Traditional competitive analysis could not explain quantitative and qualitative
The conclusion drawn was that modern competitive firms deliberately create qualitative
differences in their products and in their selling activities.
In other wor
Positive: It is a competition because of It is a monopoly because each firm
the presence of
has some control over market
i) a large number of firms
ii) freedom of entry
Negative: It is not a pure competition
It is not a m
Any adjustment made in the price or the product by an individual firm spreads its
influence over a large number of competitors.
The impact of such adjustments is significant.
The net effect of these two assumptions is on the demand cu
Supply of inputs:
The cost of a firm in employing resources also depends upon the supply conditions of the
If we concentrate only on the labor supply problems several difficulties are likely to
Supply of labor normally depends upon the siz
The law of equimarginal utility as the basis of consumer equilibrium can be extended to
cover any number of goods. In its general form, the law can be stated as
This law is also known as the principle of substitution.
In order to m
Substitution and Income effects:
Marginal utility, equimarginal utility or law of demand in general, help to analyze
Price and the quantity of a good are generally inversely related.
This means that the consumption or demand of a good i
With every increase in the units of good X consumed, the marginal utility for good X
(Mux) will start falling.
And with every decrease in the good Y consumed (Muy) will start rising.
Continue the process until the two ratios are equated.
Stock and Flow:
The concept of capital is essentially a stock concept.
Such a stock of goods produces income for future consumption opportunities.
A house purchased with an investment of $15,000 today will bring in rent for the future
20 years or so.
Sources of Monopoly:
Traditionally monopoly is considered as an evil form of market.
It stands in the way of economic justice.
Restrictive practices of the monopolist cause prices to be higher and supply of goods to
be smaller than what would normally be
So long as market price is above AVC the firm will cover all its variable costs and the
same fixed costs as well.
If the price falls below AVC the firm will have to close down and to stop productive
This is because variable cost is current expen
Short run equilibrium explained: Let us study three short run possibilities with varying
profits with the help of a figure.
In Figure 34 we have OP the fixed market price with MR = AR for the three types of
The cost structures of the firms are diff
Selling (Advertising) Cost:
Selling Cost (SC) is another outstanding feature of a monopolistic competitive market.
This in the form of advertisement expenditure.
Selling Cost and Product Differentiation together enable the producer to maintain some
Though some economists fear instability in oligopolistic markets, efforts are made from
time to time to analyze them.
The earliest work in this respect is that of French economist, Cournot (1834).
Since then Bertrand, Edgeworth, Stackelbe
The distinction between Fixed and Variable factors:
The distinction between the two types of factors is the basis of cost analysis and the law
If all the factors of production were perfectly divisible and variable, the cost of
The law of supply is a direct relation between price and supply.
Higher the price (P1) greater the supply.
A firms supply curve is equiv.aspt to its Marginal Cost curve.
To construct market supply curves of a firm we have to make a lateral summation of th
In the act of production, a progressive increase in the input results in a similar increase in
There is a significant difference in the composition of input and its effect on the output.
In the short run, the total employment of
Total Cost Curves:
Let us begin with a picture of Total Cost, Total Fixed Cost and Total Variable Cost
Curves. This is simpler and easier to understand. With increasing units of output: 4, 11,
18, 23, 25 and 26, Total Fixed Cost remains constant at $40. T
To make the comparison convenient Marginal Physical Product (MPP) is converted
into Marginal Revenue Product (MRP).
For this purpose, MRP is multiplied by the marginal revenue earned by a firm in the
If a firm is operating under a competitive produ
In a competitive market, price is fixed and given for an individual firm.
Moreover, every firm should earn only normal profits as included in its Average Cost of
However, in the short run, different firms may have a varyin
This is the Super Normal profit of the firm.
The second firm with AC2 as its Average Cost curve is a less efficient firm. Its Average
Cost curve passes from above the MR = AR curve. In an equilibrium point e2 we find
MR = MC and output level is Q2 . For t
The two Sweezys assumptions suggest that neither a fall nor a rise in price would benefit
Oligopoly price is rigidly fixed.
Moreover, such a price rigidity causes a Kink in the demand curve with its lower segment
steeper or inelastic and its upp
The three phases of the LAC mark variations in the scale economies.
Initially between the N1N2 points on LAC and for output levels Q1Q2 we find the falling
phase of LAC.
The cost decreases and the returns increase.
This is the phase of Economies or increa
The second important feature of a monopoly market is the absence of
substitutes for the goods produced and sold by the monopolists.
Buyers have no other option except to purchase goods from the monopolist
at whatever price he charges.
This results in a si
The second constraint on monopoly power arises out of the income and willingness of
If the monopolist attempts to charge a price as high as Pn his sales fall to zero.
So even though a monopolist has complete freedom to charge any high price thi
The relation between a firms demand curve and market demand curve can be explained
in two ways.
When there are innumerable firms under competition each firms demand quantity
appears as a dot or a point (f1, f2.fn) on the market demand curve.
Again with ea
The marginal product
Let us assume one worker and a small quantity of raw materials together form a variable
With every increase in the variable unit, output will increase simultaneously.
This increase will appear in the total output.
The Law of Variable Proportions or Returns:
In the act of production, with constant units of fixed inputs, but progressively increasing
units of variable inputs, the output will increase but not in the same proportion.
Initially it will increase at an inc
Relative and subjective nature of utility:
Wants are satisfied with the help of various goods.
The want satisfying quality of goods is called their utility.
The quality of food to satisfy hunger and that of water to satisfy thirst are therefore their
Quantitative and Qualitative Differences:
Traditionally a competitive market is considered an ideal form of market.
As a rule almost all markets are competitive in nature.
Only in exceptional cases certain market imperfections may cause departure from
The market is said to be pure when
i) There is a large number of buyers and sellers;
ii) Goods produced and sold are homogeneous, and
iii) There is Free Entry or Exit for any producer or seller.
The three conditions together ensure that