Market Structure

• Market structure


  The nature and degree of competition in the market for goods and services
• The structures of market both for goods market and service (factor) market are determined by the nature of competition prevailing in a particular market
• Market (in economics)


  The whole area where the buyers and sellers of a product are spread, not a particular place
• In the present age, the sale and purchase of goods are with the help of agents and samples. Hence, the sellers and buyers of a particular commodity are spread over a large area. The transactions for commodities may be also through letters, telegrams, telephones, internet, etc.
• Market (definition)


  The whole region in which buyers and sellers of a particular product are in such free intercourse with one another that the price of the same goods tends to equality, easily and quickly
• Characteristics of a market

  • An area
  • One commodity
  • Buyers and sellers
  • Free competition
  • One price
• Determinants of market structure

  • The number and nature of sellers
  • The number and nature of buyers
  • The nature of the product
  • The conditions of entry into and exit from the market
  • Economies of scale
• Perfect competition


  A market structure characterised by a complete absence of rivalry among the individual firms, where all firms are price-takers and there is freedom of entry into, and exit from, the industry
• Conditions for perfect competition

  • Large number of buyers and sellers
  • Freedom of entry or exit of firms
  • Homogeneous product
  • Absence of artificial restrictions
  • Profit maximisation goal
  • Perfect mobility of goods and factors
  • Perfect knowledge of market conditions
  • Absence of transport costs
  • Absence of selling costs
• Perfect competition is a rare phenomenon in the real world, but it helps in understanding the working of an economy where competitive behaviour leads to the best allocation of resources and the most efficient organisation of production
• Monopoly


  A market situation in which there is only one seller of a product with barriers to entry of others, and the product has no close substitutes
• Characteristics of monopoly


  • One producer or seller of a particular product
  • Firm itself is an industry
  • Full control on the supply of a product
  • No close substitute of the product
  • Restrictions on the entry of other firms
  • Price-maker, not price-taker
  • Demand curve slopes downwards to the right
  • Cannot determine both price and quantity simultaneously
• Monopolist's product


  Elasticity of demand is zero
• Monopolist's product


  No close substitute in the market, so cross elasticity of demand is very low
• Monopoly


  Restrictions on the entry of other firms
• Monopolist


  Can influence the price of a product, is a price-maker not a price-taker
• Pure monopoly is not found in the real world
• Monopolist cannot determine both the price and quantity of a product simultaneously
• Monopolist's demand curve


  Slopes downwards to the right, so monopolist can increase sales only by decreasing price to maximise profit
• Monopolist's marginal revenue curve


  Below the average revenue curve and falls faster, because monopolist has to cut price to sell additional unit
• Oligopoly


  Market situation with a few firms selling homogeneous or differentiated products
• Oligopoly


  • Interdependence among sellers
  • Advertising is important
  • Presence of competition
  • Barriers to entry of new firms
  • Lack of uniformity in firm size
  • Indeterminate demand curve for individual seller
• Oligopoly


  No unique pattern of pricing behaviour due to conflicting motives of independence and cooperation
• Monopolistic competition


  Market situation with many firms selling differentiated products
• Monopolistic competition


  • Large number of sellers
  • Product differentiation
  • Freedom of entry and exit
  • Downward sloping but elastic demand curve
  • Independent behaviour of firms
  • Selling costs are essential
  • Non-price competition
• Draw a graph showing Supernormal Profits in a Monoply

  Graph

  
• Graph For market equilibrium

  graph

  
• Monopoly achieves profit maximization when...

  Marginal Cost(MC)=Marginal Revenue(MR)
• What is productive Optimum?

  Max quantity at lowest price
• Perfect Competition normal profits is achieved when...

  Marginal Cost(MC)=Average Cost(AC)