Market Structures

/perfectcompe .... come6Market Structures16Modelis simplified version of the realityIn order to understand the real behaviour of markets, market modelsshould be analused.IMonopolyMonopoly is a market where a special product which does nothave close substitutes IS produced by single firm with balliersto entryFeatures- There is a special product which does not have close substitutes-There is only one fim in the industryso, industry . Fim-Entry IS fullu rescricted-Price discriminating abilityA monopoly can sell same product at different pilces indifferent places-Acting as a price makercan decide /change picesSources of monopoly / Reasons for restricted entryheofGovernment license and franchiseseg- Electricity BoardWater Boardg(Strategic)OROwnership of key rowmatellal and exclusive knowledge on productiontechniqueeg. Coca cola03Patent rightseg-: LG door coolingRATHUM ofEconomies of scale- These firms are called as since theycan sell its produces C16 lotest pices when C1 new firmentered in to the industry - it cannot sell res products atosuch lowest Plice because he needs time to experience theeconomics of scale Because of that, envy 4 is naturallyrestriced.eg: windows operating system produced by Microsoft.osLimiting pricing policies adopted by the existing firmC Antificial restrictions created by the mohopoly by reducingpieces while facing a loss for a short time)Demand curve faced by monopolyA monopoly firm 15 a piece mater which implies determinationand change in price by the monopoly is possible due to 2main reasons.OI No close substitutes02Only one firm in the industry-Demand curve of a price makerDownward sloping demandcurveThere fore a monopoly firm faces demand culve with negativeslopePFlims demandIndustry=curvedemand comeD>@0RATHMA Total revenue Average revenue and Marginal revenueitof a monopolyTotal revenueAverage revenueP = a- beTRAR . RTR = PQAR a aQ-bp2TR . (a-bo)QTRaQ-bQAR=AMarginal revenueMR = d TR = a-2bQd @MRforTR Function of a monopoly is maximazation FuncbobTRPrice * ARPherAR9aCompanision between demand equation é MR equation- Intersect 15 sameDemand up aMRabalsoMKEATHMA theSlope of MR is twice as demand equations slopeMR - bqDemand 2b2PMRDHO+Relationship between price and marginal revenueTR = PQMR - dTRdQMR= D. dQQ.dpdodQMR - P + Q. dpdeMR. PC +10dPResipiocal of PEDdoMR = PCPEDThis is always negativeMR = P (1-PEDRATINA PEDE atCaseMPIF PED IS I 2 MR is zero.P>OrPED=1MRShort run equilbrium of the MonopolyEquilbrium of the firm IS o situation where total profit IS maximisedor total loss IS minimised.6Maximum gap betweenTR and TC.TotalapproachMarginal approach2 conditions have to be fullfilled in marginal approach1 MR MCI2Slope of MCslope of MREqulibrium price : Price where the total profit is maximised.herEquilbrium quantity : Quantity where the total profit IS maximised.PMCPEeconome-profitATCAbnormal piofit_super-normalprofitCMRDQERATHRA JustNThere's no possibility of establishing the equilibilium of a monopolyat the inelastic part of the demand culve. It is always in theelastic part.mmelapaceMCATCKPPearlPex cess capacity/unutilized capacityATHMRO4Q2Ratio tax-To be situated in the inelastic part MC culve should nether be zetoor negative But theroucally it would never happen.-when demand IS elastic when the monopoly decreases the price wtalrevenue increases So, monopoly 15 keeping a excess capacity ClefthandsideofATC) to increase it whenever needed.objectProfit maximisation at MR - MCIf the firm move from Q1 quantity be 13 making losses since Q isthe quantity where MR= MC By increasing one ant be gets a lossngMonopoly may incur losses in short run Cadvertising makingare Ficial battlers - But they may produce inculling economic lossesin the short run expecting profits in long lun.