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Karnataka Class 12 Commerce Economics Duopoly Complete Notes

Karnataka Class 12 Commerce Economics Duopoly : The Karnataka State Open University established on 1st June 1996 vide Karnataka Govt. Notification No. ED 1 UOV 95 dated 12th February 1996 – KSOU Act 1992 is considered to be a reputed Open University amongst the open learning institutions in the country. Keeping in view the educational needs of our country, in general, and state in particular the policies and programmes have been geared to cater to the needy.

Karnataka Class 12 Commerce Economics Duopoly :  For more than 18 years, KSOU has redefined the way students are educated, with the aim of imparting knowledge by professionally managed, multi- disciplinary and multi- faceted oasis.

To outreach the pre-defined vision, university proudly launched its premium ICT Enabled programs with a belief that these programs would help fresh graduates, working professionals and even home based learners to learn the skills which would help them face the challenges of life and turn them into the next generation of leaders who will ensure the vitality of their regions.

Karnataka Class 12 Commerce Economics Duopoly Complete Notes

Karnataka Class 12 Commerce Economics Duopoly :Economics is generally understood to concern behavior that,given the scarcity of means, arises to achieve certain ends. When scarcity ceases, conventional economic theory may no longer be applicable.From this standpoint, economics is very much the study of choices. Though many are lead to believe that economics is driven purely by money or capital, in reality, it is much more expansive.

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Karnataka Class 12 Commerce Economics Duopoly : If the study of economics is the study of how people choose to use their resources, we must consider all of their possible resources, of which money is but one. In practice, resources can encompass everything from time to knowledge and property to tools. Because of this, economics helps illustrate how people interact within the market to realize their diverse goals.

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Karnataka Class 12 Commerce Economics Duopoly Complete Notes

Karnataka Class 12 Commerce Economics Duopoly : A duopoly (from Greek δύο, duo (two) + πωλεῖν, polein (to sell)) is a form of oligopoly where only two sellers exist in one market. In practice, the term is also used where two firms have dominant control over a market., it is the most commonly studied form of oligopoly due to its simplicity.

Karnataka Class 12 Commerce Economics Duopoly :  An oligopoly is a market with just a few firms. For instance, the market for cell phone service in our part of the U.S. is currently dominated by Verizon Wireless, ATT, and Sprint, a total of three large companies. (There are also some smaller companies.) In this market, each of these large firms realizes that its own output and the output of each of its competitors will affect the market price. In contrast, in a competitive market (like the markets for wheat, corn, or cattle), there are hundreds or thousands of firms supplying the good, and each firm can safely ignore the possible effect of its own output or each competitor’s output on the price. In this lesson, we assume that each firm takes into account how its own output, and its competitors’ outputs, affects the price, and through the price, its own profit.

Karnataka Class 12 Commerce Economics Duopoly :  Since one firm’s output decision will affect the profits of the other firms, firms in an oligopoly are likely to act strategically. Two firms are acting strategically when each looks at what the other is doing, and thinks along these lines: “I’ve got to make my production decisions contingent on what he does. If he sells 1,000 units, then to maximize my profits, I have to sell 1,100 units. And if I produce 1,100 units, does it make sense for him to produce 1,000 units?” The firms are reacting to each other. In a competitive market, in contrast, the firms do not react to each other;

Karnataka Class 12 Commerce Economics Duopoly :  In this lesson, we will assume there are only two firms in the market. A market with just two firms is called a duopoly. Obviously a duopoly is the simplest sort of oligopoly, and many of the concepts and results that we will describe can be extended to the case of an oligopoly with more than two firms. Duopoly analysis by economists dates back to the 19th century. Some of the central concepts of duopoly analysis have to do with strategic behavior, and the analysis of strategic behavior is the heart of the 20th century discipline called game theory. So game theory builds on duopoly theory. We will turn to game theory in the next lesson.

Duopoly models in economics and game theory

There are two principal duopoly models, Cournot duopoly and Bertrand duopoly:

  • The Cournot model, which shows that two firms assume each other’s output and treat this as a fixed amount, and produce in their own firm according to this.
  • The Bertrand model, in which, in a game of two firms, each one of them will assume that the other will not change prices in response to its price cuts. When both firms use this logic, they will reach a Nash equilibrium.

