Managerial Economics Unit-3
Managerial Economics Unit - 3
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Okay now let's move to our first topic😌
Market Analysis
Pastly, a specific place where purchase & sale of goods takes place was termed as market.
But in a broader outlook economist says that,
"market refers to the whole area or platform where the buyers and sellers of the products are spread and it is not limited to a specific place."
Nature of market
1. It is for a commodity.
2. It covers the whole area not a fixed location.
3. Market assumes that perfect competition should be present (However, this opinion is gradually diminishing as economists believe that imperfect market also exist).
4. Potential buyers and sellers are present.
5. Sale and purchase of commodity takes place.
6. Price rule is followed.
Determinants of market structure
"The nature and degree of competition for goods and services in the market determines the market structure."
●Number and nature of seller
●Nature of product
●Number and nature of piers
●Entry and exit conditions
●Economies of scale
Basis of market classification
On the basis of area
(Local, regional, National, International markets)
On the basis of nature of transaction
(Spot and future market)
On the basis of volume of business
(Wholesale and retail market)
On the basis of goods and services
(Commodity and factor market)
On the basis of time
(Very short, short, long, very long market)
On the basis of legality
(Open and black market)
Types of market
Degree of competition is an important factor which affects the market type.
There are broadly two types of competition on which market type is dependent.
1. Perfect market or perfect competition
2. Imperfect market or imperfect competition
1. Perfect market structures
These are the structures which involves sale of same type of product to a large number of buyers.
This market structure is unrealistic but holds atmost importance for theoretical and hypothetical reasons.
Features of perfect competition
Large number of buyers and sellers
Homogeneous product
Free entry and exit
Perfect knowledge about the prices
Absence of transportation cost
Perfect mobility of the factors of production
Absence of artificial restrictions
Absence of selling cost (cost of advertising, sales promotion, etc)
Price determination in perfect competition
In case of perfect competition in the market, all goods are sold at a single price or at fixed price and because of this reason, marginal revenue of the firm in perfect competition is always equal to the average revenue (MR = AR) thus, the industry is a price maker while the firm selling the same product is a price taker.
Types of Returns
●AR = AC, the firm will get normal profit
(Break - even point)
●If AR is greater than AC, the firm will get Super normal profits
●If AR is less than AC, the firm will suffer losses.
●If AR is less than AVC (average variable cost) , then the firm will stop production.
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2. Imperfect market structures
Any market structure which does not satisfy the features of perfect market structure is known as imperfect market structure.
Various forms of imperfect competition are:
A) Monopoly
The word monopoly is derived from the Greek words "monos" meaning "single" and "polien" meaning "to sell".
It has the following features:
●Single seller
●Homogeneous product
●Restricted entry
●Full control over price
●Price discrimination
●Increased scope for mergers
●Lack of innovation
●Lack of competition
NOTE: The main source of establishing a monopoly is "different kinds of entry barriers" in that particular industry or business. Some of the main sources of barriers to entry are stated by Joe Bain.
Types of monopoly
●Natural monopoly
●Social aur public monopoly (Indian Railways)
●Legal monopoly (Copyrights, patents)
●Fiscal monopoly (RBI, allowed to print money)
●Private monopoly
●Absolute or pure monopoly (involvea only single seller)
●Imperfect monopoly (perfect substitutes are not available but remote substitutes are available)
●Simple or single monopoly
●Discriminative monopoly
Price determination under Monopoly
The firm of monopoly market is a price maker. It either receives Super normal profit or normal profit or just minimum loss in short run.
NOTE: Monopoly market aggressively uses price discrimination. price discrimination is a situation in which the seller charges different prices from different types of customer for the same good.
B) Monopolistic competition
Monopolistic competition involves the following characteristics:
●Large number of sellers
●Product differentiation (has close substitutes)
●Freedom of entry or exit
●Independent behaviour (every firm is independent of the other).
●Product groups (there is not any industry in this competition but there is "groups of firms" which produce similar products.
●It involves selling cost.
●Control over price at some extent.
Price determination under monopolistic competition
Monopolistic competition market is also a price maker to an extent. It can receive Super normal profits, normal profit or just minimum losses.
