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ECONOMIC ENVIRONMENT OF
BUSINESS (5571)
Executive MBA/MPA (Col)
MONOPOLY VERSUS
PERFECT COMPITITION IN
PAKISTAN
ZAHID NAZIR
Roll.No. AB523655
Semester:Autumn 2008
INTRODUCTION
The two basic features, viz. large number of firms and homogeneous
product make the demand perfectly elastic for an individual firm. As a result
of this, the demand curve (i.e. AR curve) facing an individual firm becomes a
horizontal straight line and MR curve coincides with AR curve.
Now, demand comes from the buyers and the supply from the sellers.
The demand from the buyers can be shown by the Market Demand Schedule
and the supply from the sellers can be shown by the Market Supply
Schedule.
Table
Demand and Supply Schedules
Quantity demand per Quantity supplied per
Price per unit of week week
commodity
Units Units
Rs.
50 80 530
40 120 480
30 200 400
20 300 300
10 500 180
5 650 70
60 D
S
50 • •
40 • •
Price (Rs.)
30 • •
P E
20 •
10 • •
S • M • D
DD represents the demand curve and SS the supply curve. The two curves
intersect at point E. This point of intersection is called the point of
equilibrium – because it is at point E that quantity demanded equals
quantity supplied, viz. 300 units. The possible level of price at which
QD=QS is Rs. 20/-. It is also called the equilibrium price or the market
price, because it is at this price that quantity demanded and quantity
supplied are in equilibrium.
We may further note that there exits the tendency towards prevalence
of only one price for the commodity in the market under perfect
competition. (Fig-b). Let us assume that the price instead of being Rs. 20/-
is Rs. 30/-. Then when the price is Rs. 30/-, the sellers are prepared to sell
more. At Rs. 30/- as the price, supply is likely to expand to 400 units but at
the same time, demand will contract to only 200 units. Thus, supply is in
excess of demand when the price is Rs. 30/-. Sellers will compete with each
other to dispose of their stock, and this will result in lowering of the price.
Therefore, when supply is in the excess of demand, the price will start falling
from Rs. 30/- to Rs. 20/- at which point the quantity demanded will equal
quantity supplied and the original equilibrium point will be restored.
Y
Quantity of X Demanded and Supplied
60 D
S
(Fig-b) Prevalence of Only
50 • • One price
40 • •
Price (Rs.)
S Exceeds D
30 • •
P E
20 •
10 • •
S • D Exceeds S • D
Why does the price rise ? The price rises in the market because of two
theoretical conditions:
i) When demand increases i.e., when the demand curve shifts to the
right (Fig-c). Let us assumed that the original equilibrium point is E
ii) When supply decreases, i.e. when the supply curve shifts to the
left. (Fig-d) Let us assume that E is the original point of equilibrium and OP
is the original price level. Now when supply decreases, the supply curve
shifts to the left and the new supply curve is S1S2. The new equilibrium
points now becomes E’ and the new price is OP’, which is higher than the
original price OP; thus when supply decreases, the price rises.
i) The demand decreases, i.e. when the demand curve shifts to the
left. (Fig-e)
ii) The supply increases, i.e. when SS curve shifts to the right. (Fig-f)
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Let us assume that E is the original point of equilibrium and OP is the
original price level. Now, when the supply increases, the supply curve will
shift to the right. The new supply curve will be S1S2. and the new point of
equilibrium will be E’. The new price will now be OP’ which is lower than
the previous price OP. Thus, the price will decline when supply increases.
Thus shifts in demand and supply curve will influence the price.
i) The very short period or the market period is that period of time
in which the supply is fixed or is perfectly inelastic. The very short period is
so short a period that supply cannot adjust itself to the change in
demand, e.g. if the demand for fish, or milk, or any such commodity shoots
up one fine morning, it would be difficult to increase their supply
immediately to meet demand.
ii) The short period is that period in which the supply can adjust
itself only partly to the change in demand; may be as a result of firms
making full use of their plant capacity by varying the amounts of only
variable factors. The short period is not long enough to enable the firms to
expand their plant capacities.
iii) The long period refers to that period of time in which the supply
can adjust itself more fully or even fully to the change in demand. The
supply becomes more elastic and at times even perfectly elastic. The long
period is long enough to permit new firms to enter or the existing firms to
expand.
iv) The Very Long Period is that period of time for which we cannot
predict with any degree of accuracy as to what will happen to forces of
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demand and supply. In fact, Keynes once said ‘in the very long period we are
all dead’.
We shall therefore limit the role of time element while analyzing the
price theory to the very short, short and long periods.