-Though they have no competitors and no substitutes they have toDTAmaintain their monopolistre status by incurring huge expenditures.es advertisingpatent rightsat to fraal bainers AM-So there's a possibilis to eain BATHER PCO nomic lossesby cc monopoly (3)short run [itcLong run equlibriumMonopoly experiences economic profits in long runNow. there's no substitutes no competitorsIf there's no profit they would leave the industryMCep.LATCSAIC=BMRD.oPoint B Optimum plant size& A monopoly producer in long can does not produce in the optimum plantare He IS producing in a particular Plant see which IS less than optimumplant size.Point C - Sub optimum Level sub optimal. sizeOptimum point or quantity can be produced within the same plant sizemespective to expansion of the scale to long runherOptimum point in the sholt run compared with the long 10n.Swhy excess capacity ? (C-D)I1 Main objective profie maximisason2Till he has the capacity to increase the outputC-BDifference between optimum plant SIZE & sub optimum plantsize asACTHEA.MRATHNA DatetoSupply curve of the monopoly our andSupply cuive for a monopoly cannot be piecisely defined due to2 main reasons.There's a uncertainty in supply curveof.) Annopoly can supply same commodity at the same) oncesby different quantities into different markets02. Monopoly can supply same good by the same quantity atifferent prices into di fferent marketsBecause of these reasons there's no unque of sold relationship betweenP of Q. Therefore a unque supply curve cannot be determinedIMCSame commodityPE*same picce (PE)Different Qs CQA QB)Different marketsMRB MR ADADBO9512doolsP2MCPASame commodityPs.same quantity (QE)Different prices CPA & P@Different marketsMRAMRBDAD BoOFRATHNA 712%2Monopolistic competitionitThis is a market where differentiated products are produced bylarge number of business firmsProperties / AssumptionsoA differentiated product is produced02Large number of sellers and buyers03Entry and exit IS free; no balliers04Each firm in the industry has group of customers attracted,05price setters (price making ability)05 Production technique is very simple.07main goal is profis maximisationeg-: restaurants, saloons, retail shopsProduct differentiationProducing a same good which satisfy same human needs and wants indi fferent formsAfter sales serviceBy human capital (theway of treating to customers by uniforms,,external appearance)Product attributes (shape. colour, design. dutability, quality)herProduct differentiation may be,of Real differentiation02 Imaginary differentiation Differentiation is in the minds9of customers.Free entry and exitBecause of 5ofproduction technique IS very simple02 Intial requirement of capital expenditure is lowRATHNA No:Date:/Special group of customers attracted to each CLUB moreMonopolistic competition firms act as pince setters due to this fact.Each firm act independently there's no huge interdepence among theFirms.Price making ability-Though the market share of one firm is comparatively small 3 firms havethe ability of determing their own price upto certain extent.-Main reason Product differentiationSpecial group of customers attractedD2-Faces a downward sloping demand curve as a price setterDifference between the demand curve faced by monopoly and aFirm in a monopolistic competition-Both are price makers but power of price setting ability of a monopolyIS higher than firms in monopolistic competition NUT more powerfulreasonsonly because of product differentiation(much more(more Flatter demand curvemilasuc D curve(more steap)DAStrategic vanables of a firm in monopolistic competitionMain goal -P Profit maximisationStrategic variables they can control - price2ndrateion outpatproduct attitubetes1stadvertising 2Date://No:Shoit to apore braggerun equilibilium wPMCATCPEoution songEconomicprofitSupernomalPIONEC1AbnamalprofitMRDQ0DEbothThere's a possibilito of experiencing is economic loss and economic plofit bya Firm in menopolistic competition in sholt run.listenLong run equilibriumCHORAprom Eventhough a fims in monopolistic competition experience economic loss ofGroup cComm economic profit in shoit jun ; every firm has to experience normal profitin-long run.When majority of firms experience economic profit,New firms are entering to the industry expecting economicprofits (Due to the free entru)Then 2 importent incidents can be seen.OD Demand for factors of production increases . henceCost +Amount ofprices of factors increase and cost is increase theneconomicPrice+Plofit iscost curve shift upward.deneased02Due to the increase in market supply market piceIS decreasing.This process IS continued until every firm is getting zeroeconomic plofits.