AEL3

• Market

  A place where buyers and sellers are exchanging goods and services
• Considerations in an economic market

  • Types of goods and services being traded
  • The number and size of buyers and sellers in the market
  • The degree to which information can flow freely
• Perfect or Pure Market


  A market situation which consists of a very large number of buyers and sellers offering a homogeneous product, where no firm can affect the market price
• Perfect Competition

  • The behavior of an individual firm is that of a price taker
  • The industry is characterized by freedom of entry and exit
• Perfect Competition cannot be found in the real world
• Conditions required for Perfect Competition

  • A large number of sellers
  • Selling a homogenous product
  • No artificial restrictions placed upon price or quantity
  • Easy entry and exit
  • All buyers and sellers have perfect knowledge of market conditions and of any changes that occur in the market
  • Firms are "price takers"
  • There are very many small firms
  • All producers of a good sell the same product
  • There are no barriers to enter the market
  • All consumers and producers have 'perfect information'
  • Firms sell all they produce, but they cannot set a price
• Firm's objective in Perfect Competition

  To produce the level of output that will maximize profit
• Firm in Perfect Competition

  • Some inputs are variable and therefore fixed costs arise regardless whether the firm is operating or not
  • Since the firm is a price taker, it has no control on the price of a product
  • All inputs and costs of production are variable
  • The firm can build most appropriate scale of plant to produce the optimum level of output
• Imperfect Competition

  A type of market structure showing some but not all features of competitive markets
• Forms of Imperfect Competition


  • Monopoly
  • Oligopoly
  • Monopolistic competition
• Monopoly

  A market situation where there is only one seller of goods or services
• A monopoly should be distinguished from a cartel
• Characteristics of a Monopoly

  • There is only one producer or seller of goods and only one provider of services in the market
  • New firms find extreme difficulty in entering the market
  • There are no available substitute goods or services so that it is considered unique
  • It controls the total supply of raw materials in the industry and has no control over price
  • It owns a patent or copyright
  • Its operations are under economies of scale
• Types of Monopolies

  • Natural Monopoly
  • Legal Monopoly
  • Coercive Monopoly
• Monopolist

  A price maker, since he is the sole seller of a product that has no close substitute in the market
• Oligopoly

  A market situation with a small number of sellers, each aware of the action of others
• Types of Oligopoly

  • Pure or Perfect Oligopoly
  • Imperfect or Differentiated Oligopoly
  • Collusive Oligopoly
  • Non-collusive Oligopoly
• Cartel

  A formal agreement among oligopolists to set-up a monopoly price, allocate output, and share profit among members
• Collusion

  A formal or an informal agreement among oligopolists to adopt policies that will restrict or reduce the level of competition in the market
• Kinked demand curve

  The demand curve of the individual firm in oligopolistic market, with a "kink" at the existing price caused by the firm's expectation of the actions its rivals are likely to take if the firm changes its price
• Monopolistic Competition

  A market situation in which there are many sellers producing highly differentiated products
• Monopolistic Competition

  • Product differentiation gives each monopolistic competitor some market power, since each competitor can raise price slightly without losing all its customers
  • A large number of buyers and sellers in a given market act independently
  • There is a limited control of price because of product differentiation
  • Sellers offer differentiated products or similar but not identical products
  • New firms can enter the market easily, however there is a greater competition in the sense that new firms have to offer better features of their products
  • Economic rivalry centers not only upon price but also upon product variation and product promotion
• Monopsony

  A market situation in which there is only one buyer of goods and services in the market
• Oligopsony

  A market situation where there are a small number of buyers, usually with a small number of firms competing to obtain the factors of production