PRIYA KHANDELWAL: CHARACTERISTIC OF OLIGOPOLY
& KINK DEMAND CURVE
PRISHA HARIA: SHORT & LONG RUN IN MONOPOLISTIC
MOHIT JOSHI: SHORT & LONG RUN IN MONOPOLY
DIVIT DHOLABHAI: MARKET STRUCTURE
AYUSH CHAUDHARY: BREAK EVEN POINT
MEANING OF OLIGOPOLY
1. Oligopoly refers to a market situation in which there are
few firms selling homogenous or differentiated products .
2. Sometimes, also known as “competition among the few” as
there are few sellers in the market and every seller
influences and is influenced by the behavior of other firms .
3. Example : markets for cement , airlines etc.
CHARACTERISTICS OF OLIGOPOLY
• Few Sellers- The oligopoly market structure consists of a few, large firms that
dominate the industry .
• Homogeneous or differentiated products-
1. Here the firms may produce a homogeneous product like cement or steel , this industry
is called homogeneous or perfect oligopoly
2. Here the firms may produce differentiated products like automobiles , this industry is
called differentiated or imperfect oligopoly.
• Entry is possible but difficult- There are some barriers which prevent easy entry in
oligopoly industry like higher requirement of capital , etc.
CHARACTERISTICS OF OLIGOPOLY
• Interdependence- Here the actions of one firm affects the action of other firms.
• Uncertainty- Oligopoly market is uncertain because of the rivals behavior , for eg if
the rival company increases or decreases the price it affects the price of ones
• Interminateness- An oligopoly firm being dependent on other firms for its price and
output decision loses its definiteness and determinateness due to dependence and
uncertainty factors .
KINK DEMAND CURVE
• Developed by Paul M Sweezy.
• Explains the price Rigidity in Oligopoly market.
• If a firm reduces the price, competitions follow it and
neutralize the expected gain.
• If a firm increase its price the rival firms do not follow it.
SHORT RUN AND LONG
RUN IN MONOPOLISTIC
FIRM’S EQUILIBRIUM IN THE SHORT
A firm’s short-run equilibrium can be discussed on the basis of the following
i. A firm is rational i.e. it tries to maximize profit.
ii. It operates under U shape average cost curve.
iii. The demand curve for the firm’s product is downward sloping i.e. its price
and quantity sold are inversely related.
iv. No additional variation in its product i.e. the firm does not introduce
further variations or differentiation in its product.
With the above assumptions, a firm tries to produce that quantity of output
which maximizes its revenue or minimizes its loss.
In the short-run the firm may operate with (1) excess profit, (2) normal profit
and (3) loss.
Total Revenue = Price output= OQ OP= OQMP
Total Cost= Average Cost Output= QS OQ= OQSN
Profit= TR-TC= QQMP-OQSN= NSMP
The output, price, revenue and profit of the firm can be stated as:
Output= OQ TC= OQSN
Price= OP TR= OQMP
The firm earns excess profit
SHORT-TERM EQUILIBRIUM WITH
Demand and cost conditions may require
a firm under monopolistic competition to
operate with loss.
The position of SAC is above the demand (AR)
line. The position of the firm can be explained as:-
Output = OQ Price = OP
AC = QH TC = OQ QH =
TR = OQ OP = OQNP Loss = PNHG
The firm incurs loss= PNHG as its TC>TR.
In the long-run a firm cannot continue to operate with loss hence a firm which cannot cover all
the cost will leave the market.
Excess profit earned by the existing firms will attract more firms. Additional firms producing
close substitutes would bring down the market share of the existing firms.
The demand curve of these firms will shift downwards. Prices would also decline.
Free entry and exit help bring about this situation. Exit of firms which incur loss or entry of
new firms attracted by the excess profit will ultimately leave the remaining firms with no more
than normal profits.
Tangency of AC to AR at S gives the firm only normal profit.
Output= OQ AC=QS
TR= OQSP π= Normal
In monopolistic competition the concept of ‘Industry’ loses its relevance due to a wide
variety of products. The automobile industry includes cars, buses, trucks and other three
and two wheelers too. However, they don’t compete with each other though they belong to
the same industry.
Therefore, Prof. E. Chamberlin introduces the concept “group”. According to Chamberlin
group includes products which are closely related. The product should be close technological
and economic substitutes.
All car producers belong to a technological group as they produce products which
technically cover the same want i.e. transport. However, they are not economic substitutes
as they widely differ in their prices. Maruti and Mercedes cars are technical substitutes
but not economic substitutes as the latter is priced too high.
