Price & Output

decisions under
Imperfect Competition
Unit – 8 Dr. Malini N
Week 8 Cost Function

Quadrant 1 1. Watch the eLearning content on “Cost Function” before the live session.
e-Content 2. Read the e-LM on “Unit 6: Cost Function”

Quadrant 2 1. Revise the “L5: Production Function” ” recording of the live Session
e-Tutorial 2. Attend the live session #6 on “Cost Function”

Quadrant 3 1. Take the formative assessment for “Cost Function”

e-Assessment 2. After the live session, repeat the formative assessment for “Cost Function” for self-assessment
3. Attempt solving the Practice MCQs & Case Study #6 on “Cost Function”

Quadrant 4 1. Participate in collaborative learning by discussing the Practice MCQs

Discussions
 Unit – 8
Price & Output decisions under Imperfect
Competition
• Topics:
• Introduction,
• Monopoly, types of price discrimination under
monopoly,
• Sources of monopoly,
• Monopolistic competition,
• Product differentiation,
• Short run equilibrium, Long run equilibrium in
monopoly & Monopolistic competition
 Monopoly
• Monopoly is that situation of market in which there is a single seller of a
product.
• For example: There is only one firm dealing in the sale of cooking gas in a
particular town. Hence, monopoly is a market situation in which there is
only one producer of a commodity with no close substitutes.

• According to Prof. Ferguson, “A pure monopoly exists when there is only

one producer in a market. There are no direct competitors.”
• Mc Connel says, “Pure or absolute monopoly exists when a single firm is the
sole producer for a product for which there are no close substitutes.”
Features of Monopoly Market
1. One seller & large number of buyers
2. Monopoly is also an industry
3. Restrictions on the entry of new firms
4. No close substitutes
5. Price maker
6. Profit Maximization
Sources of Monopoly
1. Economies of scale
2. Capital Requirements
3. Technological Superiority
4. No substitute goods
5. Control of natural resources
6. Legal Barriers
 Demand & revenue under monopoly
• In a monopoly situation there is no difference between firm & industry. Accordingly,
under monopoly situation, firm’s demand curve also constitutes industry’s demand curve.
Demand curve of the monopolist is also average revenue (AR) curve. It slopes downward.
It means if the monopolist fixes high price, the demand will shrink. On the contrary, if he
fixes low price, the demand will expand. Under monopoly, average revenue & marginal
revenue curves are separate from one another. Both slope downwards.
• Following facts can be identified as a result of negative AR & MR:
i. Demand rises with fall in price (AR). Hence, by lowering the price, a monopolist can sell
more units of the commodity.
ii. AR is another name of price per unit, i.e., P=AR.
iii. With fall in price, both AR & MR fall, but falling MR is more. Rate of fall in MR is usually
more than rate of fall in AR.
iv. AR is never 0, but MR may be 0 or even -ve.
Fig.: Demand and revenue under
monopoly
Determination of price and equilibrium under monopoly

• A monopolist will so determine the price of a product as to get maximum profit.

A monopolist is in equilibrium when he produces that amount of output which
yields him maximum total profit. A monopolist is also in equilibrium in the
short period when he incurs minimum loss. Under monopoly, price &
equilibrium are determined by 2 different approaches:

1. TR & TC Analysis
2. MR & MC Analysis
3. https://www.youtube.com/watch?v=mksD2D0aI-0
4. https://www.youtube.com/watch?v=WMRqno5jV64
TR & TC curve analysis
Monopolist can earn maximum profit by selling
that amount of output at which difference
between TR & TC is maximum. By fixing
different prices or by changing the supply of the
product, a monopolist tries to find out the level
of output at which the difference between TR &
TC is maximum, i.e., total profit is maximum.
That amount of output at which a monopolist
earns maximum profit will constitute his
equilibrium situation.
 MR & MC analysis
• In case of monopoly, one can know about price
determination or equilibrium position with the help of
MR & MC analysis. According to this analysis, a
monopolist will be in equilibrium when 2 conditions
are fulfilled, i.e.,
1. MC=MR
2. MC curve cuts MR curve from below. A monopolist
earns maximum profit when he is in equilibrium.
• Price & equilibrium determination under monopoly
are studied with reference to 2 time periods:
A. Short period
B. Long period
Price determination under short period or short-run
equilibrium
• Short-run refers to that period in which time is so short that a monopolist cannot change
fixed factors like: machinery, plant etc. Monopolist can increase his output in response to
increase in demand by changing his variable factors. Similarly, when demand decreases, the
monopolist will reduce his output by reducing variable factors & by slowing down the
intensive use of fixed factors. A monopolist will face any of the 3 situations in the short
period:

• https://www.youtube.com/watch?v=CzDXT6YDv2Q
Super Normal Profit
Super normal profit: If the price (AR)
fixed by the monopolist in equilibrium is
more than his AC, then he will get super
normal profits. The monopolist will
produce up to the extent where MC=MR.
If the price of equilibrium output is
more than AC then the monopolist will
earn super-normal profit.
Normal Profit

