MODULE 2 - MARKET STRUCTURE

• 4 BROAD CATEGORIES OF MARKET SRTUCTURE

  PERFECT COMPETITION

  MONOPOLY

  MONOPOLISTIC COMPETITON

  OLIGOPOLY
• PERFECT COMPETITION A market where infinite number of sellers sell homogeneous good to infinite number of buyers and buyers, and sellers have perfect knowledge of market conditions.
• PERFECT COMPETITION is a market structure in which large number of sellers sell a homogenous product at uniform price.
• A marker is said to be perfectly competitive if it satisfies the following features:

  Large number of buyers and sellers

  Homogenous goods

  Price is uniform

  ·        Price takers

  ·        Price makers

  ·        Price leaders

  ·        Price followers

  Free entry and free exit

  Profit maximization

  No government regulation

  Perfect mobility of factors of production

  Perfect knowledge:

  Absence of transport cost

  Perfectly elastic demand curve
• LARGE NUMBER OF BUYERS AND SELLERS:

  under perfect competition, there exist a large number of sellers and the share
• HOMOGENOUS GOODS:

  under perfect competition, all firms sell homogenous goods which are identical in quantity, shape, size,
• Differentiated product similar but not identical or different but close substitutes
• Price is uniform as the product of the different sellers in the market are homogeneous.
• Price takers - have no option but to charge the ruling market price
• Price makers - able to fixed their own price
• Price leaders - market leaders whose price changes are followed by rivals
• • Price followers follow the price-changing lead of the market leader
• FREE ENTRY AND FREE EXIT:

  any firm can enter or leave the industry whenever it wishes
• PROFIT MAXIMIZATION:

  ·        the goal of the firm is to maximize profit
• NO GOVERNMENT REGULATION:

  ·        there is no government intervention in the market.
• PERFECT MOBILITY OF FACTORS OF PRODUCTION:

  ·        resources can move freely from one firm to another without any restrictions, the labors are not unionized and they can move between jobs and skills.
• PERFECT KNOWLEDGE:

  individual buyer and seller have perfect knowledge market and information is given free of cost.
• ABSENCE OF TRANSPORT COST

  ·        Transport cost is zero. Price of the product is not affected by the cost of transportation.
• PERFECTLY ELASTIC DEMAND CURVE

  Demand curve reflected by AR curve facing firm under perfect competition is perfectly elastic meaning.

  
  

  Firm can sell as much as it wants at the ruling market price.