Price determination in Perfect competitive markets

Time period plays very important role in regulating the supply and other technical
words regulating the elasticity of the supply curve. The effect of the time is
described in following 3 topics
1. Very short run period
We cannot change the supply, supply is fixed
For e.g. one cannot change the amount of produce through any means
2. Short run period
It is the period which is not sufficient enough to adjust the change in demand
through the changes in the supply of commodity i.e. full adjustment between
demand and supply cannot be take place. In short time period there are two
types of the factors of production
Fix: - these are those which quantity and no cannot be change due to short
span of the time. Fixed factors are machinery, building etc.
Variable factors: - these are change factor of the production. In short run the
supply of the goods can be altered only by adjusting such variable factors
In perfect competition short period price is determined by industry by
interaction of short period demand and short period supply of the commodity.
Demand for commodity is summation of the demand of the all consumers. It
slops downward from the left to right. Supply curve for the industry is sum of
all output produced by industry. It has upward slope. The equilibrium price is
determined by the forces of the demand and supply of the industry. This
equilibrium price is given to all firms. They can sell as much as they can on
this given price. Let a figure

Let a SRS is the supply curve for an industry which is summation of the all out-put of
the firm. Let initial demand curve is DD. Then equilibrium point will be E. At which
price of commodity is P.Let demand of commodity decreased. Then the new
equilibrium point will be E1. At that point price fixed is OP1.

 At price OP firm earning supernormal profit area profit equal to ELSP at that point
SMC= MR and the SAC less than average revenue.
In firm at prices OP1 firms earning normal profit at that point SMC= MR and the
SAC is equal to average revenue.
At price OP2 the firm is under loss which is equal to the area SRE 2P2.at that point
SMC= MR and the SAC is greater than average revenue.
Sometimes the question arises whether firms will continues production even if it is
having the substantial loss, than answer can be given with the help of shutdown
point. The firm will continue production until AVC is higher than AR i.e. price is lower
than AVC.

fig:- supernormal profit

Fig:- Loss

Fig:- Normal profit

Long run period

In the long run time period is enough to time to make decision about continuity or
discontinuity about expansion or contraction. Due to this capacity it can adjust
industry supply fully changes in demand. In this all factor of production is variable.
The firms will be equilibrium at point where long run marginal cost is equals to the
marginal revenue and it is getting normal profit at that time.
If the firms earn supernormal profit, it can expand business to produce more and
industry invites new producers. It will increase the industrial supply and thus price
fall. Similarly if farms earn loss the firms are quit, they will reduce the supply of the
outputs and price will increases. When the firm exit from the business again the
profit will increases. Both loss and super normal profit are unstable. Due to this
reason the long run equilibrium is difficult to measure. Long run is volatile concepts.
Once long run completes, short run starts immediately starts. Long run is also called
planning period.

Pure monopoly
Monopoly is a market structure in which there is a single seller, there are no close substitutes for the
commodity it produces and there are barrier to entry.
e.g. National security:- Nepal army, Nepal electricity authority, Nepal oil
corporation.
Main characteristics of pure monopoly:
1. Single seller
A pure, or absolute, monopoly is an industry in which a single firm is the sole
producer of a specific good or the sole supplier of a service; the firm and the
industry are synonymous.
2. No close substitutes
A pure monopolys product is unique in that there are no close substitutes. The
consumer who chooses not to buy the monopolized product must do without it. Due
to this the demand curve is inelastic.
3. Price maker
It has control over price. He can change its product price by adjusting the supply.
4. Blocked entry
There is blocked entry of new firm due to technological, legal or some other types of
barrier.
5. Firm and industry
There is no distinction between the firm and industry in monopoly market situation.
6. Price discrimination
A monopolist may be able to charge different prices for the same product from
different customers.
This is most unwanted form of the markets form the consumer point of view as it
exploits consumer surplus but it is most desirable form of the market for the
governments to implements the government policies or to distribution of the
services.
Causes of monopoly
1. Natural

Some minerals are available only in certain regions. For example, South Africa has the
monopoly of diamonds; nickel in the world is mostly available in Canada and oil in Middle
East. This is natural monopoly.
2. Technical

A firm may have control over raw materials, technical knowledge, special know-how,
scientific secrets and formula that enable a monopolist to produce a commodity. e.g., Coco
Cola.
3. Legal

Monopoly power is achieved through government licensing, imposition of foreign trade

barrier, patent rights, copyright and trade marks by the producers. This is called legal
monopoly.
4. Large amount of capital

The manufacture of some goods requires a large amount of capital or lumpiness of capital.
All firms cannot enter the field because they cannot afford to invest such a large amount of
capital. This may give rise to monopoly. For example, iron and steel industry, railways, etc.
5. State

Government will have the sole right of producing and selling some goods. They are State
monopolies. For example, we have public utilities like electricity and railways.
6. Size of market
Small size of market does not allow the existence of more than a single large plant.
Price and out-put determination in monopoly market
In short run
The firm in short run does not get sufficient time to alter its cost, or change
quantity.

The equilibrium price and output is determined at a point where the short-run marginal cost
(SMC) equals short run marginal revenue (MR). Since costs differ in the short-run,
If AC > AR (P) firm will incur loss
If AC < AR (P) firm will incur super normal profit
If AC = AR firm will incur normal profit
Which is as shown in figure below

Long run equilibrium

In long run firms gets sufficient time to reduce cost and increase revenue by proper adjustment.
Profit maximizing output and price are determined at point where LMC= MR, in long run the monopolist
always gets supernormal profit because he sets price (AR) more than his average cost.