Market and Market Structure

Meaning of Market
Market is the main area of activities of the firm or industry. The producers purchase inputs from
market and sell their yield in the market. Generally, market means a place where buyers and
sellers meet for their buying and selling purpose. In economics, the term market does not refer to
a particular place. Market means an arrangement whereby buyer and seller interact to determine
the prices and quantities of a commodity.

In the words of Cournot, “Economists understand by the term market not any particular place in
which things are bought and sold but the whole of any region in which buyers and sellers are in
such free intercourse with one another that the price of the same goods tends to equality easily
and quickly.”
So, Market refers to arrangement, whereby buyers and sellers come in contact with each
other directly or indirectly, to buy or sell goods.

Essentials of a Market
In Economics market refers to the market for a commodity. Thus the essential features of a
market are:
a. A commodity which is bought and sold
b. The existence of buyers and sellers,
c. a place, be it a certain region, a country or the entire world, and
d. The contact between buyers and sellers

Classification of Market

On the basis of the Area, market is classified into

 Local Market: The market that is restricted to certain areas of a country and perishable
items such as milk, vegetables, fish etc., are sold is considered as local market.
 National Market: In national such type of goods are sold which have demand through the
country (Rajshahi silk, paper of karnaphuli mill, etc.)
 International Market: Because of improve communication and transport several goods are
now being sold in different countries. Bangladesh sells tealeaves, leather, cloth, shrimp,
and jute in the international market.

On the basis of Time, market is classified into

 Very Short Period Market: In this market, supply of any commodity is not
responsive to the demand.
 Short Period Market: In this type of market the firm cannot adjust the supply of a
commodity although it makes maximum usage of inputs.
 Long Period Market: In this type of market, period of time is very long so that
supply of a commodity can be adjusted in respect of demand.

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  Very Long Period Market: In this market more change is possible than long
period market.

On the basis of Competition, market is classified into

1. Perfectly competitive market structure.
2. Imperfectly competitive market structure.

Perfect Competition
A market is said to be perfect when all the potential sellers and buyers are promptly aware of the
prices at which transaction take place and all the offers made by other sellers and buyers , and
any buyers can purchase from any sellers and conversely. Under this condition the price or
commodity will tend to be same (after allowing for cost of transport including import duties) all
over the market.
Perfect competition, is said to prevail when the following conditions are found in the market.
1. Large number of buyers and sellers
2. Homogeneous Products
3. Free entry or exit in the market
4. Uniform price
5. Perfect knowledge about the market
6. Perfect mobility
7. Absence of transport cost

Imperfect Competition
An imperfect competitive market is a type of market where the conditions of the perfect
competitive markets are not satisfied. Perfect competitive makes indicate that no one firm in the
market can influence market prices, there are no barriers to entry and there is free exit from this
market, suppliers offer homogenous goods and there exist information asymmetry that
encourages price and costs asymmetry.

The types of imperfect competition are

1. monopoly
2. monopolistic competition
3. oligopoly
4. duopoly and
5. monopsony

Monopoly
Monopoly is a market situation wherein Single producer and seller and firm have a sole control
over the supply and price of the product.
Example: Gas, telephone and electricity.

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Important feature of monopoly market
 One seller in the market
 Large number of buyers in the market
 Seller controls the supply of commodity
 Obstacle to enter new firm

Monopolistic Competition
Monopolistic competition is a form of imperfect competition where many competing producers
sell products that are differentiated from one another. Enter of new firm is relatively open and
easy. The manufacturer of Colgate or Pepsodent cannot decide its price-output policies without
considering the possible reaction of rival firms producing close substitutes.

Example: This product differentiation is found due to difference in name, brand, trademark,
color, fragrance, quantity, packing, design etc. Medical store, retail general store, restaurants, dry
cleaners, hair dressers, are good examples of monopolistic competition.

Important feature of monopolistic competition

1. Limited buyers and sellers
2. Homogeneous Products but not indifferent
3. No obstacle to entry or exit
4. One seller can control a large portion of buyers

Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of
sellers. Each oligopolist is likely to be aware of the actions of the others. The decisions of one
firm influence and are influenced by the decisions of other firms.

Example: Steel, Cement, automobiles, soft drinks, tyres, telephone service providers etc.

1. Pure Oligopoly
2. Differentiated Oligopoly

Important feature of oligopoly market

 Homogeneous or heterogeneous product. It makes them very unique
 There is always fear of retaliation by rival to each other.
 Advertising and selling cost have strategies importance of oligopolistic firms.
 The firm in this market has the potential to earn abnormal profits.

Duopoly
A special type of the oligopoly market structure is the duopoly. In this type of market there are
only two large firms that dominate the market.

Important feature of duopoly market

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  Only two seller
 Homogeneous product
 No entry

Monopsony
A market similar to a monopoly except that a large buyer not seller controls a large proportion of
the market and drives the prices down. Sometimes referred to as the buyer's monopoly.

Important feature of monopsony market

 Large number of seller
 Only one buyer

Comparison among different market forms

Number of Nature of Price elasticity Degree of

Forms of firms products of demand for control over
market an individual price
structure firm

Perfect A large no. of Homogeneous Infinite None

Competition firms product
Imperfect A large number Differentiated Large Some
Competition of buyers products(close
(1) Monopolistic substitute )
Competition

(2) Pure Few firms Homogeneous Small Some

Oligopoly product
(without
product
differentiation0)
(3)Differentiated Few firms Differentiated Small Large
Oligopoly (with products (close
product substitute )
differentiation)

Monopoly One Unique product Very small Very large

without close
substitute

Market Equilibrium: Equilibrium of demand and supply

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 In a perfectly competitive market equilibrium is attained through the interaction of demand and
supply. If demand is greater than supply, then price will rise. On the other hand if demand is less
than supply, then price will fall. So market will be in equilibrium where demand is equal to
supply. It is shown in figure 1.

In the figure1, DD is the demand curve and SS is the supply curve. E is the equilibrium point
where DD=SS. OP is the equilibrium price and OM is the equilibrium quantity of demand and
supply.

If price increases to OP1, the demand will be P1G and supply will be P1H. Here SS>DD. GH
amount of goods will remain surplus and unsold at price OP 1. There will be a competition among
the producers to sell that surplus amount. As a result price will be fall and it will be falling till it
becomes OP.

Y D S

G H
P1
G
P E
L
P2
Price

K
S D

X
0
M
Demand and supply

Fig. 1: Market equilibrium

If price falls to OP2, the demand will be P2L and supply will be P2K. Here SS<DD. So KL
amount of goods will be shortage at the price OP 2. There will be a competition among the buyer.
As a result price will be rise and it will be rising till it becomes OP.

At price OP demand and supply will be equal to OM. At this price and quantity market will gets
its equilibrium.

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