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Unit - 4
Market Structure
Market
It is a public place in which goods and services are bought and sold.
Market structures
On the basis of competition markets can be classified as:
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Duopoly
Perfect Competition
Features
(1) Large number of buyers and sellers
Eg: Rice market
Sellers sell at market price.
Contribution of individuals or single firm is insignificant. Therefore, sellers cannot influence
market price.
Individual demand is very small. Therefore, buyers cannot alter price.
Both, buyers and sellers cannot fix the price.
Sellers have to accept the price fixed by the market. Therefore, they are price takers.
(2) Homogenous products
Products are homogenous and identical (Rice)
If single seller charges high price, he loses his customers.
(3) Free entry and exit conditions
In short period, firms cannot enter or leave the industry.
Firms are not compelled to enter or exit (high profits – enter; loss – exit/leave). Therefore,
there was large number of firms.
(4) Absence of government or artificial restriction
No government restriction on supply and pricing.
→If these 4 conditions are fulfilled then there is Pure competition.
(5) Perfect knowledge on the part of buyers and sellers
Buyers and sellers know about the market conditions.
Therefore, buyers won’t offer more price and sellers won’t accept less price.
Hence, there is no need of advertisement.
, 2
(6) Perfect mobility of factors of production
Factors should be free to move from one industry to another, depending on the remuneration
they get.
(7) Absence of transport cost
In perfect competition, there is a uniform price, i.e., transport costs are not included in price.
Price determination under Perfect competition
Price is determined by the interaction of 2 forces; viz., demand and supply (aggregate).
Individual demand and supply cannot influence price.
Equilibrium Price
Price is determined by the interaction of demand and supply (D=S).
Equilibrium price where D=S.
Equilibrium output is OM.
At equilibrium both buyers and sellers are satisfied.
If price>equilibrium price then S>D (unsold stock is disposed at lower price). Thereby, price
reaches equilibrium.
If price is below the equilibrium price D>S buyers won’t get the desired quantity. So, they
would bid the prices up. Thereby, price will go on increasing and reaches the equilibrium.
Conditions for equilibrium of firm and industry
(1) MC=MR
(2) MC should cut MR from below
Firm equilibrium when MC=MR=AR (price)
B is the equilibrium point (both the conditions are satisfied).
Unit - 4
Market Structure
Market
It is a public place in which goods and services are bought and sold.
Market structures
On the basis of competition markets can be classified as:
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Duopoly
Perfect Competition
Features
(1) Large number of buyers and sellers
Eg: Rice market
Sellers sell at market price.
Contribution of individuals or single firm is insignificant. Therefore, sellers cannot influence
market price.
Individual demand is very small. Therefore, buyers cannot alter price.
Both, buyers and sellers cannot fix the price.
Sellers have to accept the price fixed by the market. Therefore, they are price takers.
(2) Homogenous products
Products are homogenous and identical (Rice)
If single seller charges high price, he loses his customers.
(3) Free entry and exit conditions
In short period, firms cannot enter or leave the industry.
Firms are not compelled to enter or exit (high profits – enter; loss – exit/leave). Therefore,
there was large number of firms.
(4) Absence of government or artificial restriction
No government restriction on supply and pricing.
→If these 4 conditions are fulfilled then there is Pure competition.
(5) Perfect knowledge on the part of buyers and sellers
Buyers and sellers know about the market conditions.
Therefore, buyers won’t offer more price and sellers won’t accept less price.
Hence, there is no need of advertisement.
, 2
(6) Perfect mobility of factors of production
Factors should be free to move from one industry to another, depending on the remuneration
they get.
(7) Absence of transport cost
In perfect competition, there is a uniform price, i.e., transport costs are not included in price.
Price determination under Perfect competition
Price is determined by the interaction of 2 forces; viz., demand and supply (aggregate).
Individual demand and supply cannot influence price.
Equilibrium Price
Price is determined by the interaction of demand and supply (D=S).
Equilibrium price where D=S.
Equilibrium output is OM.
At equilibrium both buyers and sellers are satisfied.
If price>equilibrium price then S>D (unsold stock is disposed at lower price). Thereby, price
reaches equilibrium.
If price is below the equilibrium price D>S buyers won’t get the desired quantity. So, they
would bid the prices up. Thereby, price will go on increasing and reaches the equilibrium.
Conditions for equilibrium of firm and industry
(1) MC=MR
(2) MC should cut MR from below
Firm equilibrium when MC=MR=AR (price)
B is the equilibrium point (both the conditions are satisfied).
