MARKET STRUCTURES

Perfect competition: Perfect competition is a market structure where many firms offer a
homogeneous product. Because there is freedom of entry and exit and perfect information, firms
will make normal profits and prices will be kept low by competitive pressures.

Features
• Many buyers and suppliers.

• All firms sell an identical product (the product is a "commodity" or "homogeneous").

• All firms are price takers (they cannot influence the market price of their product). So it can
alter its rate of production and sales within any feasible range.

• Market share has no influence on prices.

• Buyers have complete or "perfect" information—in the past, present and future—about the
product being sold and the prices charged by each firm.

• Resources for such a labour are perfectly mobile.

• Firms can enter or exit the market without cost.

 A homogeneous product: Every type of car Ford produces is distinct from every other
type of Ford car and from every car produced by Ford’s competitors. We say that car
firms sell a differentiated product.
 Each car has characteristics that appeal to particular customers, so Ford can raise the
price of one of its cars without instantly losing all of its sales as customers switch en
masse to other cars.
 In contrast , one farmer’s No.1 winter wheat is indistinguishable from any other farmer’s
No.1 winter wheat. We say that wheat farmers sell a homogeneous product. Thus there is
no reason why well informed buyers would buy from anyone but the lowest price
supplier of No.1 winter wheat. Thus anyone selling more than this minimum can expect
to sell nothing, every supplier must sell at the same price.

MANY SELLERS

 A key distinction between the car and the wheat industry is in the number of sellers.
 Any one wheat farmer’s contribution to the total production of wheat is a very small drop
in an extremely large bucket. Ordinarily a farmer will assume that he has no effect on
price.
  The firm is unable to influence the world price of wheat and that it is able to sell all that it
can produce at the going world price.
 The firm is faced with a perfectly elastic demand curve for its product and so it is a price
taker.

Total factor cost is the total opportunity cost incurred by a perfectly competitive
firm from the employment of a given resource.

Economic profit: The difference between the total revenue received by the firm
from its sales and the total opportunity costs of all the resources used by the firm.

Effects of Oligopoly Market Structure

• Small output and high prices: As compared with perfect competition, oligopolist
sets the prices at higher level and output at low level.

• Restriction on the entry: Like monopoly, there is a restriction on the entry of new
firms in an oligopolistic industry.

• Prices exceed Average Cost: Under oligopoly, the firms fixed the prices at the
level higher than the AC. The consumers have to pay more than it is necessary to
retain the resources in the industry. In other words, the economy’s productive
capacity is not utilised in conformity with the consumers’ preferences.

Selling Costs: In order to snatch markets from their rivals, the oligopolistic firms
may engage in aggressive and extensive sales promotion effort by means of
advertisement and by changing the design and improving the quality of their
products.

• Wider range of products: As compared with pure monopoly or pure competition,

differentiated oligopoly places at the consumers’ disposal a wider variety of
commodities.

• Welfare Effect: Under oligopoly, vide sums of money are poured into sales
promotion to create quality and design differentiations. Hence, from the point of
view of economic welfare, oligopoly fares fairly badly. The oligopolists push non-
price competition beyond socially desirable limits.