Thus a group under monopolistic competition constitutes those products which are close
substitutes both in the technical and economic sense of the term.
Under the above assumptions the group i.e. all the firms in the group settle down in long run
equilibrium with normal profits.
SHORT AND LONG RUN EQUILIBRIUM OF
THE MONOPOLY FIRM
What Is Monopoly?
A market structure characterized by a single seller,
selling a unique product in the market. In a
monopoly market, the seller faces no competition, as
he is the sole seller of goods with no close substitute.
SHORT RUN EQUILIBRIUM OF THE
Like in perfect competition, there are three possibilities for a firm’s
Equilibrium in Monopoly are as follows:-
The firm earns normal profits –A firm earns normal profits when the
average cost of production is equal to the average revenue for the
It earns super-normal profits –A firm earns super-normal profits when
the average cost of production is less than the average revenue for the
It incurs losses – A firm earns losses when the average cost of
production is higher than the average revenue for the
As you can see that the MC curve cuts the MR curve at the equilibrium
point E. also, the AC curve touches the AR curve at a point
corresponding to the same point. Therefore, the firm earns normal
As you can see that the price per unit = OP = QA also, the cost per unit
= OP’. Therefore, the firm is earning more and incurring a lesser cost.
In this case, the per unit profit is
OP – OP’ = PP’
Also, the total profit earned by the monopolist is PP’BA.
As you can see that the average cost curve lies above the average
revenue curve for the same quantity. the AVERAGE REVENUE = OP
and the AVERAGE COST = OP’. Therefore, the firm is incurring an
average loss of PP’ and the TOTAL LOSS IS PP’BA. In the short-run, a
monopolist sometimes sets a lower price and incurs losses to keep new
LONG RUN EQUILIBRIUM OF THE
• It makes all the necessary adjustments.
• Depending on the demand and cost structure.
• It determines the price.
• A monopoly firm usually earns excess profit in the
long – run equilibrium.
Market is understood as a place where sellers and buyers meet for settling a
It is also defined as a group of firms/individuals that in contact with each other
in order to buy or sell goods.
TYPES OF MARKET
There are 4 types of market in market
structure they are :-
It is a market situation where there are large number of sellers and buyers.
Products/commodities have no quantitative & qualitative differences.
In perfect competition seller is a price taker.
The price of the product is determined by the total demand and supply.
It is difficult to create a situation like perfect competition.
The closest examples for perfect competition are agricultural commodities & stock
One producer selling homogeneous or an unique product.
The producer has almost complete control over supply so he can decide the price and
the output of the product.
In order to maximize the profit he would either control price or the output.
It is is difficult to have real life situation of monopoly market where a producer have a
total control over supply.
Producer could discriminate price between the buyers.
Few examples of monopoly are:
• Water supply in Mumbai controlled by BMC
• Railway services controlled by central government
Market where there are few sellers selling standardized or differentiated
commodities. Few examples are airlines, steel, cement, automobile industry etc.
Entry to oligopoly market is free but in reality there are many barriers.
In oligopoly rival firms join together and form a cartel.
Each firm have some influence over the price it the product is differentiated.
It is a possibility that oligopoly market turns into monopoly due to mergers.
Market situation where there are many sellers selling differentiated products, few
examples are Garments, soaps, detergents.
The sellers sell differentiated products.
Products is done through design, colour & other characteristics.
Selling cost is an essential aspect in monopolistic competition.
Producer tries to convince consumer that his product is better then his competitors.
Demand in this market is elastic since the products are close substitutes.
BREAK EVEN POINT
• The break-even point (BEP)
in economics, business—and
specifically cost accounting—is the point at
which total cost and total revenue are
equal, i.e. "even". There is no net loss or
gain, and one has "broken even",
though opportunity costs have been paid
and capital has received the risk-adjusted,
expected return. In short, all costs that
must be paid are paid, and there is neither
profit or loss.
BREAK EVEN ANALYSIS
• A break-even analysis is a financial calculation
that weighs the costs of a new business, service
or product against the unit sell price to
determine the point at which you will break even.
In other words, it reveals the point at which you
will have sold enough units to cover all of your
• Changes in Price
• Changes in Fixed cost
• Changes in variable cost per
• Break-even analysis is based
on the assumption that all
costs and expenses can be
clearly separated into fixed
and variable components. In
practice, however, it may not
be possible to achieve a clear-
cut division of costs into fixed
and variable types.
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