CHAPTER SEVEN
MARKET STRUCTURES
Market
The term ‘market’ is usually used to mean the place where buyers and sellers meet to transact business. In Business
studies, however, the term ‘market’ is used to refer to the interaction of buyers and sellers where there is an
exchange of goods and services for a consideration.
The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but
any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods
and services are available, made known and used regularly.
In economics market structure refers to the organization and the number of sellers and buyers who meet to
transact exchanges with objective of transfer of ownership for goods and services. The main types of markets
considered are;
i. Factor markets
ii. Product markets
Factor market;
Factor market is a market where factors of production (land, raw materials, capital and technology) are bought and
sold.
Firms buy productive resources in return for making factor payments at factor prices. The interaction between
product and factor markets involves the principle of derived demand. Derived demand refers to the demand for
productive resources, which is derived from the demand for final goods and services or output. For example, if
consumer demand for new cars rises, producers will respond by increasing their demand for the productive inputs or
resources used to produce new cars.
Product market;
It is a particular market in which specific goods and services are sold and with particular features that distinguish it
from the other markets. The features are mainly in terms of the number of sellers and buyers and whether the goods
sold are homogeneous or heterogeneous. Product market is also referred to as market structure. Markets may be
classified according to the number of firms in the industry or the type of products sold in them.
Types of product market
The number of firms operating in a particular market will determine the degree of competition that will exist in a
given industry. In some markets there are many sellers meaning that the degree of competition is very high, where as
in other markets there is no competition because only one firm exists.
When markets are classified according to the degree of competition, there are four main types, these are;
i. Perfect competition
ii. Pure monopoly (monopoly)
iii. Monopolistic competition
iv. Oligopoly
1. Perfect competition
The word ‘perfect’ connotes an ideal situation. This kind of situation is however very rare in real life; a perfect
competition is therefore a hypothetical situation.
This is a market structure in which there are many small buyers and many sellers who produce a homogeneous
product. The action of any firm in this market has no effect on the price and output levels in the market since its
production is negligible.
Features of Perfect Competition
a. Large number of buyers and sellers: The buyers and sellers are so many that separate actions of each one of
them have no effect on the market. This implies that no single buyer or seller can influence the price of the
commodity. This is because a single firms (sellers) supply of the product is so small in relation to the total
supply in the industry. Similarly, the demand of one buyer is so small compared to the total demand of one
buyer is so small compared to the total demand in the market that he/she cannot influence the price.
b. Firms (suppliers) in such a market structure are therefore price takers i.e. they accept the prevailing
market price for their products.
ECONOMICS CHAPTER 7 MARKET STRUCTURES NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, c. Identical or homogeneous products: Commodities from different producers are identical in all aspects e.g.
size; brand and quality such that one cannot distinguish them. Buyers cannot therefore show preference for the
products of one firm over those of the other.
d. Perfect knowledge of the market: Each buyer and seller has perfect knowledge about the market and therefore
no one would affect business at any price other than the equilibrium price (market price).If one firm raises the
price of its commodity above the prevailing market price, the firm will make no sale since consumers are aware
of other firms that are offering a lower price i.e. market price. All firms (sellers) are also assumed to know the
profits being made by other firms in the industry (in selling the product)
e. Freedom of entry or exit in the industry; The buyers and sellers have the freedom to enter and leave the
market at will i.e. firms are free to join the market and start production so long as the prevailing market price for
the commodity guarantees profit. However if conditions change the firms are free to leave in order to avoid
making loss.
f. In this market structure, it is assumed that no barrier exists in entering or leaving the industry.
g. Uniformity of buyers and sellers; All buyers are identical in the eyes of the seller. There are therefore, no
advantages or disadvantages of selling to particular buyers. Similarly, all the sellers are identical and hence
there would be no special benefit derived from buying from a certain supplier.
h. No government interference; the government plays no part in the operations of the industry. The price
prevailing in the market is determined strictly by the interplay of demand and supply. There should be no
government intervention in form of taxes and subsidies, quotas, price controls and other regulations.
i. No excess supply or demand; the sellers are able to sell all what they supply into the market. This means that
there is no excess supply. Similarly, the buyers are able to buy all what they require with the result that there is
no difficult in supply.
j. Perfect mobility of factors of production; The assumption here is that producers are able to switch factors of
production from producing one commodity to another depending on which commodity is more profitable to
sell. Factors of production are also freely movable from one geographical area to another.
k. No transport costs; the assumption here is that all sellers are located in one area, therefore none of them incurs
extra transport costs or carriage of goods. The sellers cannot hence charge higher prices to cover the cost of
transport. Buyers, on the other hand, would not prefer some sellers to others in an attempt to cut down on
transport costs.