Normal profit: If in the short run

equilibrium MC=MR, the
monopolist price AR=AC, then he
will earn only normal profit.
Losses

Minimum loss: In the short run, the

monopolist may incur loss also. If in the
short-run price falls due to depression or
fall in demand, the monopolist may
continue his production so long as the low
price covers his AVC. A monopolist in
equilibrium, in the short period, may bear
minimum loss equivalent to fixed costs. In
this situation, AR=AVC & the monopolist
bears the loss of fixed costs.
Price determination of Long-run or long-run equilibrium
In the long run, the monopolist will be in
equilibrium at a point where his long-
run marginal cost is equal to marginal
revenue. In the long run, because of
sufficiently long period at the disposal of
the monopoly firm, all costs can be
varied & supply can be increased in
response to increase in demand.
Price discrimination or discriminating monopoly
Definitions:

In the words of Koutsoylannis,“Price discrimination exists when the same product is sold at
different prices to different buyers.”
According to Robinson, “Price discrimination is charging different prices for the same product or
same price for the differentiated product.”
Types of Price discrimination
• Price discrimination is a common pricing strategy’ used by a
monopolist having discretionary pricing power. This strategy is
practiced by the monopolist to gain market advantage or to
capture market position.
• There are three types of price discrimination:
1. Personal
2. Geographical
3. On the basis of use
i. Personal:
• Refers to price discrimination when different prices are charged from different individuals.
The different prices are charged according to the level of income of consumers as well as
their willingness to purchase a product. For example, a doctor charges different fees from
poor and rich patients.

ii. Geographical:
• Refers to price discrimination when the monopolist charges different prices at different
places for the same product. This type of discrimination is also called dumping.

iii. On the basis of use:

• Occurs when different prices are charged according to the use of a product. For instance, an
electricity supply board charges lower rates for domestic consumption of electricity and
higher rates for commercial consumption.
Degrees of Price discrimination
• Price discrimination has become widespread in almost every
market. In economic jargon, price discrimination is also called
monopoly price discrimination or yield management. The degree
of price discrimination vanes in different markets.
• There are three degrees of price discrimination
1. First degree price discrimination
2. Second degree price discrimination
3. Third degree price discrimination
First Degree Price Second Degree Price Third Degree Price Discrimination
Discrimination Discrimination
Refers to a price Refers to a price Refers to a price discrimination in which
discrimination in which a discrimination in which the monopolist divides the entire market
monopolist charges the buyers are divided into into submarkets and different prices are
maximum price that each different groups and different charged in each submarket. Therefore,
buyer is willing to pay. This prices are charged for these third-degree price discrimination is also
is also known as perfect groups depending upon what termed as market segmentation.
price discrimination as it they are willing to pay. In this type of price discrimination, the
involves maximum Railways and airlines practice monopolist is required to segment market
exploitation of consumers. this type of price in a manner, so that products sold in one
In this, consumers fail to discrimination. market cannot be resold in another
enjoy any consumer market. Moreover, he/she should identify
surplus. First degree is the price elasticity of demand of different
practiced by lawyers and submarkets. The groups are divided
doctors. according to age, sex and location. For
instance, public transportation buses
charge lower fares from senior citizens.
Students get discount in cinemas,
museums and historical monuments.
 Monopolistic Competition Market
• According to J.S. Bains “Monopolistic competition is found in the industry
where there is a large number of small seller, selling differentiated but close
substitute product.”
• According to Lim Chong Yah “ Monopolistic Competition is a market
situation where there are many producers but each offers a slightly
differentiated product.”
Features of Monopolistic Competition Market
• Large number of firms and buyer
• Product differentiation
• Freedom of entry and exit
• Selling cost
• Price policy
• Non price competition

•
https://www.youtube.com/watc
h?v=mksD2D0aI-0
Week 9 Price & Output decisions under Perfect
Competition
Quadrant 1 1. Watch the eLearning content on “L7: Price & Output decisions under Perfect
e-Content Competition” before the live session.
2. Read the e-LM on “Unit 7: Price & Output decisions under Perfect Competition ”

Quadrant 2 1. Revise the “Cost Function” recording of the live Session

e-Tutorial 2. Attend live session #7on “Price & Output decisions under Perfect Competition ”

Quadrant 3 1. Take the formative assessment for “L7: Price & Output decisions under Perfect
e-Assessment Competition ”
2. After the live session, repeat the formative assessment for “L7: Price & Output
decisions under Perfect Competition ” for self-assessment
3. Attempt solving the Practice MCQs & Case Study #7 on “Price & Output decisions
under Perfect Competition ”
4. Attempt Continuous Assessment - 2
Quadrant 4 1. Participate in collaborative learning by discussing the Practice MCQs & Case Study
Discussions