By:

Lecturer, Department of Economics

Hope University

Hope University, Ethiopia

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 INTRODUCTION: MARKET STRUCTURE
 Market is the process of planning and implementing the
conception, pricing, promotion, and distribution of goods,
services and ideas to create exchanges that satisfy individual
and organizational objectives.
 A market is any arrangement that brings buyers and sellers
together and enables them to get information and do business
with each other.
 A market is a collection of buyer and sellers that interact,
resulting in the possibility for exchange.

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 TYPES OF MARKET
 Physical market: is a set up where buyers can physically meet
their sellers and purchase the desired merchandise from them in
exchange of money.
 Digital marketing: is the marketing of products or services
using digital technologies, mainly on the internet but also
including mobile phones, display advertising, and any other
digital media.

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 Types of Market Structure
 Markets are classified into different types on the basis of
factors such as:

 The degree of competition among firms in a market,

 The number of buyers and sellers,

 The nature of the commodity, the mobility of goods and

factors of production, and

 The knowledge of buyers and sellers about prices in the

market.

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 Cont’d
 •
The market in which an individual firm operates or sells its
product to consumers can be categorized broadly into perfect
and imperfect markets.

 The types of market structure are:

 Perfectly competitive market

 Pure monopoly market

 Monopolistically competitive market

 Oligopoly market

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 Perfectly Competitive Market (PCM)
 A perfectly competitive market is a market structure in which
there are a large number of producers (firms) producing a
homogeneous product.
 No individual firm can influence the price of the commodity.
 No buyer or seller has market power or where all buyers and
sellers are price-takers
 A market structure in which firms treat price as a parameter.
 In PCM, the price is determined by the industry (aggregate of
all the firms producing the same product) through the forces
of demand and supply.
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 CHARACTERISTICS OF PCM
 A perfectly competitive market has several distinguishing
characteristics. The main features include:

 Many Buyers and Many Sellers: There are many consumers

with the willingness and ability to buy the product at a certain
price and many producers with the willingness and ability to
supply the product at a certain price.

 Homogeneous Products: The industry or market is defined as

group of firms supplying homogeneous products.

 That is, products supplied by the different firms are exactly the
same.
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 Cont’d
 Free Entry/Exit: Firms have freedom of movement or there is no
barrier that restricts firms from entry into and/or exit out of a
perfectly competitive market.
 Firms Aim to Maximize Profit: The objective of firms in perfect
competition is profit maximization.
 Absence of Government Intervention: There is no government
regulation or intervention in the market in any way.
 Perfect Mobility of Factors of Production: This implies that all
factors of production, such as labor and raw materials, are free to
move from one sector to another or from one firm to another.

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 Cont’d
 Perfect Information for Both Consumers and Producers: It
is assumed that in a PCM both sellers and buyers have complete
information and knowledge of the market.
 Information is costless and there is no uncertainty about
future prices, and no non-price competition exists under
a perfectly competitive market.

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 The Demand Curve of PCM
 PCM firm faces a completely horizontal or perfectly elastic
demand curve for its product indicating that it can sell any
amount of output only at the ongoing market price ( P ).

 The demand curve is also the average revenue (AR) and

marginal revenue (MR) curve.

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 Cont’d
 Total Revenue (TR): it is the total amount of money a firm
receives from a given quantity of its product sold.

 Average revenue (AR):- it is the revenue per unit of item sold.

It is calculated by dividing the total revenue by the amount of
the product sold.

 Marginal Revenue: it is the additional amount of money/

revenue the firm receives by selling one more unit of the
product. Thus, in a perfectly competitive market, a firm‘s average
revenue, marginal revenue and price of the product are equal.

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 Any unit of output sells, the price which is determined by the
intersection of market DD and market SS.

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 Short Run Equilibrium of the Firm
 Shot run is a production period in which the amount of one or
more of the inputs a firm uses is fixed or constant.