C) Duopoly
Duopoly is a kind of oligopoly market which we will read in the next few headings.
This concept of duopoly market is basically used by the Economists for theoretical purposes and this concept was established around 1838 by AA Cournot.
Example: Coca-Cola and Pepsi, Android versus iOS, etc.
●It involves the following features:
●There are two sellers or produces.
●Product produced are almost similar or identical.
●Both sellers can jointly agree to a single price.
●Producers may use independent marketing and production strategies.
●Producers can also work in collaboration.
Price determination under duopoly
In case of agreement between two firms
Price determination will be same as monopoly.
In case of no agreement between two firms
Both the producers will try to capture the market through minimising the prices.
D) Oligopoly
Oligopoly is a market condition where there is a huge competition among a few large firms and there is an element of interdependence in decision-making.
Oligopoly market involves the following features:
●Interdependence
●Importance of advertising and selling cost.
●Indeterminate demand curve
(because of higher level of interdependence, rivalry firms always play the game of having moves and counter moves between them and this results in indeterminate demand curve of the oligopoly market).
●Only few sellers
●Aggressive and defensive marketing methods. ("Advertising can become a death or life matter under oligopoly." by professor WJ Bannal ).
●Can have cut-throat competition but also collusion.
●Can have identical products or differentiated products.
●Small number of large firms.
Types of oligopoly
1. Pure or perfect oligopoly
(These Industries deal with homogeneous products like cement, copper, etc)
2. Imperfect or differentiated oligopoly
(Example: automobile industry produces auto rickshaws, trucks as well as designer cars)
3. Collusive oligopoly
(Firms co-operate with each other, for example: cartels, associations)
Collusive oligopoly can be of two type:
Perfect/Cartels collusion
Imperfect/Price leadership collusion
4. Non collusive oligopoly
(Highest level of competition among the firms, e.g. Telecom industry)
NOTE: The model of Kink demand curve is also known as the model of oligopoly. This model is developed by Paul M. Sweezy, Hall and Hitch.
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Okay now move on to our next topic
Pricing Analysis
The basic terms used in Economics are PRICE ( amount paid by a customer for a product or service) and PRICING (a process through whuch value a unit commodity or unit service is decided in terms of money).
Factors influencing/Determinants of pricing
1. INTERNAL FACTORS
•Orgaisational factors
•Marketing mix
•Product differentiation (branding, style, color, flavour)
•Cost of product
•Objective of firm
2. EXTERNAL FACTORS
•Demand
•Competetion
•Suppliers
•Economic conditions
•Buyers
•Government
Different pricing policies
1. COST-ORIENTED POLICIES
●Full cost/ Mark-up/ Cost Plus princing/ The sum of margin method
[CP+P (margins at every stage) = SP]
●Marginal cost/ Incremental cost pricing
[CP+MC = SP]
●Break Even Point(BEP)/ No profit No loss pricing
[CP = SP]
●Rate of return/ Target pricing
[CP + P(targeted) = SP]
2. CUSTOMER DEMAND ORIENTED PRICING
Its is based on Law of demand.
3. COMPETETION-ORIENTED PRICING
■Parity/Going rate pricing
(Best suited for oligopoly market)
■Pricing below competetive level/Discount pricing
(Adopted by new entrants)
■Pricing above competetive level/ Premium pricing
(Can be adopted by leading and reputed companies only)
■Sealed bid/ Tender pricing
(Pricing set in quotation to get any contract)
4. OTHER PRICING POLICIES
☆Value-based pricing
(Servicing rendering)
☆Product-line pricing
(Complementary goods)
☆Price bundling pricing
(Perishable goods like hotel rooms, train tickets)
☆Loss leader pricing
(A company with variety of products sells it premium product at loss and recovers that loss from selling its other products at higher prices)
☆Peak load pricing
(Sells at higher prices by making customer feel that urgent buying will help them out otherwise they will suffer by paying more, like offer on airlines tickets only for 3 hrs, etc)
☆Skimming pricing
(Selling at higher prices initially and then lowering them. Draws higher profit through lesser sales, e.g. Apple)
☆Penetration pricing
(Opposite of skimming pricing, e.g. Reliance jio)
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