and exit.
The firms products are homogeneous.
There is complete information.
Firms are profit maximizers.

Large number of buyers

and sellers

The number of buyers & sellers are so large that

none of them can influence the prevailing price in
the market. Each buyer or seller buys or sell very
insignificant proportion of total supply of the
commodity in the market

Homogeneous products

Products sold in prefect market are homogenous

i.e...They are identical in all respects like quality,
size, design, weight etc. They are perfect substitute
of one another. The product in the eyes of the
buyers. Since the buyer cannot distinguish between
the product of one firm that of another, he becomes
indifferent as to the firm from which he buy.

Free entry or exit of firm

It means there are no artificial barriers or natural

obstacles in the way of new firms wishing to enter
the industry. Buyers and sellers are free to enter or
leave the market (industry) at any time they like.

There is complete
information

Firms and consumers know all there is to know about

the market prices, products, and available
technology.

Any technological breakthrough would be instantly

known to all in the market.

Firms are profit maximizers

The goal of all firms in a perfectly competitive market

is profit and only profit.

Market Demand Versus

Individual Firm Demand
Curve
Price
$10

Market
Market supply

Firm
Price
$10

Market
demand

2
0

1,000

3,000 Quantity

Individual firm
demand

4
2
0

10

20

30

Quantity

Profit-Maximizing Level of
Output

The goal of the firm is to maximize profits.

Profit is the difference between total revenue and

total cost.

Profit-Maximizing Level of
Output

What happens to profit in response to a change in

output is determined by marginal revenue (MR) and
marginal cost (MC).

A firm maximizes profit when MC = MR.

Profit Maximization: MC =
MR

To maximize profits, a firm should produce where

marginal cost equals marginal revenue.

How to Maximize Profit

If marginal revenue does not equal marginal cost, a

firm can increase profit by changing output.

The supplier will continue to produce as long as

marginal cost is less than marginal revenue.

How to Maximize Profit

The supplier will cut back on production if marginal

cost is greater than marginal revenue.

Thus, the profit-maximizing condition of a

competitive firm is MC = MR = P.

First Condition for maximization of profit is

MR= MC

Second Condition for maximization of profit is

MC curve cut MR curve
from below
Industry
Firm (is a Price T
Supply Curve

Price

Pric
e

MC
MC=MR

E0

Demand Curve

Output

Output

Price=AR=MR

Firms Maximize Total Profit

Firms seek to maximize total profit, not profit per unit.

Firms do not care about profit per unit.

As long as increasing output increases total profits, a profit-maximizing

firm should produce more.

Profit Maximization Using Total

Revenue and Total Cost

Profit is maximized where the vertical distance

between total revenue and total cost is greatest.

At that output, MR (the slope of the total revenue

curve) and MC (the slope of the total cost curve) are
equal.

Total cost, revenue

Profit Determination Using

Total Cost and Revenue
Curves
TC
TR
385
350
315
280
245
210
175
140
105
70
35
0

Loss

Maximum profit =81

Profit

130
Profit =45
Loss

1 2 3 4 5 6 7 8 9

Quantity

EXAMPLE
Credit Cards
A credit card is a small plastic card
issued to users as a system of
payment.
Credit cards are issued by the banks
which allows a card holder to purchase
goods on credit.
All banks in collaboration with Visa
or Master Card provides the facility.

Credit Cards
1. There are total 88 banks
providing credit cards.
2. Varieties of cards.
3. Segments of people using
credit cards

Credit Cards
Payment options
used by people in
India.
24 % of
consumers use
Credit/debit cards.
Only Urban
population use
Credit cards.

Credit Cards
HDFC has the highest share at 23
%
Perfect Competition.

MONOPOLY

In economics, a monopoly exists when a

specific individual or an enterprise is the only
supplier of a particular kind of product or
service
While a competitive firm is a price taker, a
monopoly firm is a price maker.
A

firm is considered a monopoly if . . .

it is the sole seller of its product.
its product does not have close substitutes.

Why Monopolies Arise

The fundamental cause of monopoly is barriers to
entry.
Barriers to entry have three sources:
Ownership of a key resource.
This tends to be rare. De Beers is an example
The government gives a single firm the exclusive right to
produce some good.
Patents, Copyrights and Government Licensing.

28

Monopoly: Equilibrium

Firm = Market

Short run equilibrium diagram = long run equilibrium diagram (apart

from shape of cost curves)

At ym: pm > AC therefore you have excess (abnormal, supernormal)

profits

Short run losses are also possible

continued...

03/08/15

Monopoly: Equilibrium
29

MC
P

Pm = the
price
AC

Pm

ym
continued...

MR

Demand

y
03/08/15

Monopoly: Equilibrium
30

MC
P

AC

The
shaded
area is the
excess
profit

Pm

ym
continued...

MR

Demand

y
03/08/15

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN
31

PROFIT-MAXIMIZING CASE:

A firm in the short run earns maximum profit when it meets the following conditions;

MR = MC and MC curve cuts MR from below

Average Revenue is greater than Average Total Cost.

continued...

03/08/15

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN
32
PROFIT-MAXIMIZING

Revenue/
Cost
P

Profit

CASE:

MC
ATC

E
DD
MR
0

Q
continued...

Output

03/08/15

33

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN

NORMAL PROFIT CASE:

A firm in the short run earns normal profit when it meets the following conditions;

MR = MC and MC curve cuts MR from below

Average Revenue is equal to Average Total Cost.

continued...

03/08/15

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN
34

NORMALPROFIT CASE:
Revenue/
Cost
P

MC
ATC

O
E
DD
MR

Q
continued...

Output

03/08/15

35

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN

LOSS-MINIMIZING CASE:

A firm in the short run minimize loss in following way;

MR = MC and MC curve cuts MR from below

Average Revenue is less than Average Total Cost but greater than AVC.

continued...

03/08/15

EQUILIBRIUM PRICE AND OUTPUT

UNDER MONOPOLY IN SHORT RUN
36

LOSS-MINIMIZING CASE:
Revenue/
Cost
P

Loss

A
O

MC
ATC

DD
MR
0

Q
continued...

Output

03/08/15

EXAMPLE OF MONOPOLY
De beers diamonds
They are miners and buyer of 70% of world rough diamond
It took control of all aspects of diamond trade in 1989
It was sole seller of diamond with no close substitute
They could determine who could buy uncut stones, in what
quantities and decide which cutting centres to be used.

Questions??

Thank you!!