Let us assume that E1 is the original point of equilibrium and OP1 is the
original price prevailing in the market. Now, one day the demand for
commodity X increases suddenly and the demand curve shifts to the right,
the new demand curve being D2D3; but in the very short period supply will
remain perfectly inelastic; shown by the Market Supply Curve (MSC); and
the new equilibrium point will be E2 and the new price will be OP2. This will
be the very short period price which is considerably above the original
market price, because the supply is perfectly inelastic. (Fig-g)
However, in the short period, supply will be able to adjust itself partly
to the change in demand, and the new supply curve will be SPS; and the
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new equilibrium will be at a point E3 and the new price will be OP3. The
price in the short period is now lower than the price in the very short
period; although it is above the original market price.
In the long period, the supply will be able to adjust itself more fully
or even fully to the change in the quantity demanded. There will thus be
two possibilities: (a) the supply curve may become more elastic and the new
supply curve will be LPS; the new equilibrium point will be E4 and the new
price will be OP4; (b) the supply may become perfectly elastic and may fully
adjust itself to the change in demand. In this case, the new supply curve
may become horizontal (LPS2), the new equilibrium point will be E2 and the
new price will become OP5, which has come back to the original price level.
Thus, depending on the period of time allowed to pass, the supply may
partly, fully or not at all adjust itself to the change in demand and will
influence the price. This analysis highlights the role of time element in
theory of price.
MONOPOLY
If a certain firm is the only one that can produce a certain good, it has a
monopoly in the market for that good.
• A monopolist:
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To understand what a monopoly is and how a monopoly operates, we'll have
to delve deeper than this. What features do monopolies have, and how do
they differ from those in oligopolies, markets with monopolistic competition
and perfectly competitive markets?
Features of a Monopoly
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Comparing monopoly with perfect competition
In the long run the firm can adjust other inputs ...
A NATURAL MONOPOLY
It is a NATURAL MONOPOLY.
DISCRIMINATING MONOPOLY
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– e.g. business travellers may be less sensitive to air fare levels than
tourists.
• The monopolist may increase profits by charging higher prices to the
businessmen than to tourists.
• Discrimination is more likely to be possible for goods that cannot be
resold
– e.g. dental treatment.
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MONOPOLY IN PAKISTAN
Three major examples of monopoly in Pakistan are:
Consequent to the British annexation of the Punjab in 1849 from Sikh rule,
and more so after 1857 when the British Crown formally extended its
sovereignty over India, a structured administration commenced in the
Punjab.
Between 1885 & 1890 the Company established Breweries in Rawalpindi &
Quetta & acquired an interest in the Oticumand (South India) & Norailiya
(Ceylon) breweries. A distillery was also established in the above period in
Rawalpindi next to the Brewery.
The Murree Brewery at Ghora Galli was therefore among the first modern
beer breweries established in Asia. Murree Beer proved to be very popular
among the British troopers who were largely barracked in the 'Galis' of these
hills.
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The virtues of beer brewed from barley malt & hops as a light alcoholic
beverage were not lost on the local population who rapidly became avid
consumers.
By the turn of the 20 century, the name "Murree" was famous for its beer in
keg and bottle in the bars, beer halls and army messes of British India.
Murree Beer was first awarded a medal for product excellence at the
Philadelphia Exhibition in 1876, followed by numerous awards over the past
140 years.
Two English families were closely connected with the founding of the
original brewery. Edward Dyer was the first General Manager of the
company. He was also the founder of Dyer Meaken breweries, Simla hills.
Edward Whymper, a member of this family was the first person to climb
Matterhorn mountain in 1865.
Under the present prohibition law, only non-Muslims and foreigners are
permitted to consume alcohol. Notwithstanding the consequent reduction in
demand, the Company decided as policy to concentrate on product
excellence. It was decided to modernize the plants.
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A Ziemann (German) brew house was installed in 1967, 'Saladin' Box
Maltings in 1971. Also in the late sixties, it was decided to embark on an
ambitious long-term program to mature Malt Whiskies. Over the past four
decades white oak casks and vats have been procured from North America,
Australia and Spain.
Our two underground cellars now hold over half a million liters of Malt
Whisky for varying periods of maturation up to 12 years under controlled
temperature conditions.
The Murree Brewery is one of the oldest public companies of the sub-
continent. Its shares were traded on the Calcutta Stock Exchange as early as
1902, and is now the oldest continuing industrial enterprise of Pakistan.
In 1997-1998 and 1998-1999, Murree Brewery was judged among the top 25
performing public companies by the Karachi Stock Exchange.
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cheap contraband and locally produced alcohol which is expected to
remain much in demand within Pakistan.
