MARKET STRUCTURES

MARKET STRUCTURE

Market structure refers to the nature and degree of competition in the market for goods and services. Determinants of Market Structure: Number and nature of sellers and buyers: - monopoly duopoly, etc. Number of Product: No product differentiation differentiation, etc. Entry and Exit conditions: free restrictions, etc. Understanding market structure is very much needed for fixing the prices, for marketing, production and investment behavior, profit determination, etc.

1. 2. 3.

Factors affecting size of the Market

Several factors determine the size of the market are: 1. Demand. 2. Durability. 3. Transportability. 4. Standard of the good. 5. Transport facilities. 6. Selling Cost. 7. Government Policy. 8. Other factors (credit and banking, science and technology, etc).

Types of Market Structure:

The type of market depends on the degree of competition prevailing in the market. There are different types of competition prevailing in the market. These are: Perfect Competition. Imperfect Competition: Monopoly, Monopolistic Competition, Duopoly, Oligopoly, etc.

Perfect competition (PC): PC is characterized by many sellers selling identical products to many buyers. Monopoly (M): Monopoly is a situation of a single seller producing for many buyers. Its product is necessarily extremely differentiated since there are no competing sellers producing near substitute product. Monopolistic Competition (MC): It differs in only one respect, namely, there are many sellers offering differentiated product to many buyers. Oligopoly (O): In oligopoly, there are a few sellers selling competing products for many buyers. Duopoly (D): A duopoly is a market that has only two suppliers, or a market that is dominated by two suppliers to the extent that they jointly control prices.

PERFECT COMPETITION

A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of market at a time. Perfect competition is a market structure characterized by a complete absence of rivalry among the individual firms.

1.

2.
3. 4. 5.

6.

7.

Large number of Buyers and Large number of Sellers. No single buyer or seller can influence the price. Price Taker. Products are Homogeneous (same Products). Cross elasticity of demand is infinite. Free entry and free exist of firms. Perfect knowledge of the market conditions. Guarantees uniformity of prices throughout the market. Perfect mobility of factors of production. If demand exceed supply, free to move the additional factors to achieve equilibrium point. No transport costs. Prices are same. Absence of selling costs. No sales promotion, homogeneous product.

Features of Perfect Competition:

Price determination in Perfect Competition:

In Perfect Competition market, the price is determined by total demand and total supply. THE FIRM IS A PRICE TAKER AND NOT A PRICE MAKER. There is a demand price for each unit of commodity. It is the price at which each particular unit can find buyers. There is a supply price for each unit of commodity. It is the price at which that unit will find sellers. The market price is determined by the intersection of Demand and Supply Curves. Behavior of AR and MR curves in Perfect Competition

Behavior of Average Revenue and Marginal Revenue.

Output Price (Rs) TR (Rs) AR (Rs) MR (Rs)

1 2 3 4 5

10 10 10

10 20 10 10 10 30 10 10 10 40 10 10 10 50 10 10

When prices do not change with change in output (prices remaining fixed): Price=AR=MR. Diagram: (AR curve and MR curve is a horizontal line)

Assumptions & Conditions for Equilibrium of a Firm:

1. 2.

Assumptions: The firm aims at maximization of its profits. It is assumed that a firm has full knowledge of the profit maximization position (conditions). Conditions: A firm in order to attain the equilibrium position has to satisfy two conditions: Marginal Revenue = Marginal Cost. Marginal Cost curve must cut Marginal revenue Curve from below. The total profits of the firm can be increased by expanding output as long as the MR= MC, the firm stops production. If beyond this, the firm produces, MR<MC and it is loss. If MC curve cuts MR from above, then the firm as the chance to increase its output ( falling MC is favorable to increase output). Diagram

Equilibrium of a Firm in Short run: (Perfect Competition)

In short run, the firm may be making profits, super profits or losses. A manager should consider the Average Cost of a the firm also, apart from Marginal Revenue and Marginal Cost. IN that case, we observe 3 situations: When the Average Cost is lower than price, then the firm is said to be earning supernormal profits. (AC < P). When the Average Cost is equal to price, then the firm is said to be earning normal profits. (AC = P). When the Average Cost is greater than price, then the firm is said to be incurring losses. (AC > P). These can be shown with diagrams. Firms can enter/exist the industry only in long run very easily, not in short run. ( reason being, in short run, to enjoy supernormal profits, new firms cannot create fixed equipment immediately and in case of losses, firms cannot leave the industry because of fixed cost mild production exist wait for price recovery).

Equilibrium of a Firm in Long run: (Perfect Competition)

In long run, because of no restrictions of entry or exit of firms, the inefficient firms (who undergoes losses) would either shut down or would try to improve their efficiency. On the other hand, profit earning firms will attract new firms to be established total supply of commodity will increase- price per unit falls- profit vanishes and all the firms will try for break even (BEP). Two conditions of long run equilibrium: Price = MC = AC MC curve cuts AC curve at minimum point. (lowest point). All firms have identical cost curves, the conditions of equilibrium of a firm and the industry are same. The price taker firm is an adjustor of output and sales. Its attempt to maximize profit (normal profits) leads it to find a level of output at which this objective is fulfilled.

Conditions of firm and industry are same in long run.

End of the Perfect Competition Market Structure.

Thank You.