Market Structure
Market:- A market is the area where buyers and sellers contact each other and exchange goods and services.
Market is an area or atmosphere of potential exchange -Phillip Kotler
Market structure identifies how a market is made up in terms of:
- The number of firms in the industry
- The nature of the product produced
- The degree of monopoly power each firm has
- The degree to which the firm can influence price
- Firms behavior - pricing strategies, non-price competition, output levels, Profit levels
- The extent of barriers to entry
Perfect Competition
A market in which there are many sellers and buyers ,the products are homogeneous and sellers can easily enter and exit from market.
features of perfect competition:-
- Large number of buyers and sellers
- Homogeneous product
- Free entry and exit
- Profit maximisation
- No government regulation
- Perfect mobility of factors of production
- Perfect knowledge
Determinants of Price under Perfect Competition:-
• TR and TC approach: Seller aims to maximise profit (profit = TR-TC), reaches equilibrium
when difference between TR and TC is maximised
• MR and MC approach: Profit is maximised when MR=MC. Since only one price in the market
D=AR=MR
* Long Run Equilibrium: In the long run, with the entry of new firms in the industry, the price of the product will go down as a result of the increase in supply of output and also the cost will go up as a result of more intensive competition for factors of production. The firms will continue entering the industry until the price is equal to average cost so that all firms are earning only normal profits.
* Short-Run Equilibrium of the Firm: A firm is in equilibrium in the short-run when it has no tendency to expand or contract its output and wants to earn maximum profit or to incur minimum losses. The short-run is a period of time in which the firm can vary its output by changing the variable factors of production.
Monopolistic Competition
Monopolistic competition is a form of market structure in which a large number of independent firms are supplying products that are slightly differentiated from the point of view of buyers.
Features of monopolistic competition
- Product differentiation
-There are large number of independent sellers and buyers in the market.
- some control over price
- product variation
- free entry and exit
- heavy expenditure on advertisement and other selling cost
- Lack of perfect knowledge
- less mobility
In other words, product differentiation is the only characteristic that distinguishes monopolistic competition from perfect competition.
Over the short-run, firms can usually gain some abnormal profit, but over the long run, other firms entering the market due to the low entry barriers will compete and make the price lower.
In the long run, there are no abnormal profits because of the features of Monopolistic competition. There are a few large firms, but many small firms that will compete for profit and thus drive the price down. Also, low entry barriers mean new firms will enter the market and further add competition.
Monopoly:
Definition:- there must be a single producer or seller of a product.
Features of monopoly
- Single seller
- Large number of buyers
- No close substitutes
- Price discrimination
- No selling costs
- Relatively inelastic demand curve
- DAR>MR
- AR&MR curves are downward sloping
- No free entry and exit of firms
Price determination of monopoly :-
• One and only one firm produces and sells a particular commodity or a service.
• There are no rivals or direct competitors of the firm.
• No other seller can enter the market for whatever reasons legal, technical, or economic.
• Monopolist is a price maker. He tries to take the best of whatever demand and cost
conditions exist without the fear of new firms entering to compete away his profits.
• Since all of the firms sell the identical product, the individual sellers are not distinctive.
Buyers care solely about finding the seller with the lowest price.
• Monopolist will go on producing as long as MR>MC.
Accordingly, the standard definition for market power is to define it as the divergence between price and marginal cost, expressed relative to price. In Mathematical terms we may define it as − L = (P – MC)
Oligopoly
oligopoly is that market situation in which there are few firms selling homogeneous or differentiated product.
pure oligopoly :- pure oligopoly found industrial product like cement, zinc, aluminium.
imperfect oligopoly:- .imperfect oligopoly found consumers product like automoblies, soaps,TV etc
Features of oligopoly
- Few firms
- Advertising and selling cost
- Group behaviour
- Interdependence
- Real world situation
Indeterminateness of demand curve
Kinked demand Curve for Oligopolist:
he oligopolist faces a kinked‐demand curve because of competition from other oligopolists in the market. If the oligopolist increases its price above the equilibrium price P, it is assumed that the other oligopolists in the market will not follow with price increases of their own. If the oligopolist reduces its price below P, it is assumed that its competitors will follow suit and reduce their prices as well.
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