It is also evident from their financial statements that there is rapid growth in
the sales of liquors.
Balance Sheet
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Profit and Loss Account
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Cash Flow Statement
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THE MONOPOLY OF THURAYA IN SATELLITE
TELECOMMUNICATION IN PAKISTAN
History
THURAYA has aggressively launched its services in Pakistan with its offices
in all major cities and with an ever-expanding dealer network. We are
working towards encouraging THURAYA usage all across Pakistan i.e. in the
remote valleys of NWFP, deserts of Sindh, agricultural plains of Punjab, the
rugged mountains of Baluchistan and covering the oceans. But also it can be
used in all major cities of Pakistan. Future is satellite communications as it
works in every corner of Pakistan and is accessible to all.
But only two points or hubs located in two different locations and the
fact is:
The Two hubs or terminals were owned by PTCL and still PTCL is
the owner.
PTCL is the main Licensee.
Thuraya is the only service provider.
Any other company can set up it’s satellite telecommunication in
Pakistan, if and only has to have the above mentioned terminals.
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PERFECT COMPITITION IN PAKISTAN
One of the classical example of perfect competition in Pakistan is
Telecommunication sector. It has all the characteristics of perfect
competition like:
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In third place is Warid, owned by the Abu Dhabi group of the
United Arab Emirates and sister of Wateen group. With 5.9
million subscribers it controls 14% market of subscribers.
Norway Telenor, a recent entrant with about a billion US dollar
invesment in Pakistan has been doing well, based on its recent
earning report. It has about 4.6 million subscribers or 11% of the market.
Telenor stock is listed in the Oslo stock market (TEL) and Nasdaq NY
(TELN).
Paktel and Instaphone now owned by China Mobile Company
(ZONG). It has 2.7% market share.
One sign of the growth burst of the sector in Pakistan and its self-confidence
are the media ads of the various companies. As they fight for market
share, that battle is being conducted over the airwaves and newsprint.
It is hard not to notice the mobile phone advertising campaigns in Pakistan.
The mobile phone and services advertisements are in the media, on
billboards and everywhere else imaginable.
The quality and aggressiveness of the advertising campaigns indicates the
level of effort to gain market share. According to studies Pakistan has been
adding 2 million subscribers each month in 2006. The market segments
mobile companies are targeting include:
• tech-savvy youth
• business users (due to the their higher average revenue per user)
• first-time subscribers in remote and rural areas
• previously ignored segments, for instance housewives and women
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Mobile Cellular Services (as on 27 March 2009 )
CELLULAR SUBSCRIBERS
Growth
Mobilink Ufone Zong Instaphone Telenor Warid Total Rate %
2000 114,272 80,221 112,000 306,493 15.39
2001 309,272 116,711 96,623 220,000 742,606 142.29
2002 800,000 350,000 218,536 330,000 1,698,536 128.73
2003 1,115,000 550,000 319,400 420,000 2,404,400 41.56
2004 3,215,989 801,160 470,021 535,738 5,022,908 108.90
2005 7,469,085 2,579,103 924,486 454,147 835,727 508,655 12,771,203 154.26
2006 17,205,555 7,487,005 1,040,503 336,696 3,573,660 4,863,138 34,506,557 170.2
2007 26,466,451 14,014,044 1,024,563 333,081 10,701,332 10,620,386 63,159,857 80.70
2008 32,032,363 18,100,440 3,950,758 351,135* 18,125,189 15,489,858 88,019,812 39.4
July-2008 32,056,336 18,368,074 4,446,024 351,135 18,329,428 15,774,299 89,325,296 1.4
Aug-2008 31,578,241 18,600,511 4,803,058 321,134 18,316,157 15,944,559 89,563,660 0.3
Sep-2008 31,359,049 18,801,402 5,092,476 321,134 18,472,445 16,157,778 90,204,284 0.7
Oct-2008 30,882,528 18,978,138 5,297,610 321,134 18,634,249 16,411,898 90,525,557 0.4
Nov-2008 30,055,187 19,100,291 5,398,823 321,134 18,875,127 16,656,589 90,407,151 -0.1
Dec-2008 28,479,600 19,301,180 5,503,274 321,134 19,387,956 16,914,054 89,907,198 -0.6
Jan-2009 28,315,076 19,414,930 5,851,858 321,134 19,657,177 17,143,722 90,703,897 0.9
Feb-2009 28,116,064 19,497,028 5,979,853 321,134 19,842,594 17,251,369 91,008,042 0.3
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MONOPOLY
MERITS
DEMERITS
PERFECT COMPITITION
MERITS
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DEMERITS
CONCLUSION:
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