& Then, there's no mouvation to enter in to the industryLuminex No:3Date:;/itstMajority of business firm experience economic losses,(inThen existing firms are leaving the industry in long runBecause of that ,at tenOICast decreases02 Price increasesC tEconomic loss graduallyP.f sool decreases&This process 15 continued unail every firm gets zelo economic lossesin long rh.PLATCLMCLATEsyng9 idomosureMRDQo06Compansion between long run equlibrium of firm in perfect competitionand auffrem in monopolistic competitionPPLMCLATCATCLMCquaranteewinglosDDLATE P6PEyouPAMREARCE learnerthroughSLAmillHDD3prevent =187aMRDinnecttocodice toPGLumineso7.2Jenjuc)amOS allocative efficiency P=MClowest can+ productive4No:DateEconomicofPrice in monopolistic competition 15 greater than price in perfect competitionhtQuantity produced by a Firmin perfectcompetition is greater than quantity ofmono03 There's productive efficiency at long run in perfect competition but not inmonopolistic competition04There's allocative camp efficiency at long run in perfect competition, but notin monopolistic competition because Price > MC.55Perfect competition firms are producing at optimum plant size Bue mohopolisticcompetition Forms are producing beyond that point1>4Oligopoly marketThis 15 a market where a homogeneious or differnated product ISproduced by few number of fimsTV channelsGasBanksthepureFuelNewspapersdisposed.cementRadio channelssteelautomobileProperties / Features / AssumpachsorProduct may be homogenious or differentialedof Few number of fimsHIT03 Entry is bathered04 Huge interdependencydethicMarket domination awarding S and noowoodHuge amount of expenditure.27APnce ngidityFormal or informal agreement between Fims to solupcollusivethe once and quantity supply 09 price cattel leadershipOligopolyNon-collusiveNo any formal or informal agreement.Each firm independently setup paces and quantityaamBut there's interdependency there's asidnificant impact on others eg- kinked demandCounot SNo:Date: à / /AThere sino modelo go trets crahn certifie-behaviourarriv 15ofrone) di afters from another Because of that economists introduced differentlane Dmodels to explain different markets (20 models) DESSE- sris (11also 51 kinked demand curvé analysis(4)\21dues lon OR Count modelnon collusiv with e is SCHOOL >33Price leadership modelspreve laky acollusive04 Cartel modelservice95 na on DECISION bar 50 NG (1) supersob sited 2006001 St seart at INCerrkinked demand curvel analysis as quarter grds nu mit NDDS 220 serrorThis has been 40 explain emigidion con cept of coligobololmarketgentren 95119 s-This price regidity cannot be seen in each and every funnin cologoooly-According to this model a firm in digopoly has to face 2 differentdemand culves : comparatively inelastic and elastic demand curvesting?912440MPEiskinked demandcarveD1enDRD70oPaO-The market price in this model IS set at the kinked point-If +he Firm IS trying to 2increase its pricedemand IS elasticdecrease its pricedemand 15 inelastic-Reason for the elastic of demand curve wheniincrease the price Cabove thiskinked point DO.329When ai firm Ltrying its pucerotherthisnarioustwo 50119Firms ,in the indu sty do not respond for the ance. DUto23.to process25change+ Therefores Quantity a demando of the respective on 10ideadD $35.07firm decreases by a latoe amount Idd to laviv we sns so is meldagTherefore firms don't like to increase the price because increasing the price hasa tisk of loss (decease in Qd by a large amountLuminex 6Date: E/ /No:Reason For the inelastic of demand curve when decreasing the priceWhen a firm 15 trying to decrease its price same action IS followed by other firmsin the industry. Because of that Qd of this respective firm increases by a smallamount C% increase in Qd < % decrease in price) - Demand IS inelastic& Therefore a firm is not ready to reduce its plice since the final result isdecrease in total revenue.Due to these & reasons, both decrease in price and increase in price causesa loss each firm in the industry IS trying to keep its price at existinglevel - Therefore an olropoly market which has this behaviour is always havinga price regiding.eg- Dialog