Characteristics of duopoly

1. Existence of only two sellers

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2. Independence

3. Presence of monopoly elements: so long products are differentiated, the firms enjoy some monopoly power, as each product will have some loyal customers

4. There are two popular modes of duopoly, i.e., Cournot’s Model and Chamberlain’s Model.

Market Structure: Oligopoly (Imperfect Competition)

I. Characteristics of Imperfectly Competitive Industries

A. Monopolistic Competition

• large number of potential buyers and sellers

• differentiated product (every firm produces a different product)

• buyers and sellers are small relative to the market

• no barriers to entry or exit

B. Oligopoly

• large number of potential buyers but only a few sellers

• homogenous or differentiated product

• buyers are small relative to the market but sellers are large

• barriers to entry

C. What is product differentiation?

• Product differentiation occurs when firms sell similar but not identical products.

• Examples?

  •  Two kinds of product differentiation.
  •  Real product differentiation = actual differences exist between the goods produced by different firms.
  • Imaginary product differentiation = no actual differences but consumer believe there are and act as if there were differences between the goods produced by different firms.

• Impact of product differentiation on firm demand.

Recall that a perfectly competitive firm is a price taker with demand that is perfectly elastic. A price taker cannot raise its price without losing all of its quantity demanded. If that firm can differentiate its product then it will no longer be a price taker. Rather, it can now raise its price and not lose all of its quantity demanded, although it will still lose some. Thus, product differentiation causes a firm’s demand to become larger and less elastic.

• Relationship between firm demand and market demand.

Firms have more competitors than does the entire market because they have both the competitors from other goods that the market has plus the competition from other firms within the same market. Hence, market demand is split into firm demand. As the number of firms in the market increase then firm demand will get smaller. The increased competition also leads to more substitutes for firms and, hence, firm demand is more elastic than is market demand. As the number of firms in the market increase then firm demand will become more elastic. • Market Power Market power is the ability of a firm to raise price and not lose all of its quantity demanded. That is, firms with market power have downward sloping demand curves. Perfectly competitive firms have no market power.

• Market Power

Market power is the ability of a firm to raise price and not lose all of its quantity demanded. That is, firms with market power have downward sloping demand curves. Perfectly competitive firms have no market power. Monopolies have market power because of lack of competition. However, product differentiation, as discussed above, also by itself causes demand to be downward sloping. That is, product differentiation is a second source of market power.

II. Monopolistic Competition

A. The short-run in monopolistic ally competitive industries.

Monopolistic ally competitive industries look like monopolies in the short-run, as is shown in the graph below. The firm has a downward sloping demand curve because of product differentiation. Profit can be positive (as shown below), negative or equal to zero dependent upon market conditions. The firm produces where marginal revenue equals marginal cost. Price is given by the demand curve at profit maximizing output and profit equals (p – ATC)Q.

The only difference between monopolistic completion and monopoly in the short-run is that discussed in the previous section – firm demand is smaller and more elastic than market demand for monopolistic competition whereas for monopoly firm demand equals market demand. Similar to both monopoly and perfect completion, firms in monopolistic competition may decide to shut down. The decision is the same for all firms in the short-run:

o If P > ATC => profit > 0 => produce

o If P = ATC => profit = 0 => produce

o If P < ATC => profit < 0 => decision to produce or shutdown depends on: ƒ

  • If P < AVC => shutdown ƒ
  • If P ≥ AVC => produce

B. The long-run in monopolistic ally competitive industries.

Monopolistically competitive industries act like perfectly competitive industries in the long-run. This is because, like perfect competition, firms can freely enter and exit the industry. That is, no entry barriers exist to keep out competition. As a result, similar to perfect competition, profit serves as a signal to firms to either enter or exit the industry in the long-run

o If profit > 0 => entry occurs driving down prices and profit.

With entry and more competition market demand is split between more competing firms. Hence, market demand falls and becomes more elastic.

o If profit < 0 => exit occurs driving up prices and profit. With exit and less competition market demand is split between fewer competing firms. Hence, market demand rises and becomes less elastic.

o Therefore, profit moves to profit = 0 where there exists no entry or exit => profit = 0 is the long-run equilibrium in the market, just as it is in perfect completion.

Karnataka Class 12 Commerce Economics Duopoly Complete Notes

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