Market Structure

Market?
Components of Market
Sellers Buyers Product Price Exchange
Market is set of conditions in which buyers and sellers contact each other and conduct exchange transactions.

Classification of Market
Based on
Area (Local, Regional, National,) Nature of Transactions (spot Mkt, Future Mkt) Volume of business (Wholesale & Retail) Time (short period, long period,) Status of sellers (Producers, C & F Agents, Wholesalers, Retailers,) Regulations (Regulated and Un-regulated) Competition (Perfect,..,Monopoly)

Classifying Markets
Classifying markets (by degree of competition)
number of firms freedom of entry to industry
free, restricted or blocked?

nature of product
homogeneous or differentiated?

nature of demand curve

degree of control the firm has over price

Alternative Market Structures

Different market structures
Perfect competition

Imperfect competition
Monopoly Duopoly Monopolistic competition Oligopoly
With product differentiation
Without product differentiation

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Features of the four market structures

Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition Monopolistic competition

Very many Many / several

Unrestricted

Homogeneous (undifferentiated)

Cabbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

Monopoly

One

Restricted or completely blocked

Unique

Pure Competition

Monopoly

Duopoly

Oligopoly (undifferentiated)

Oligopoly (differentiated)

Monopolistic Firms

Perfect Market

Features of Perfect Competition

Large number of buyers and sellers
Seller is a price taker

Homogeneous Product
Identical, Perfect substitutes

Pure Market

Free entry and exit

Profit-firms will enter the market and vice-versa

Perfect knowledge of the market

Buyers & Sellers are completely aware of prices

Perfect mobility of factors of production

Factors of production can be easily move in & move out

Absence of transport cost

Price equilisation of commodity and factors geographically

Existence of a single and uniform price

Both buyers and sellers cannot influence the price

Non-intervention of Government
Market economy

Price Determination under Perfect Competition

Price per metre (in Rs) 50 40 30 20 10

Quantity demanded 10 15 20 25 30

Quantity supplied (mn meters)

25 23 20 15 10

Pressure on Price Falling Falling Neutral Raising Raising

Short-run equilibrium of industry and firm under perfect competition

P
S

Pe

O
Q (millions)

Industry

Behaviour of price, while supply remains the same

P
S
P1

P
P2 D1 D2

M2 M M1

Q (millions)

Behaviour of price, while demand remains the same

S2 P1 P P2

S3

M1

M2

Q (millions)

Industry

The Price Taker Assumption

P
Pe

P D

D Qe
Market Supply and Demand

Qmilk
Demand for Milk

Qmilk

Marginal Revenue
Q 0 P 6 TR 0 MR 6 6 6 6 6 6

1
2 3 4 5 6 7

6
6 6 6 6 6 6

6
12 18 24 30 36 42

Demand = Marginal Revenue

P P = D = MR

D Qe
Market Supply and Demand

Qmilk
Contented Cow Dairys Demand

Qmilk

Perfect Competition
Short-run equilibrium of the firm
Price
given by market demand and supply

Output
where P = MC

Profit
(AR AC) Q possible supernormal profits

Equilibrium of industry and firm under perfect competition

P
S

Rs

Pe

AR Equilibrium Point -MC=MR=Price - MCD cut MR from below & O after MC must be raising Equilibrium Point

D = AR = MR

O
Q (millions)

Qe Q (thousands)

(a) Industry

(b) Firm

Short-run equilibrium of industry and firm under perfect competition

Super Normal Profit Rs (AC < Price)

P
S

MC

AC

Pe

AR AC

D = AR = MR

O
Q (millions)

Qe Q (thousands)

(a) Industry

(b) Firm

Loss minimising under perfect competition

Loss (AC > Price)

P
S

Rs

MC

AC

AC P1 AR1

D1 = AR1 = MR1

O
Q (millions)

Qe Q (thousands)

(a) Industry

(b) Firm

Normal Profit
Normal Profit MC = MR RsAC = AR

P
S

MC AC

P2 D2

AR2

D2 = AR2 = MR2

O
Q (millions)

O
Q (thousands)

(a) Industry

(b) Firm

Short-run shut-down point

P
S

Rs

MC

AC

AVC

P2 D2

AR2

D2 = AR2 = MR2

O
Q (millions)

O
Q (thousands)

(a) Industry

(b) Firm

Perfect Competition
Short-run equilibrium of the firm (cont.)
short-run supply curve of firm
the MC curve

Short-run supply curve of industry

sum of supply curves of firms

Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away

Long-run equilibrium under perfect competition

Profits return Supernormal profits New firms enter to normal
P
S1 Se LRAC P1 PL AR1 D1 DL

Rs

ARL

O
Q (millions)

QL Q (thousands)

(a) Industry

(b) Firm

Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away
LRAC = AC = MC = MR = AR

Long-run equilibrium of the firm under perfect competition

Rs
(SR)MC (SR)AC

LRAC

DL AR = MR

LRAC = (SR)AC = (SR)MC = MR = AR

Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away

LRAC = AC = MC = MR = AR

long-run industry supply curve

Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away

LRAC = AC = MC = MR = AR

long-run industry supply curve incompatibility of economies of scale with perfect competition

Perfect Competition
The long run
long-run equilibrium of the firm
all supernormal profits competed away

LRAC = AC = MC = MR = AR

long-run industry supply curve incompatibility of economies of scale with perfect competition

Does the firm benefit from operating under perfect competition?