8
(Forms of Market, Producer’s Equilibrium and Price
and Output Determination in Perfect Competition)
QUICK
1. Market: Market is a system or a mechanism or an arrangement by which buyers and sellers of a
commodity are brought in close contact for the purchase and sale of the commodity.
2. Forms of Market: There are four main forms of market:
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition and
(d) Oligopoly
(a) Perfect Competition: It means a form of market where there are large number of buyers and sellers of a
commodity which is homogeneous in nature which is sold with no control over price by an individual firm at
a fix price.
It is a market situation in which no individual firm can influence the market price. Market price is
determined by the industry, i.e., by the collective action of all buyers and sellers.
Features:
(i) The number of sellers and buyers is very large. It is so large that no individual seller or buyer can influence
the market price of the commodity.
Implications: Buyers and sellers of the product are just price takers. A competitive firm faces a perfectly
elastic demand curve. Also have no bargaining power in the market.
(ii) All sellers (or firm) sell homogeneous products.
Implication: This feature ensures uniform price in the market.
(iii) The entry or exit of firm in the long run is free.
Implication: This feature ensures that there are neither abnormal profits nor losses by any firm in the long
run.
(iv) Buyers and sellers have perfect knowledge about the market.
Implication: Uniform price will prevail in the market.
(v)Factors or production are perfectly mobile.
Implication: This feature ensures the uniform cost structure of all firms.
(vi) Transport costs are zero.
Implication: Transport costs do not affect the market price.
,Pure Market: Pure competition exists when there are a great number of sellers whose products are all
identical and no one seller controls a large enough part of the total output to exert an appreciable influence
on price. Thus it may be concluded that pure competition is the state of market that satisfies following three
conditions:
(i) Large number of buyers and sellers.
(ii) Homogeneous product.
(iii)Free entry and exit of firms.
(b) Monopoly: Monopoly is a market situation in which there is only one firm producing a commodity. The
commodity has no substitutes in the market. Indian Railways is an example of monopoly.
Features:
(i)There is only one seller (or producer) of a product in the market.
Implication: Firm is a price-maker. It usually exploits the buyers by charging a high price of its product.
(ii) There are no close substitutes of the product in the market.
Implication: Buyers have to purchase the commodity from the monopolist or go without it.
(iii) There are barriers to the entry of new firms.
Implication: Firm earns abnormal profits in the long run.
(iv) Firm has full control over price.
Implication: Firm is price market.
(v) Price Discrimination: The act of selling the same product at different prices to different buyers is known
as price discrimination. Monopolist can easily do price discrimination because he is the only seller of the
product in the market. If a monopolist adopts the policy of price discrimination the situation is called
discriminating monopoly.
(c) Monopolistic Competition: Monopolistic competition is a form of market which like perfect competition
has large number of sellers and allows the firm the freedom of entry and exit and unlike perfect competition
it has product differentiation and partial control over the price of the product.
Features:
(i) There is a large number of sellers and buyers.
Implication: No individual seller can influence the market price in a big way.
(ii) Product sold by different sellers are differentiated on account of different brand names, packing, colour,
shape, customer service.
Implication: This feature makes monopolistic competition different from perfect competition. Firms are
price makers.
(iii) Firms are free to enter or leave the industry.
Implication: All firms earn only normal profits in the long run.
(iv) Buyers and sellers do not have complete knowledge about the market.
Implication: Products sell at different price in the market.
(v) Firms spend a lot of money to promote their sales.
Implication: Market demand of the product rises. Selling costs also tends to raise the costs.
(d) Oligopoly:
Meaning: Oligopoly is a market structure characterized by a small number of large firms which are mutually
dependent on each other for taking price and output decisions.
Classification:
(i) Perfect and Imperfect oligopoly: If the firms produce homogeneous products, it is called perfect
, oligopoly. Steel industry is an example of perfect oligopoly. If the firms produce differentiated product, it is
called imperfect oligopoly or differentiated oligopoly. Automobile industry is one example of imperfect
oligopoly.
(ii) Non-collusive and Collusive Oligopoly: If the firms compete with each other, it is called non-collusive
oligopoly. If the firms co-operate with each other rather than compete in setting the price and output, it is
called collusive oligopoly.