 In the short run, the quantity of output produced by a

competitive firm can be increased (decreased) only by
increasing (decreasing) the variable inputs.

 The short run equilibrium of a firm or an industry (a market)

is thus the output level that maximizes profit or minimizes
loss under such conditions determined by using any of the two
approaches.

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 Total Revenue – Total Cost (TR – TC) Approach
 Using this approach, a firm is in equilibrium when total revenue
less total cost is the maximum.

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 Cont’d
 That is, the firm maximizes profit when the difference between
total revenue and total cost is the greatest.

 To the left of point B and to the right of C, STC>TR so that the

firm is in a loss (negative ∏).

 Between B and C, however, the firm is enjoying a positive

profit and it is maximized at the point where the vertical
difference between the TR and STC is largest (at Qe).

 Point B is the break-even point where the firm just covers its
cost of production and operates at zero economic profit.

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 The Marginal (MR-MC) Approach
 The marginal approach is a useful analytical tool at least for the
following reasons.

1. The first reason is that the short run equilibrium output (profit
maximizing level of output) and the associated profit can be
clearly determined by equating marginal revenue to
marginal cost, i.e., MR = MC.

2. The second reason is that comparing the value of MR and MC

to the left and right of short run equilibrium output has an
important implication for a firm’s decision on whether to
expand or reduce output.
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Cont’d
 Cont’d
 The firm in the short- run gets positive or zero or negative
profit depends on the level of ATC at equilibrium.

 Depending on the relationship between price and ATC, the

firm in the short-run may earn;

 Economic profit

 Normal profit or incur loss and

 Decide to shut-down business.

 Cont’d
1. Economic/positive profit: If the AC is below the market price
at equilibrium, the firm earns a positive profit equal to the
area between the ATC curve and the price line up to the profit
maximizing output.

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 Cont’d
2. Loss: If the AC is above the market price at equilibrium, the
firm earns a negative profit (incurs a loss) equal to the area
between the AC curve and the price line.

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 Cont’d
3. Normal Profit (zero profit) or break- even point: If the AC is
equal to the market price at equilibrium, the firm gets zero
profit or normal profit.

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 Cont’d
4. Shutdown point: If P is smaller than AVC, the firm minimizes
total losses by shutting down. Thus, P = AVC is the shutdown
point for the firm.

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 Cont’d
 In summery, PCM Firms decide

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 Illustration
 Suppose the market (per unit) price a firm faces is $10 and its cost function is
given by: TC = Q2 +1. Calculate the profit maximizing level of output and
the maximum profit. Solution:

Equating the market price to the MC will give the equilibrium output. That is,

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 Home Doing Exercise 1
•
 Home Doing Exercise 2
 Suppose that the firm operates in a PCM. The market price of
its product is $10.

 The firm estimates its cost function is TC=2+10q-4q2+q3

A. What level of output should the firm produce to maximize

its profit?

B. Determine the level of profit at equilibrium.

C. What minimum price is required by the firm to stay in the

market?
 The Long Run Equilibrium
 Unlike the short run, the long run is a period of time in which a
firm can vary/change the amounts of all of its inputs.

 Since all inputs are variable in the long run, a firm has the
option of adjusting its output through adjusting its plant size
to achieve maximum profit.

 Adjustment of the number of firms in the industry in response

to profit motives is the key element in establishing the long run
equilibrium.

 Firms are in equilibrium when they have adjusted their plant

size so as to produce at the minimum of the LAC curve.
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 Cont’d


The Long Run Equilibrium of a Firm

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 Cont’d
 In LR, LAC will be tangent to the demand curve defined by the
market price. Therefore, the equality:
 LMC = SMC = SAC = LAC = P = MR is the long run
equilibrium condition of a competitive firm.
 The implication is that competitive firms will earn only normal
profit in the LR.

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 THANKS!!!

THE END OF LECTURE FOUR!!!

THANKS!!!