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,)
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

Features of the four market structures

Features of the four market structures

Features of the four market structures

Features of the four market structures

Features of the four market structures

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
Market

Homogeneous Product
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

Short-run equilibrium of industry and firm under perfect

competition

P
S

Pe

D
O
Q
(millions)
Industry

Perfect Competition: Price & Revenue

No: Price Total Avera Margi
Reve ge
nal
Outp
nue Reve Reve
ut
nue nue
1
6
6
6
2
3
4
5
6
7

6
6
6
6
6
6

12
18
24
30
36
42

6
6
6
6
6
6

6
6
6
6
6
6

Hence we say under perfect competition, Price=AR=MR

P=AR=MR

P
P = AR = MR

D
Qe
Market Supply and
Demand

PERFECT COMPETITION
Short-run equilibrium of the firm
Price
given by market demand and supply

Output
Where MC=MR

Profit
= TR-TC
(AR AC) Q
possible supernormal profits

EQUILIBRIUM OF INDUSTRY AND FIRM UNDER PERFECT

COMPETITION

Rs
S
M
C

Pe

D = AR
=
MR

AR

O
Q
(millions)
(a) Industry

Equilibrium Point
MC=MR=Price
MCDcut MR from below &
O after
MC must be raising
Equilibrium Point

Qe
Q
(thousands)
(b) Firm

Short-run equilibrium of industry and firm under perfect

competition

P
S

Pe

Super Normal
Profit
Rs
(AC < Price)

M
C

D = AR
=
MR

AR
AC

D
O

AC

Qe

Q
(millions)

Q
(thousands)

(a) Industry

(b) Firm

Loss minimising under perfect competition

Loss (AC >
Price)

Rs

M
C

A
C
AR

P1

D1 = AR1
1

= MR1

D
O

A
C

Qe

Q
(millions)

Q
(thousands)

(a) Industry

(b) Firm

Normal Profit
Normal Profit
MC = MR
AC = AR

P
S

P2

Rs

M
C

D2 = AR2

AR2

= MR2

D2
O

AC

O
Q
(millions)

Q
(thousands)

(a) Industry

(b) Firm

Short-run shut-down point

Rs
S

P2

M
C

D2 = AR2

AR2

= MR2

D2
O

A
C
AVC

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
LRAC = AC = MC = MR = AR

Long-run equilibrium under perfect competition

New firms enter

Profits return
Supernormal
to normalprofits

Rs

S1
Se

P1

AR1

LRA
C
D1

PL

ARL

DL

D
O

QL

Q
(millions)

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
O

Firm is in equilibrium when MC =MR

Firm maximizes the profit when the price
exceeds the AC.
In the short run firms earn either
supernormal profits(when AR exceeds
AC),losses(when AC exceeds the AR)or
will be forced to shut down(when AR falls
short of AVC)

LONG RUN EQUILIBRIUM

Long run shows the entry and exit of the
firms into the industry. If firms make
supernormal profits in the SR, new firms
will enter the industry till the excess
profits get wiped out.
Similarly, If firms are making losses
,existing firms will quit the industry so that
the remaining ones will be able to make at
least normal profits.
Thus, under long run , firm and industry
under perfectly competitive market will