The market (perfect competition) has normal demand and supply curves. The individual buyers demand curve is
however; perfectly elastic since one can buy all what he/she wants at the equilibrium price. Similarly, the individual
sellers supply curve is also perfectly elastic because one can sell all what he/she produces at the equilibrium price.
Perfect competition market hold on the following assumptions;
a. There are no transport costs in the industry
b. Buyers and sellers have perfect knowledge of the market
c. Factors of production are perfectly mobile
d. There is no government interference
Examples of perfect competitions are very difficult to get in the real life but some transactions e.g. on the stock
exchange market, are very close to this.
Criticism of the concept of perfect competition
In reality, there is no market in which perfect competition exists. This is due to the following factors:
a. Very few firms produce homogenous products. Even if the products were fairly identical, consumers are
unlikely to view them as such.
b. In real situations, consumers prefer variety for fuller satisfaction of their wants; hence homogenous products
may not be very popular in these circumstances.
c. There is a common tendency towards large-scale operation. This tendency works against the assumption of
having many small firms in an industry.
d. Firms are not found in one place to cut down on transport costs as this market structure requires.
e. Governments usually interfere in business activities in a variety of ways in the interest of their citizens. The
assumption of non-interference by the state is therefore unrealistic in real world situations.
f. Information does not freely flow in real markets so as to make both sellers and buyers fully knowledgeable of
happenings in all parts of a given market.
2. MONOPOLY
ECONOMICS CHAPTER 7 MARKET STRUCTURES NOTES PREPARED BY MR. ANTONY AMBIA Page 2
MARKET STRUCTURES
Market
The term ‘market’ is usually used to mean the place where buyers and sellers meet to transact business. In Business
studies, however, the term ‘market’ is used to refer to the interaction of buyers and sellers where there is an
exchange of goods and services for a consideration.
The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but
any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods
and services are available, made known and used regularly.
In economics market structure refers to the organization and the number of sellers and buyers who meet to
transact exchanges with objective of transfer of ownership for goods and services. The main types of markets
considered are;
i. Factor markets
ii. Product markets
Factor market;
Factor market is a market where factors of production (land, raw materials, capital and technology) are bought and
sold.
Firms buy productive resources in return for making factor payments at factor prices. The interaction between
product and factor markets involves the principle of derived demand. Derived demand refers to the demand for
productive resources, which is derived from the demand for final goods and services or output. For example, if
consumer demand for new cars rises, producers will respond by increasing their demand for the productive inputs or
resources used to produce new cars.
Product market;
It is a particular market in which specific goods and services are sold and with particular features that distinguish it
from the other markets. The features are mainly in terms of the number of sellers and buyers and whether the goods
sold are homogeneous or heterogeneous. Product market is also referred to as market structure. Markets may be
classified according to the number of firms in the industry or the type of products sold in them.
Types of product market
The number of firms operating in a particular market will determine the degree of competition that will exist in a
given industry. In some markets there are many sellers meaning that the degree of competition is very high, where as
in other markets there is no competition because only one firm exists.
When markets are classified according to the degree of competition, there are four main types, these are;
i. Perfect competition
ii. Pure monopoly (monopoly)
iii. Monopolistic competition
iv. Oligopoly
1. Perfect competition
The word ‘perfect’ connotes an ideal situation. This kind of situation is however very rare in real life; a perfect
competition is therefore a hypothetical situation.
This is a market structure in which there are many small buyers and many sellers who produce a homogeneous
product. The action of any firm in this market has no effect on the price and output levels in the market since its
production is negligible.
