Market StructureMarket Structure

Types of Market StructureTypes of Market StructureMarket StructureMarket Structure No. of firms No. of firms

and degree and degree of of production production differentiatiodifferentiationn

Nature of Nature of industry industry where where prevalentprevalent

Control over Control over priceprice

Method of Method of MarketingMarketing

Perfect CompetitionPerfect Competition Large No. of Large No. of firms with firms with identical identical productsproducts

Financial Financial markets and markets and some farm some farm productsproducts

NoneNone Market Market Exchange or Exchange or AuctionAuction

Imperfect CompetitionImperfect Competition

(a)(a) Monopolistic Monopolistic CompetitionCompetition

Many firms Many firms with real or with real or perceived perceived product product differentiatiodifferentiationn

ManufacturinManufacturing: Tea, g: Tea, toothpaste, toothpaste, TV, shoes, TV, shoes, etcetc

SomeSome Competitive Competitive Advertising Advertising Quality Quality rivalryrivalry

(b)(b) OligopolyOligopoly Little or no Little or no product product differentiatiodifferentiationn

Aluminum, Aluminum, Steel, Cars, Steel, Cars, Cigarettes, Cigarettes, etc. etc.

SomeSome Competitive Competitive Advertising Advertising Quality Quality rivalryrivalry

(c)(c) MonopolyMonopoly A single A single producer producer without without close close substitutesubstitute

Public Public Utilities: Utilities: Telephone, Telephone, electricity, electricity, etcetc

Considerable Considerable but but regulatedregulated

Promotional Promotional advertising if advertising if supply is supply is largelarge

Characteristics of Perfect Characteristics of Perfect CompetitionCompetition

• Large Number of sellers and buyersLarge Number of sellers and buyers

• Homogeneous ProductsHomogeneous Products

• Perfect mobility of factors of productionPerfect mobility of factors of production

• Free entry and exit of firmsFree entry and exit of firms

• Perfect knowledgePerfect knowledge

• Absence of collusion or artificial restraintAbsence of collusion or artificial restraint

• No government InterventionNo government Intervention

Price determination under Price determination under perfect competitionperfect competition

• In a perfect competitive market, the In a perfect competitive market, the main problem for a profit maximizing main problem for a profit maximizing firm is not to determine the price of its firm is not to determine the price of its product but to adjust its output to the product but to adjust its output to the market price so that profit is maximum. market price so that profit is maximum. Price determination is analyzed under Price determination is analyzed under three different time periods:three different time periods:

1.1. Market period or very short runMarket period or very short run2.2. Short runShort run3.3. Long runLong run

Pricing in market periodPricing in market period

• In market period, the total output of In market period, the total output of a product is fixed. Each firm has a a product is fixed. Each firm has a stock of commodity to be sold. The stock of commodity to be sold. The stock of goods with all the firms stock of goods with all the firms makes the total supply Since the makes the total supply Since the stock is fixed, the supply curve is stock is fixed, the supply curve is inelastic. inelastic.

Pricing in the short runPricing in the short run

• A short run is by definition, a period A short run is by definition, a period in which firms can neither change in which firms can neither change their size nor quit, nor can new firms their size nor quit, nor can new firms enter the industry. It is possible to enter the industry. It is possible to increase or decrease the supple by increase or decrease the supple by increasing or decreasing the variable increasing or decreasing the variable inputs. In short term, the supply inputs. In short term, the supply curve is elastic. curve is elastic.

• Profit is maximum at the level of Profit is maximum at the level of output where MR = MC. Since price is output where MR = MC. Since price is fixed at PQ, Firms AR = PQ. If AR is fixed at PQ, Firms AR = PQ. If AR is given MR = AR. The firms MR is shown given MR = AR. The firms MR is shown by the AR = MR line. The firms upward by the AR = MR line. The firms upward sloping Mc curve intersects AR = MR at sloping Mc curve intersects AR = MR at point E. At point E, MR = MC. Point E is point E. At point E, MR = MC. Point E is therefore the firms Equilibrium Point. therefore the firms Equilibrium Point. An ordinate EM drawn from point E. An ordinate EM drawn from point E.

Pricing in the long runPricing in the long run

• In contrast to the short run, firms can adjust In contrast to the short run, firms can adjust their size or quit the industry and new firms their size or quit the industry and new firms can enter the industry. If the market price is can enter the industry. If the market price is such that AR>AC, then the firms make such that AR>AC, then the firms make economic or super-normal profit. As a economic or super-normal profit. As a result, new firms get attracted to the result, new firms get attracted to the industry causing a rightward shift in the industry causing a rightward shift in the supply curve. Similarly if AR< AC, then the supply curve. Similarly if AR< AC, then the firm makes losses. This causes a leftward firm makes losses. This causes a leftward shift in the supply curve. The rightward shift shift in the supply curve. The rightward shift reduces the prices while the leftward shift reduces the prices while the leftward shift increases it. This goes on until AR = AC.increases it. This goes on until AR = AC.