Features:
(i) Oligopoly is composed of few large firms.
Implication: Action of each firm not only influences itself but also other firms are affected by it.
(ii) There is high degree interdependence among the firms.
Implication: This feature makes oligopoly different from other forms of market. Demand curve of a firm here
is indeterminate.
(iii) There are barriers to the entry of firms.
Implication: Due to entry barriers, the number of firms in the industry remains small or limited.
(iv) There exists non-price competition. Firms normally are afraid of price-competition which may lead to
price war. Product differentiations and advertisement are the two main forms of non-price competition.
Implication: Prices remain rigid in the market.
(v) Imperfect Knowledge: Buyers and sellers do not have perfect knowledge about the market of the
product. Due to large amount of selling costs, consumers begin to know.
Producers' Equilibrium
1. Who is a Producer? Producer is a person or organization who takes decisions about to what to produce and
how to produce to earn profit.
2. Producer's Equilibrium: A producer is said to be in equilibrium when he produces an output level at which
his profits are maximum.
3. Equilibrium Conditions: There are two method for the determination of producer's equilibrium:
(i) TR-TC Approach: A producer will be in equilibrium at that level of output where the difference between
TR-TC is maximum. If profit (TR-TC) is maximum at more than one output level, the output level beyond
which profits starts declining in the equilibrium output.
(ii) MR-MC Approach: Usually in microeconomics MR-MC approach is used to determine the position of
producer's equilibrium. The conditions of equilibrium according to this approach are:
(a) MC = MR (b) MC must cut MR from below.
Determination of Price and Output in a Perfect Competition
Firm is an individual enterprise which is a price taker & industry is a group of competing firms selling a
product. Industry is a price maker.
1. Equilibrium in an Industry: In perfect competition no single firm or consumer can influence the price.
Price is determined by the industry with the help of demand & supply forces. Demand curve of an industry is
downward sloping representing aggregate demand of an economy, on the other hand is upward sloping
aggregate supply of an economy. The determination of price will take at point where demand & supply curve
are intersecting each other.
(Forms of Market, Producer’s Equilibrium and Price
and Output Determination in Perfect Competition)
QUICK
1. Market: Market is a system or a mechanism or an arrangement by which buyers and sellers of a
commodity are brought in close contact for the purchase and sale of the commodity.
2. Forms of Market: There are four main forms of market:
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition and
(d) Oligopoly
(a) Perfect Competition: It means a form of market where there are large number of buyers and sellers of a
commodity which is homogeneous in nature which is sold with no control over price by an individual firm at
a fix price.
It is a market situation in which no individual firm can influence the market price. Market price is
determined by the industry, i.e., by the collective action of all buyers and sellers.
Features:
(i) The number of sellers and buyers is very large. It is so large that no individual seller or buyer can influence
the market price of the commodity.
Implications: Buyers and sellers of the product are just price takers. A competitive firm faces a perfectly
elastic demand curve. Also have no bargaining power in the market.
(ii) All sellers (or firm) sell homogeneous products.
Implication: This feature ensures uniform price in the market.
(iii) The entry or exit of firm in the long run is free.
Implication: This feature ensures that there are neither abnormal profits nor losses by any firm in the long
run.
(iv) Buyers and sellers have perfect knowledge about the market.
Implication: Uniform price will prevail in the market.
(v)Factors or production are perfectly mobile.
Implication: This feature ensures the uniform cost structure of all firms.
(vi) Transport costs are zero.
Implication: Transport costs do not affect the market price.
,Pure Market: Pure competition exists when there are a great number of sellers whose products are all
identical and no one seller controls a large enough part of the total output to exert an appreciable influence
on price. Thus it may be concluded that pure competition is the state of market that satisfies following three
conditions:
(i) Large number of buyers and sellers.
(ii) Homogeneous product.
(iii)Free entry and exit of firms.
(b) Monopoly: Monopoly is a market situation in which there is only one firm producing a commodity. The
commodity has no substitutes in the market. Indian Railways is an example of monopoly.
Features:
(i)There is only one seller (or producer) of a product in the market.
