Economic Theory - Price Determination

Flashcards covering key concepts in price determination, including different market structures (perfect competition, monopoly, monopolistic competition) and pricing strategies.

Price Determination

The process by which the forces of demand and supply interact to establish the market price for goods and services, influencing resource allocation in an economy.

Perfect Competition

A hypothetical market structure characterized by numerous buyers and sellers, homogeneous products, and free entry and exit, where prices are determined by market demand and supply.

Equilibrium of the Firm (Perfect Competition)

Occurs when a firm produces at the output level where marginal cost (MC) equals marginal revenue (MR), maximizing profit or minimizing losses; firms are price takers in perfect competition.

Short Run Equilibrium (Perfect Competition)

A firm may experience profits or losses in the short run, but production occurs where MC = MR. Losses may lead to shutting down if operating losses exceed fixed costs.

Long Run Equilibrium (Perfect Competition)

Firms earn only normal profits due to free entry and exit. Prices adjust to OP, ensuring no supernormal profits or losses, as new firms enter or exit the industry.

Equilibrium of the Industry

The industry is in equilibrium when total output equals total demand at the prevailing price, which is the equilibrium price. It requires the group of firms to manufacture homogeneous products in a market.

Monopoly Market

A market structure with a single seller of a product with no close substitutes, where new firms cannot enter, and the monopolist aims to maximize profit. They act as a price maker not taker.

Demand Curve (Monopoly)

The demand curve for a monopolist is the industry demand curve, sloping downwards from left to right, showing that more is sold at a lower price.

Supply Curve (Monopoly)

The supply curve of a monopolist is based on the average cost curve. Relationship between average cost and marginal cost depends on laws of returns.

Equilibrium Condition (Monopoly)

Essential condition is equality between marginal revenue (MR) and marginal cost (MC) at the point where monopolist profits are maximized.

Price Discrimination

Charging different prices to different consumers for the same product by a monopolist to gain pricing power and market advantage.

First-Degree Price Discrimination

Perfect price discrimination where a firm charges a different price for every unit sold, capturing all consumer surplus.

Second-Degree Price Discrimination

Charging different prices for different quantities, such as quantity discounts for bulk purchases.

Third-Degree Price Discrimination

Charging different prices to different consumer groups, such as peak and off-peak seasons.

Monopolistic Competition

A market structure with differentiated products, a large number of sellers, and freedom of entry and exit; competition is not based solely on price.

Equilibrium in Monopolistic Competition

Firms are in equilibrium where marginal revenue (MR) equals marginal cost (MC). In the long run, firms earn only normal profits due to new firms entering the market.