APPLIED ECONOMICS Lesson 6

APPLIED ECONOMICS
Lesson 6: Market structures

Meaning of Market:
The term “market” refers to a specific place where merchandise is purchased and sold. In economics, the term “market”
does not mean a specific place but the whole area where the buyers and sellers of a product are spread.
Characteristics of Market:
1. An Area
In economics, a market does not mean a specific place but the whole region where sellers and buyers of a product are
spread. Modem modes of communication and transport have made the market area for a product exceptionally wide.
2. One Commodity
In economics, a market isn't related to a place but to a specific item. Subsequently, there are separate markets for
different commodities. For example, there are separate markets for clothes, grains, jewelry, etc.
3. Buyers and Sellers
The presence of buyers and sellers is necessary for the sale and purchase of an item within the market. In the modem
age, the presence of buyers and sellers is not essential within the market since they can do exchanges of products
through letters, telephones, business agents, internet, etc.
4. Free Competition
There should be free competition among buyers and sellers within the market. This competition is in connection to the
cost determination of a product among buyers and sellers.
5. One Price
The cost of a product is the same in the market because of free competition among buyers and sellers.
Based on above elements of a market, its general definition may be as follows:

The market for a product refers to the whole region where buyers and sellers of that product are spread and there is
such free competition that one price for the item prevails within the whole region.
What are Market Structures?

Meaning: Market structure refers to the nature and degree of competition within the market for goods and services. The
structures of market both for goods market and service (factor) market are decided by the nature of competition
prevailing in a specific market
Determinants:
1. Number and Nature of Sellers: They extend from large number of sellers in perfect competition to a single seller in
pure monopoly, to two sellers in duopoly, to a couple of sellers in oligopoly, and to numerous sellers of differentiated
products.
2. Number and Nature of Buyers: If there is a single buyer within the market, this is buyer’s monopoly and is called
monopsony market. Such markets exist for local labor employed by one large employer. There may be two buyers who
act jointly within the market. This is often called duopsony market. They may moreover be a couple of organized buyers
of a product. This is known as oligopsony. Duopsony and oligopsony markets are usually found for cash crops such as
rice, sugarcane, etc. when nearby manufacturing plants buy the entire crops for processing.
3. Nature of Product: It is the nature of product that determines the market structure. In the event that there's product
differentiation, products are close substitutes, and the market is characterized by monopolistic competition. On the
other hand, in case of no product differentiation, the market is characterized by perfect competition. And if a product is
totally distinctive from other products, it has no close substitutes and there's pure monopoly within the market.
4. Entry and Exit Conditions: The conditions for entry and exit of firms in a market depend upon profitability or loss in a
specific market. Profits in a market will attract the entry of new firms and losses lead to the exit of weak firms from the
market. In a perfect competition market, there's flexibility of entry or exit of firms.
5. Economies of Scale: Firms that achieve large economies of scale in production develop large in comparison to others
in an industry. They tend to weed out the other firms with the result that a number of firms are left to compete. This
leads to the crisis of oligopoly. If as it were one firm attains economies of scale to such a large degree that it can meet
the whole market request, there's monopoly.
Forms of Market Structure:
1. Pure (Perfect) Competition
Perfect competition is a market in which:
- Each buyer and seller acts independently.
- Examples: agricultural markets such as wheat, cereals foreign exchange markets, etc.
Characteristics:
Number of Sellers - large number of buyers and sellers.
Products - all firms sell the exact same product. Price - well-informed about products and prices.
Barriers to exit and entry - Competitors are free to enter into the market, conduct business or leave the market.
2. Monopoly
Monopoly is a market in which:
- It can control the quantity supplied.
- Examples are open transportations like MRT, compute program producer like Microsoft.
Characteristics:
Number of Sellers - A single seller and no competitor.
Products— Unique and highly predictable product or no substitutes.
Price - The firm is the price maker, and the firm has significant control over the price.
Barriers to exit and entry - there are barriers to entry of the market to prevent competition.
3. Oligopoly
Characteristics:
Number of Sellers - Few large firms in the industry.
Products - Standardized or differentiated products/goods.
Price - The firms set and control their prices.
Barriers to exit and entry - difficult and huge capital investment may be the obstruction to enter.
Examples: Aluminum and steel, oil and gas, car, carriers, amusement, lodging and eateries, coffee shops, etc.
4. Monopolistic Competition
Characteristics: Number of Sellers - A large number of firms compete.
Products - standardized or differentiated products/goods
Price - Firms compete on product quality, price and marketing.
Barriers to exit and entry - easier entry and exit.
Examples: makeup, pieces of clothing, medicines, shoes, car washes, car services, etc.

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APPLIED ECONOMICS

Lesson 6: Market structures

Based on above elements of a market, its general definition may be as follows:

What are Market Structures?

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