Features of Perfect Competition
a. Large number of buyers and sellers: The buyers and sellers are so many that separate actions of each one of
them have no effect on the market. This implies that no single buyer or seller can influence the price of the
commodity. This is because a single firms (sellers) supply of the product is so small in relation to the total
supply in the industry. Similarly, the demand of one buyer is so small compared to the total demand of one
buyer is so small compared to the total demand in the market that he/she cannot influence the price.
b. Firms (suppliers) in such a market structure are therefore price takers i.e. they accept the prevailing
market price for their products.
ECONOMICS CHAPTER 7 MARKET STRUCTURES NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, c. Identical or homogeneous products: Commodities from different producers are identical in all aspects e.g.
size; brand and quality such that one cannot distinguish them. Buyers cannot therefore show preference for the
products of one firm over those of the other.
d. Perfect knowledge of the market: Each buyer and seller has perfect knowledge about the market and therefore
no one would affect business at any price other than the equilibrium price (market price).If one firm raises the
price of its commodity above the prevailing market price, the firm will make no sale since consumers are aware
of other firms that are offering a lower price i.e. market price. All firms (sellers) are also assumed to know the
profits being made by other firms in the industry (in selling the product)
e. Freedom of entry or exit in the industry; The buyers and sellers have the freedom to enter and leave the
market at will i.e. firms are free to join the market and start production so long as the prevailing market price for
the commodity guarantees profit. However if conditions change the firms are free to leave in order to avoid
making loss.
f. In this market structure, it is assumed that no barrier exists in entering or leaving the industry.
g. Uniformity of buyers and sellers; All buyers are identical in the eyes of the seller. There are therefore, no
advantages or disadvantages of selling to particular buyers. Similarly, all the sellers are identical and hence
there would be no special benefit derived from buying from a certain supplier.
h. No government interference; the government plays no part in the operations of the industry. The price
prevailing in the market is determined strictly by the interplay of demand and supply. There should be no
government intervention in form of taxes and subsidies, quotas, price controls and other regulations.
i. No excess supply or demand; the sellers are able to sell all what they supply into the market. This means that
there is no excess supply. Similarly, the buyers are able to buy all what they require with the result that there is
no difficult in supply.
j. Perfect mobility of factors of production; The assumption here is that producers are able to switch factors of
production from producing one commodity to another depending on which commodity is more profitable to
sell. Factors of production are also freely movable from one geographical area to another.
k. No transport costs; the assumption here is that all sellers are located in one area, therefore none of them incurs
extra transport costs or carriage of goods. The sellers cannot hence charge higher prices to cover the cost of
transport. Buyers, on the other hand, would not prefer some sellers to others in an attempt to cut down on
transport costs.
The market (perfect competition) has normal demand and supply curves. The individual buyers demand curve is
however; perfectly elastic since one can buy all what he/she wants at the equilibrium price. Similarly, the individual
sellers supply curve is also perfectly elastic because one can sell all what he/she produces at the equilibrium price.
Perfect competition market hold on the following assumptions;
a. There are no transport costs in the industry
b. Buyers and sellers have perfect knowledge of the market
c. Factors of production are perfectly mobile
d. There is no government interference
Examples of perfect competitions are very difficult to get in the real life but some transactions e.g. on the stock
exchange market, are very close to this.
Criticism of the concept of perfect competition
In reality, there is no market in which perfect competition exists. This is due to the following factors:
a. Very few firms produce homogenous products. Even if the products were fairly identical, consumers are
unlikely to view them as such.
b. In real situations, consumers prefer variety for fuller satisfaction of their wants; hence homogenous products
may not be very popular in these circumstances.
c. There is a common tendency towards large-scale operation. This tendency works against the assumption of
having many small firms in an industry.
d. Firms are not found in one place to cut down on transport costs as this market structure requires.
e. Governments usually interfere in business activities in a variety of ways in the interest of their citizens. The
assumption of non-interference by the state is therefore unrealistic in real world situations.
f. Information does not freely flow in real markets so as to make both sellers and buyers fully knowledgeable of
happenings in all parts of a given market.
2. MONOPOLY
ECONOMICS CHAPTER 7 MARKET STRUCTURES NOTES PREPARED BY MR. ANTONY AMBIA Page 2