and MobitelEgulibrium in this marketPMCIconcernb LoandMC3.D.EPE400 01 labor 2100 (1) sont sriT.as as mil sdt 7I-DIDbrownbsong eri 900910mD2plemSIboomsb-9009 241end SVODAD soita eris seven surus bromab 30 swents site 5 needsR -OPE@Group bePrice and quantity Temain anchanged or in the existing level though their costdecrease or increases in between A and B JON at queuto 50 M emitThere's a possibility of moving plice beyondcpoine A and B. Buttie will be aproblem for the survivel of the company. sool C us were mustand SONO sudi COMMISSION and a still ench come substant.Consome such 30 ud be a : cool to ** : Price leader ship modelbehasPrice of the market for the aproduct ss.decided by she leader andall other Firms in the market follow the market price decided bydocstheleaderengance-There are 1-a types of price leadership models.21 doirback 1 Dominantaprice leadership model COUNTS2Low cost price leader ship model the 40 torrosBastbob ilHousaBorrowmetric price leadership modellosar this moit Game to glaque are1.DominantbrometPrice for the product S decided by the biggest Margett Firm or thebasemarket share All the other small firms followcostthat Drice.longbed21candeg: BOC is the dominant from which decides buying and selling107 90719Bare foreign exchange member issues reichoration than50% shaream it lone vorisoHisstagua2Low costnimoPrice for the product IS deaded by the frim which 15 operatingat the lowest cost This price 13 followed by other firms in theindustry00 Hiru TV and Derana are-the low cost channels which decidethe rates of actors advertisements etc.CHM3BonoumetricThe firm which has lot of maiket information (demand, supply, product-ion technique) which are perfect information deades the price. othersworthrob offollow that price alougs count 10m2 gd beinter be e DONG 9 4toeg- In aluminium industry Elcardo blastithe from has lot ofmit thing3124 smots froms uc bQ 90119 29CInformation is get, and development belaque noslost us be birst cont area 1ch 97119 straig sits of 39ouit gummy Area she 2 education osmith Ihoma terlia lb yd become 31 39 - 18DateNoDetailedlaborn nobuse sontbar ishDominant price leadership modelsite70 son9ed bothsteps only watter ads (1) create verba linDom'nant firm critically analyse the total market demand at eachpossible price This can be done by a market survey2Dominant firm estimates the portion of market demand which iscovered by all small Firms3Dominant Firm estimates the market remain for itself by dedctingthe supply of small firms at each market price from the totalmarket demand.are4Dominants firm decides profitomaximising: price fortieself for165wallo?and 10 profi sing price:decided olbgrishe A dominantFirm IS followed by all other small firms. song FortygailseaprilTherefore market price may not be the profit maximising pirce forother small firmsPMCDSupply curve for allmasmall firmsnoforDisgo 21doing unit sris ud bsbosb at obonsaid10)90119gritMI am19NLO ed bswall? of sand 2417 -2000 site toPshort.PEP2MR2Dominant Demand curveMarket Demand curve3019 celgquz81 Q.P3abiamsb) not in detirm to to and darries mit andaren'to50119ord zoob responsibility 1997 190 DID distribs No:P1 price , Qd fulfilled by small firms equals so dominantPostolfirm's supplyshould be zerosubsPs price, Qd Fulfilled by small from zero so domestic mar firmcan supplysforme full crPE 10 the profit maximising price for the dominant firm decided by itselfO - Polices is 'the proft maximising quantity for dominant frire-PE IS followed by all other small firms O-Q3 provided by both dominantdoes by@ utherequlibrum market aldemand INDOTO-Q3, outof this quantity ist origin SO quantityproduced by all small firms IS 01-Q3.principle CTheren's another approach of TOOKING the qualities produced bysm damagethe-dominants esmall finnis srid bad laries sit 70According to the supply curve of all small Firms the market pricequantity produced by small firms is 0-02-23Market demand O-Q3Dominant's Qd produced Q2-Q3drive odiSmall firmsl:Qd produced OBPEND verigiri D Go0-4 = Q2-Q3are redio D GoMesign andto enowibascaremons 08 )CarisQ-Q3 = O-Qzabodes^TObasCartel models a 21 01/019992 ACartel IS alamy 98F economic intergration of Firms particularohgopoly