Market Structures

Based on the sellers - buyers relationships we can classify the market into different structures. The
main types of market structures can be classified as follows.
1. Perfect Competition Market
2. Monopoly Market
3. Monopolistic Competition
4. Oligopoly
Based on these market structures the decision making on production can differ.

Perfect Competition Market

This is a market situation where the market comprised with large number of buyers and
sellers producing highly homogenous product and free entry and exit to the market.
This is a theoretical market which we cannot find a real world situation. However markets
for agricultural products such as paddy and Beatles are some appropriate example
Characteristics of Perfect Competition market
 Large number of buyers and sellers
 Product homogeneity – All the products of different firms are similar, so the buyer cannot
differentiate the products
 Free entry and Exit – there is no restrictions for firms to enter into or go out of the market
 Perfect information about the market is freely available
 Perfect mobility of factors of production from one firm to another throughout the economy
 No government regulation
 Firms are “Price Taker”- Since the supply is high the market price is determined by the
demand and supply and firms have to accept the market price determined by demand and
supply.
In a perfect competition market, the Marginal Revenue, and Average Revenue will be equal to the
Price of the product.
It can be explained from following table
P QD TR MR AR
5 10 50
5 20 100
5 30 150
5 40 200
5 50 250
Short Run Equilibrium (Profit Maximization) of a firm in perfect competition market
In short run a firm in perfect competition market can experience three conditions when deciding
the equilibrium.
1. Abnormal Profit (Supernormal Profit)
2. Normal Profit
3. Losses
To determine the equilibrium/ Profit maximization point we can use the MR=MC approach
Abnormal Profit (Supernormal Profit)
Total Revenue (P x Q) = PAQ0

Abnormal Profit = PABC

Here the supplier will be able to charge a price
which is higher than the average cost of
producing a unit at the profit maximization
level of output. So this condition is called a
Supernormal Profit Condition.

Normal Profit
Total Revenue (P x Q) = PAQ0
Total Cost (P x Q) = PAQ0
Profit = ----
In this situation the market piece will be equal
to the average cost of producing a unit at the
profit maximization level of output. This
condition is referred to as a normal profit
condition because the seller will be able to get
a profit even if the price is equal to the cost. The
reason for this is cost of production will include
the factors payment- which includes the return
for the entrepreneurship also – Profit.
Losses

Total Income = PAQO

Total Cost = (CBQO)
Net Loss = CBAP
When the market price is less than the
average cost at the profit maximization point
(loss minimization point) then such a
condition is called as a Loss. This Losses can
occur in 3 different ways.

1. Firm covers all variable costs and a part of fixed costs.

In this loss making condition, the firm will

be able to cover all its variable cost from the
price because the price is higher than the
AVC and a part of its fixed cost. In this
situation the firm will stay in the market
with future expectation

2. Firm covers only the Variable Costs

The second condition is where the firm will

be able to cover only the variable cost. That
is the price is equal to the AVC. This is also
known as the shutdown point. If the price
fall below this the firm will leave the
market.
 3. Does not cover any cost
In this situation the firm cannot cover

Long Run Equilibrium (Profit Maximization) of a firm in perfect competition market

In long run firms in perfect competition market earns only normal profit.
Monopoly
Monopoly is a market structure in which there’s only one seller, no close substitute for the
product and there are lot of entry barriers to enter in to market
Characteristics of Perfect Competition market
 Only one single firm controls the total market supply
 No close substitutes for the product
 High entry barriers to the market
 Firm’s demand curve and market demand curves are same
 Monopolist is able to influence the market price by varying his output
E.g. Fill the following table
P QD TR MR AR
10 20 200
8 40 320
6 60 360
4 80 320
2 100 200

Short Run equilibrium in Monopoly Market

In a monopoly market the demand curve is downward sloping. In short run a firm will earn
abnormal profit or losses.
Losses may incurred during the introduction period.
Total Revenue = PNQ0
Total Cost = CBQ0
Ab. Profit = PNBC
Long Run Equilibrium in Monopoly Market
In long run the monopolist has time to expand their capacity, plants and hence they earn super
normal profit.

Price Discrimination
In a perfect competitive market the firms will have to take the price that is decided by the
market demand and supply. But in a monopoly market the monopolist can decide the Price and
quantity.
This can result in Price Discrimination
Discrimination occur when the same product is sold at different prices to different buyers.
Conditions which must be fulfilled for the implementation of price discrimination are
following,
 Market must be divided into sub markets with different price elasticity
 There must be effective separation of sub markets so that no reselling takes place
The reason for monopoly for the price discrimination is to gain high profit
Monopolistic Competition
This is a market which shows the features of both perfect competition market and
monopoly market. It means that the market comprises of large number of firms and products are
rarely homogeneous.
Characteristics
 Many small sellers
 Many buyers but they are attached to certain sales
 Free entry and exit
 Product differentiation
 Advertising and sales promotion

Short Run equilibrium in Monopolistic Competition

In short run, a firm monopolistic competition market earns
supernormal profit
Total Income = PNQO
Total Cost = (CXQO)
Net Profit = PNXC

Long Run equilibrium in Monopolistic Competition

As firms in monopolistic competition
market earn supernormal profit in short run, it
encourages more suppliers to enter the market.
This results in reduction of demand for one
firm due to availability of substitutes.
So in long run firms will earn only a normal
profits
Oligopoly Market
Oligopoly is a very common type of market in modern economic systems. Oligopoly is a
market where few large suppliers dominate the whole market
Characteristics
 Small number of sellers
 Action of one firm affects others
 High entry barriers
 High competition
 Price rigidity
 Non Price competition