Market Structures

Types of Markets
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• MONOPOLY
Perfect Competition
• Assumptions:
• Perfect competition is a market structure where no participant can
influence the prices.
• Some of the basic assumptions of this market structure are:
• Large number of buyers and sellers present in the market and so
no individual buyer or seller has the liberty to define the prices,
thus making all the individual participants insignificant in the
overall market place.
• All the firms produce homogeneous product.
• All the firms produce similar products and offer similar services
and the buyer cannot differentiate between any two product and
the allied services available with the same.
• No barrier for entry or exit in this type of market structure.
Demand Curve

• Price & Output determination

• From the equilibrium curve of the market we can see that the
market forces determine the price of the goods.
• The output gets fixed and neither the entry of new customers
nor the entry of new producers changes the picture.
• The demand for the output of the competitive firms remains
fixed at the price levels defined by the market.
• Even if additional quantities are produced there are no buyers
for the excess quantity.
Supply side
• Supply Side:

• The supply curve shows the amount of output the firm

will supply at different prices.

• In a competitive environment the supply side is more or

less defined and the price levels are fixed.

• No firm in a competitive market place can continuously

have above average profits.
Profit Determination Economic Profit
Efficiency in competitive markets
• An efficient condition in the market would be
termed when resources are allocated in ways
allowing the maximum possible net benefit from
their use.
• This will include:
• Efficient allocation of resources among the firms
• Efficient distribution of goods produced between
consumers
• Efficient combinations of products.
• Examples:
• Market demand equation for a perfectly competitive market is as given:
• Q D = 2000 – 100P
• The market supply equation is: Qs=1200 + 150P
• What does the demand equation say?
• Quantity demanded increases by 100 every 1 unit rise in the price
• Quantity demanded decreases by 100 every 1 unit rise in the price
• Quantity demanded remains fixed to 2000 every 1 unit rise in the price
• None of the above
• What does the supply equation say?
• Quantity supplied increases by 150 every 1 unit rise in the price
• Quantity supplied decreases by 150 every 1 unit rise in the price
• Quantity supplied remains fixed to 1200 every 1 unit rise in the price
• None of the above
Monopoly
• Imperfect competition
• A market is imperfectly competitive if some individual sellers have some degree of control over the price of the output.
• Any market can be classified based on Number of sellers and buyers
• Source of market imperfections:
• Barriers to entry (Eg High capital requirements - metal refining)
• Legal Restrictions (Eg. Heavy govt license – Telecom, High Cost Industry, Eg. High Intangible investments – Qualcom (Patent based).
• Advertising and Product Differentiation (Eg. Heavy advertising expenses - Coca Cola or Pepsi)
• Revenues under a Monopoly:
• The total Revenue Curve
• Price and Output determination in a Monopoly
• Comparison – Monopoly & Perfect Competition :
• Price Discrimination:
• Price discrimination occurs when a monopolist charges different prices to different buyers.
• Discrimination occurs due to consumers’ peculiarities or the nature of the goods or the distance and frontier barriers.
• Another type of market imperfection.