market In this model firms are moving into formal orinformal agreement to determine price and quantities togetherlaties toadidas lone organisation 7TH limitMam objective Increase total profit viby increasing anddecreasing quantity through limiting (restricting"the competition.voque ECladios and JostolaThere are & types of cartelswant at (FoEdsmoster or D Mailetorisharingmcartein 70adidas \ lenghembosis 10DateNo1 Marketin sharing Callel atool us bobingiq - c9-0-two 890Total marketits shared amonowithe froms gegraphically and eachStratefirm 151/flee to deteimine their own price agencies and toEPamount 4bm2 110 nd boxuboro2Output sharing caitelud begTotal output for the marketiacle shared amongithe membersof the cartel and the same lpnce incharged bysteach member>>ne dogof the cartel. Most to to SVIDS ent (2) >eg-ROPECamot ud bookbare withoug& - O+boomst wholeReasons for Cartel fartStes 9 1- booubora EQOLProducing a higher quantity by a member which exceeds the givenquota02Cheating other membersC By changing prices, by violating conditions of the agleem-ent)09-05Methods of protecting a carbelOD.DetectionA seperate committee IS appointed to detect the risks androlessexteinal Forceso which breaks down the caitel, D 21to lowlot atm parison SID arrult Isbom and d glogogileEnforcement / ban 97119 samatah of DChecking the rules J. compliance OF rules and regulations of caltalbrise:by ceacher and every I man bera DEPOSIT - MBMprotection equated revoid winnous presence03Government supportnothisgmo) sitGetting the government 7 support: to protect the cartelABanners to entryelstios 70 esque & 315 signTRestricting entry of in agreement bycreating different Cethucal / ubethroa DDUMPO No: 11Date/Priang practices-Today, most of business firms charge ununiform once for the sameproduct instead of charging a single price or uniform price for allcustomers for the same product.notes-Main objective Profit maximisationThere are 3.3 strategies in wordOD Price discrimination02 Two part tariff03) Tie-in saleDPrice discriminationCharging different prices for different consumers or for differentblocks/ batches for the same commodity.SHIDE Dd bluode To chipus bas 360)usA person / party who IS willing to buy a product . has to buy theright of buying product Firstly in addition to the payment : neededfor the product.eg- entrance free clubsPrestige SII Lanka (Agent of BMW)car - 30 millionservice - 4 millionAd mission fee for tution classesIn oligopdy & monopoly this can be seen9Tie in saledi PreventProducer is trying to sell a bundle of goods together rather thanselling a single product.eg-: packages of S-star hotels- buffet-different services (food, accomodation, entertainment )Multibarrels and bullets from EshrayalPackage offered by tourist companiese Pierie Ranasinche S.R. Charging different prices for differcustomers because of the differentdoesn . LIASNo: 12Quality of cost shard be same Date/In construction company . some toolsstrucePorcilane set Cooping kettled in sobalthesona michelle to alone 0 organ is Leader subtotalPrice discriminationsombong once SHI of stemodateshortavailage-Charging differentspirces for the same product at differentoccassions.eg: specialised doctor can charge different prices for differentclientsLawyers can charge different prices for different pricesCharbing different prices for different block of dolt ofare17.b 107 iselectricity consumption by the electricity boardwibommas omca side to sorbeed-Cost and quality of products should be sameThe level of profit can be maximised by charging ununiformodsprices sod . 