Market Structures

And Price Out Determinatio

n

Market Structures represents by four basic market models.Theoretical frameworks for existing firms and industries in the real world.

Firms and industries play a vital role in our economy. They always seek ways of reducing costs of production and of improving the quality of their goods and services, especially in a competitive market.

In the view of the scarcity of resources, they should strive to maximize their employment and production. It is their responsibility to pursue economic efficiency as their objective.

Economic efficiency the relationship between input (factors of production) and output (goods and services produced by the factors of production).

Basic Market Models Perfect/pure types

perfect or pure competition pure monopoly

Imperfect/non-pure typemonopolistic competitionoligopoly

Market Models DefinedPure competition

is a market situation where there is a large number of independent sellers offering identical products.

Pure monopoly refers to a market situation where there is only one seller or producer supplying unique goods and services.

Monopolistic competition pertains to a market situation where there are a relatively large number of small producers or suppliers selling similar but not identical products.

Oligopoly is associated with a market situation where there are few firms offering standardized or differentiated goods and services.

Market models

characteristics

Pure competition There is a large number of independent

sellers. Products are identical or homogeneous.No single seller and no single buyer can

influence the change in the market price of product.

It is easy for new firms or sellers to enter the market and for existing firms or sellers to leave the market.

There is no non-price competition like advertising, sales promotion, or packaging.

Pure monopolyThere is only one producer or seller.Products are unique in the sense that

there are no good or close substitutes available.

The monopolist makes the price.It is extremely difficult for new firms to

enter the market.There may be or no extensive

advertising or sale promotion depending on the goods or services of the monopolists.

Monopolistic competition

There are a large number of sellers acting independently.

Products are differentiated. There is a limited control of price.Entry of new firms in the market

is relatively easy. There is an aggressive non-price

competition in the product quality, credit terms, services, locations, and physical appearance of the product.

OligopolyThere are very few firms which

dominate the market. Products are identical or

differentiated.There is a price agreement

among the producers to promote their own economic interests.

The entry of a new competitor in the market is difficult.

There is a strong advertising among those who produce differentiated products like cars, cigarettes and appliances.

DETERMINANTS OF MARKET STRUCTURE

Government laws and policiesTechnologyBusiness policies and practices Economic freedom

PRICE OUTPUT AND

DETERMINATION

Pure Competitiono The demand curve of an individual

firm under a purely competitive industry is perfectly elastic. This is because the decrease or increase of the output of a single seller has no effect on the total supply and market price.

o In the case of market demand curve (demand curve of all producers of a particular product), it is elastic.

oAll producers acting at the same time can affect total supply, and therefore also market price.

oThey can sell more units of their output at a lower price. This is the law of demand.

Price Quantity demanded

TR MR AR

P5

5

5

5

5

1

2

3

4

5

P5

10

15

20

25

P5

5

5

5

P5

5

5

5

5

Table 5.1

Demand and revenue schedule of a purely competitive firm

Price and revenue

Quantity demanded

TR

D=MR

Figure 5.1

Demand, marginal revenue and total revenue of a purely competitive firm .

Graphical AnalysisPrice and output determination in

a purely competitive firm is shown and explained through graphical illustrations. Such graphs indicate the most profitable output and least loss output. The equilibrium of the firm (through thee MR=MC approach) under the short run and long run are also presented.

P 4MC AC

MR=Price

Most profitable output

Figure 5.2 : Short-run equilibrium of a firm under pure competition which indicates 80 units at a price of P4 per unit as the most profitable output. This is determined by the intersection of MR and MC curves where MR =MC (or the equilibrium of the competitive firm which is also profit maximization.

Pure monopolyThere is only one firm that

produces the product.The demand for the product of

the firm is the same as the market demand for the product. Since there is only one firm, it is also industry.

Its demand curve is the industry demand curve which is down sloping. This means a monopolist can only increase his sales by offering a lower unit price for its product. If hr does this, his marginal revenue (additional income) is lesser than the price.

QD Price TR MR

1234567

P50454035302520

P5090

120140150150140

P403020100

-10

Table 5.2 : Demand and revenue schedule of a pure monopolist.

Price

TR

D

MR

Units

Figure 5.2: Demand, marginal revenue and total revenue of an imperfect type of market structure like the monopolist.

Graphical AnalysisPrice and output determination

under pure monopoly is show and explained through graphical illustrations. The graphs indicate the profit-maximizing and loss minimizing positions of a pure monopoly profit.

The first graph shows that the pure monopolist enjoys a monopoly profit. This is the profit which is over and above the normal profit. The monopolist continue to enjoy such pure profit because there are no competitors.

Unlike under pure competition, the existence of pure profits attracts the entry of more new firms.

This results to lesser profits until the point where only the normal profits remain. However, despite the advantages of a monopolist, he does not charge the highest price because this decreases his sales, and consequently his total profit.

Monopolistic Competition

The demand curve of a firm under this market structure is highly elastic (but not perfectly elastic like that of the firm under pure competition)because of the presence of a relatively large number of competitors selling close-substitute product.

More rivals make the demand curve more elastic. Compared with the demand curve of a firm under pure monopoly, a monopolistically competitive firm has a more elastic demand curve.

OLIGOPOLYUnder this market structure, there are

very few firms which produce homogeneous or differentiated products.

Collusion is a common practice among the oligopolists. This is a secret agreement among them to have a common price and to manipulate their output for their own business interest. Thus their individual profits are the same as those enjoyed by pure monopolists.