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?