250borg D youd a great notice AofThis isubecause 2 reason SELESIA soubota ented to thereA-producer is selling thearis ofOI) A portion or full amount of the consumer surplus isacquired by the producer through price disEreEach consumer is paying maximum price willing to be padinstead of paying a single priceDE1998 sd 40s and shapeford to charged AT02The consumers who were not able to buy the product underuniform once become able to buy the product.non'tredees rediegar aboon 1e elbrided r 195 at cause 01 10010019signia D No: 13Date/Who can discriminate price ?103cconditions must be satisfied assnoof The Firm must have the market power SMILL sideThe firm should be able to make the prices.perfect competitionXNon competitive firmsMonopolyOligopdyMono competitionv(upto certain extent)02Consumers responsiveness for different prices must be de FferedThere should be a difference between once elasticity ofdemandetscon(1) saming missing to blo: 21 Arthore smoo33The firm who discriminate the price must be able to preventresellings. from the market where a lower price is chargedinto the market where a higher price is charged.Lower price customers -P priceHigherTypesnotice clai ShenomaiA1Perfect price discrimination C First degree)Perfect price discrimination is defined as selling the product for eachconsumer for the maximum price a consumer IS willing to be paid-In this practice, the producer:\should have the perfect knowledgeon thei, costumers. income and viles ad ulderloigeg-> different prices charged by a specialise & doctor for the samelocational streatment for different customers D noriesadd 10th Well-famou slawyers charge indifferent +pricesManagement team of Suvas cannel charge different prices 14DateNo:2)Quantity use price discrimination no) othCharging different prices even for the same consumer forthe same product depending on quantity boughtI. Bulk discountsDiscounts are given when the consumers are buyingin bulkseg-; wholesale pricesII Block use discriminationCharging different prices for different blocks of uniteg+ electricity3Multimarket price discriminationSame product is sold at different prices in different marketsin maximising profitbegroinIn each market plice is determined when MR = MC.beck eg: airlines (business and economic class)Tution Chall and gloup classes)Text books C European é Asian countriesAcimentic information 0206262 esaw.onlyIn a particular transaction he one party have material facts /doss ra3DynFormation owhile theinextsparty doesnot have material 19 facts?bwoinformation in 21 reminance L 90119 mumicom 9ds not terminarySebe worred owher an person slubuying aboused vehicle most-probable the seller has material information , not theSmole medicalbuyer.aboutwhen a person-is depositing his money a financialinstitution chent does not have material informationlearned SOUNE 30 most NoISDatewhen there is acementic information formed party maycabr.exploit runinformed party , That called oppurpunistic behaviourof informed partywhen a transaction with 15. completed with oppuitunistic behaviderof informed pares there's a possibility of awarket failure.There's a possibility of inefficient resource allocation inthe market Cover allocation or under allocation)There are 2 results /impacts:of pacementric information andoppultunistic behaviour of the informed paityHom s.sdeAdverselysselection do company a25019ou MONOR Moral hazardrodoutsonAdverse selection is the oppultunistic behaviour of informedok - okparty in taking benifits from trading or contacting withfilmed sidewinformed orpartytips beneficiary emitagis a20000 borstandeger Insurance companies &selecting wrong people whosehealthy conditions are fully unknown by the firm.when a person is trying to sell a used vehicle thebuyer may be cheatedMoral hazard is defined as oppultunistic behaviour of takingadvantages by the informed party from uninformed partybased on an unobserved action after the transaction.eg- when a person has taken a full insurance for his car.he has comparatively risky driving compared withthird party insurance.when someone buys a brand new vehicle from toyotaservice centies tell to come for many service timesWhen someone takes a bank loan at float hatesome banks don't decrease it when the rate is decreasing atNo:Date124 Responses to acementric in formation 20 & words added *YUOMONt@Methods of eliminating adverse e Effect emoral hazards)benid to toNONODUniversal ricoverage stamas home 1. marker ,erulio In america withdrawa D desir WHOO isaengistron 70 wildreacq .Chousand 190000 is notocollo ISVO) site02Equalizing informationNO -rigiving conformation to everybody so 910 stort %-2 methods bemistro are 70 recoveredD Screening an miuniformed party scleaming thesituation before transaction takes placeeg- Insurance companies brings clients to medicalbemeto to