Implication: Firm is a price-maker. It usually exploits the buyers by charging a high price of its product.
(ii) There are no close substitutes of the product in the market.
Implication: Buyers have to purchase the commodity from the monopolist or go without it.
(iii) There are barriers to the entry of new firms.
Implication: Firm earns abnormal profits in the long run.
(iv) Firm has full control over price.
Implication: Firm is price market.
(v) Price Discrimination: The act of selling the same product at different prices to different buyers is known
as price discrimination. Monopolist can easily do price discrimination because he is the only seller of the
product in the market. If a monopolist adopts the policy of price discrimination the situation is called
discriminating monopoly.
(c) Monopolistic Competition: Monopolistic competition is a form of market which like perfect competition
has large number of sellers and allows the firm the freedom of entry and exit and unlike perfect competition
it has product differentiation and partial control over the price of the product.
Features:
(i) There is a large number of sellers and buyers.
Implication: No individual seller can influence the market price in a big way.
(ii) Product sold by different sellers are differentiated on account of different brand names, packing, colour,
shape, customer service.
Implication: This feature makes monopolistic competition different from perfect competition. Firms are
price makers.
(iii) Firms are free to enter or leave the industry.
Implication: All firms earn only normal profits in the long run.
(iv) Buyers and sellers do not have complete knowledge about the market.
Implication: Products sell at different price in the market.
(v) Firms spend a lot of money to promote their sales.
Implication: Market demand of the product rises. Selling costs also tends to raise the costs.
(d) Oligopoly:
Meaning: Oligopoly is a market structure characterized by a small number of large firms which are mutually
dependent on each other for taking price and output decisions.
Classification:
(i) Perfect and Imperfect oligopoly: If the firms produce homogeneous products, it is called perfect
, oligopoly. Steel industry is an example of perfect oligopoly. If the firms produce differentiated product, it is
called imperfect oligopoly or differentiated oligopoly. Automobile industry is one example of imperfect
oligopoly.
(ii) Non-collusive and Collusive Oligopoly: If the firms compete with each other, it is called non-collusive
oligopoly. If the firms co-operate with each other rather than compete in setting the price and output, it is
called collusive oligopoly.
Features:
(i) Oligopoly is composed of few large firms.
Implication: Action of each firm not only influences itself but also other firms are affected by it.
(ii) There is high degree interdependence among the firms.
Implication: This feature makes oligopoly different from other forms of market. Demand curve of a firm here
is indeterminate.
(iii) There are barriers to the entry of firms.
Implication: Due to entry barriers, the number of firms in the industry remains small or limited.
(iv) There exists non-price competition. Firms normally are afraid of price-competition which may lead to
price war. Product differentiations and advertisement are the two main forms of non-price competition.
Implication: Prices remain rigid in the market.
(v) Imperfect Knowledge: Buyers and sellers do not have perfect knowledge about the market of the
product. Due to large amount of selling costs, consumers begin to know.
Producers' Equilibrium
1. Who is a Producer? Producer is a person or organization who takes decisions about to what to produce and
how to produce to earn profit.
2. Producer's Equilibrium: A producer is said to be in equilibrium when he produces an output level at which
his profits are maximum.
3. Equilibrium Conditions: There are two method for the determination of producer's equilibrium:
(i) TR-TC Approach: A producer will be in equilibrium at that level of output where the difference between
TR-TC is maximum. If profit (TR-TC) is maximum at more than one output level, the output level beyond
which profits starts declining in the equilibrium output.
(ii) MR-MC Approach: Usually in microeconomics MR-MC approach is used to determine the position of
producer's equilibrium. The conditions of equilibrium according to this approach are:
(a) MC = MR (b) MC must cut MR from below.
Determination of Price and Output in a Perfect Competition
Firm is an individual enterprise which is a price taker & industry is a group of competing firms selling a
product. Industry is a price maker.
1. Equilibrium in an Industry: In perfect competition no single firm or consumer can influence the price.
Price is determined by the industry with the help of demand & supply forces. Demand curve of an industry is
downward sloping representing aggregate demand of an economy, on the other hand is upward sloping
aggregate supply of an economy. The determination of price will take at point where demand & supply curve
are intersecting each other.
