Market Structure

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, 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

Perfect 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

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
possible supernormal profits

Equilibrium of industry and firm under perfect competition

P
S

Rs

Pe

AR Equilibrium Point -MC=MR=Price - MCD MR from below & cut O MC must be raising after 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
The long run
long-run equilibrium of the firm
all supernormal profits competed away

Long-run equilibrium under perfect competition

New firms enter
P
S1 Se LRAC P1 PL AR1 D1 DL

Supernormal profits

Rs

Profits return to normal

ARL

O
Q (millions)

QL Q (thousands)

(a) Industry

(b) Firm

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

PERFECT COMPETITION

Market Structure and Firm Behaviour Competitive behaviour refers to the extent to which individual firms compete with each other to sell their products. Competitive market structure refers to the power that individual firms have over the market - perfect competition occurring where firms have no market power and hence no need to react to each other. Elements of the Theory of Perfect Competition The theory of perfect competition is based on the following assumptions: firms sell a homogenous product; customers are well informed; each firm is a price-taker; the industry can support many firms, which are free to enter or leave the industry.

PERFECT COMPETITION

Short-run Equilibrium
Any firm maximises profits producing the output where its marginal cost curve intersects the marginal revenue curve from below - or by producing nothing if average cost exceeds price at all outputs. A perfectly competitive firm is a quantity-adjuster, facing a perfectly elastic demand curve at the given market price and maximising profits by choosing the output that equates its marginal cost to price. The supply curve of a firm in perfect competition is its marginal cost curve, and the supply curve of a perfectly competitive industry is the sum of the marginal cost curves of all its firms. The intersection of this curve with the market demand curve for the industrys product determines market price.

PERFECT COMPETITION
The Allocative Efficiency of Perfect Competition Perfect competition produces an optimal allocation of resources because it maximises the sum of consumers and producers surplus by producing equilibrium where marginal cost equals price. Long-run Equilibrium Long-run industry equilibrium requires that each individual firm be producing at the minimum point of its LRAC curve and be making zero profits. The long-run industry supply curve for a perfectly competitive industry may be [i] positively sloped, if input prices are driven up by the industrys expansion, [ii] horizontal, if plants can be replicated and factor prices remain constant, or [iii] negatively sloped, if some other industry that is not perfectly competitive produces an input under conditions of falling long-run costs.

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