wondded tests grit cl norbals DESIGNdate to of reased motor vehicle.Signaling - Informed partesiwwho the benific=SPEelactothey can give signals to uninformed partiesonI and10eg- In'construction companiessitstories DORLIn educational institutionsBCADA 70 researched ac benitsh at biosed ISIONwDa bemetation moit WHO bermaten side useda with RONDO bovesadoru are do based153id16- the 4.5 TOTAL a high orAtorigin act onrequestneedstates Perfect competitionThis is a market structure which is producing homogeneousproducts and where there are large number of sellers andbuyers.Assumptions of perfect competition1Large number of buyers and sellers-large number of sellers and buyers in the industry-each individual firm 2 whichever the size Is, supplies only a smallportion of the total quantity of output supplied to the market.-each firm alone cannot market price by changing its output*Free entry and exit is as reason for this assumption2Product homogeneity-technical charactenstcs of the product as well as the servicesa ssociated, with its saled and delivery are identical.-no way in which a buyer could differentiate among the productsof different firms.-This implies that each individual firm IS a price taker-ha s an indifinately elastic demand curveD-AR= MR=29-a firm can sell any amount of altpub at the prevailing market Plicedemand curve - average revenue. maroinal revenue curve-curve3Free entry & exit,-no bartler to entry or exit from the mdustry4Profit maximisation-goal of all individual firms CS to maximise their profits.5No government :- regulations-when there's no any government regulation that market is calledas " pure competitionThis IS a reason for the films to be a price take-RICHARD oPerfect mobility of factors of production-factors of production are free to move from one firm to another thousandthe economy.-There's a f perfect competition in the Factor marketeg- labour is not unionized, workers can mar between different jcbsraw materials and in other inputs are not owned by one party.to7Perfect knowledge-All sellers and buyers have complete knowledge of the conditions ofthe market.-knowledge refers to bob h prevailing conditions in the current period andFuture periods.information IS free and costless.uncertainty about future development in the market is ruled outShort run equilibrium of a firmThere are 2 approaches to find the equilibrium wherehe profix 15 maxi-mised.1 Total approach2Marginal approach1Total approachTC = TR - TCTCTR IS a straight lineprice ISPTRconstant at all levels of output-and film is a price takerPEprofitequilibrium IS at the point wherethere's the largest gap betweenTR and TCLosseoeeRICHARD Date ........Short run supply curve of a firmp/cP/CSupplyMCACP.curveP2AVCJAJMPIP.elPWPayPaP.asQueQQs29Shat run supply curve of industry 107 enouthers)P570PSP The industry supply (cuive is a horl zontal3,10/9summation of the supply curves o FaindividualDAJoeFirmsDA- It IS a straigh line with a positive slope.SIM-shapelof the supply curve d epends on thetechnology and Factor prices together withethe distribution 6120 of the firms inethe market or industry.Short run equilibrium of the industrySASM20DovaeQE Dateare9Margind approach a to SVIDS any noteNEEDMCCMR - total profit has not beenSAMCACSVAmaximisedit pays the firm to expandPEits output.P=MR-, ARMC> MR - total profits are reducedand it pays the firm tocut down Its productionPEMC=MR - short run profies are maximisedConditions for equilibrium to SVILLE vieque endeOUT1 MR=MC92slope of MC > slope of MRPICP/CMCMCACACPEMRLossesPCMRexcessprofits> aoeeoRee-The fact that a firm is in short run equilibrium does not necessarile meanthat it makes excess:pibfits au crode-whether the firm makes excess profits or incur losses depends on the levelACat short run equilibrium-IF AC IS below PEexcess profitsIf AC is above Pe - lossesp/cMCACShut down pointsAVC.The firm will continue toproduce only /Fit can coverPtdits valiable cost otherwiseIt will shut down as disAFC-continuing operations wouldO@RICHARDminimise 'the losses andmake it better off. Date......../No:......FichardLong run equilibrium of the firm and industryMCPlcplcLACSSACSMCP=MRDQREQEIndustryfirmLMC= LAC = PLMC=SMC=LAC=SAC=P=MR =