Module III

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 (Wholeale & 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 Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
 Features of the four market structures

Type of Number Freedom of Nature of Examples Implications for

market of firms entry product demand curve
faced by firm

Perfect Very Homogeneous Cabbages, carrots Horizontal:

competition many Unrestricted (undifferentiated) (approximately) firm is a price taker

Monopolistic Many / Builders, Downward sloping,

Unrestricted Differentiated but relatively elastic
competition several restaurants

Undifferentiated Cement Downward sloping.

Oligopoly Few Restricted Relatively inelastic
or differentiated cars, electrical (shape depends on
appliances reactions of rivals)

Local water Downward sloping:

Monopoly One Restricted or Unique company, train more inelastic than
completely operators (over oligopoly. Firm has
blocked particular routes) considerable
control over price
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 Pure
• Homogeneous Product Market
– Identical, Perfect substitutes
• 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

Quantity
Price per supplied
metre (in Quantity (mn Pressure on
Rs) demanded meters) Price

50 10 25 Falling

40 15 23 Falling

30 20 20 Neutral

20 25 15 Raising

10 30 10 Raising
Short-run equilibrium of industry and firm under perfect
competition

P
S

Pe

D
O

Q (millions)

Industry
Behaviour of price, while supply remains the same

P
S

P1

P2 D1

D2 D
M

O M2 M M1

Q (millions)
Behaviour of price, while demand remains the same

P
S2 S
P1

P S3

P2
D
O M1 M M2
Q (millions)

Industry
 The Price Taker Assumption

P S P

D
Pe

Qe Qmilk Qmilk
Market Supply Demand for Milk
and Demand
 Marginal Revenue

Q P TR MR
0 6 0
6
1 6 6
6
2 6 12
6
3 6 18
6
4 6 24
6
5 6 30
6
6 6 36
6
7 6 42
 Demand = Marginal Revenue

P S P

P = D = MR

Qe Qmilk Qmilk
Market Supply Contented Cow
and Demand Dairy’s Demand
 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 Rs
S

Pe D = AR
AR
= MR

Equilibrium Point
-MC=MR=Price
- MCDcut MR from below &
O MC must be raisingO after Qe
Equilibrium Point
Q (millions) Q (thousands)

(a) Industry (b) Firm

 Short-run equilibrium of industry and firm under perfect
competition

Super Normal
P Rs
Profit
S (AC < Price) MC AC

Pe D = AR
AR
AC = MR

D
O O Qe
Q (millions) Q (thousands)

(a) Industry (b) Firm

 Loss minimising under perfect competition
Loss (AC > Price)

P Rs AC
S MC

AC
D1 = AR1
P1 AR1
= MR1

D
O O Qe
Q (millions) Q (thousands)

(a) Industry (b) Firm

 Normal Profit

Normal Profit
MC = MR
P RsAC = AR
S MC
AC

D2 = AR2
P2 AR2
= MR2
D2
O O

Q (millions) Q (thousands)

(a) Industry (b) Firm

 Short-run shut-down point

P Rs AC
S MC
AVC

D2 = AR2
P2 AR2
= MR2
D2
O O

Q (millions) 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
New firms enter to normalprofits
P Rs
S1
Se

LRAC
P1 AR1 D1
PL ARL DL

D
O O QL
Q (millions) 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

O Q
 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?
Thank You