Gives an idea on Market Structure

1. ECONOMIC ANALYSIS (PART-IV)
Compiled by
Dr.S.Vigneswaran.,M.A.,Ph.D.,(NET,SET)
Assistant Professor of Economics,
Mannar Thirumalai Naicker College, Madurai-04.

2. TOPICS COVERED
 Market Structure
 Perfect Competition – Features – Importance.
Imperfect competition: Monopoly – Monopolistic
Competition-Oligopoly – Meaning-Characteristics –
Consumer Equilibrium.

3. PERFECT COMPETITION
Meaning:
Perfect Competition is a market structure characterized by a
complete absence of rivalry among the individual firms.
Definition:
Market where there are so many sellers that no one is big
enough to have any appreciable influence over market price.

4. FEATURES OF PERFECT COMPETITION
1. Existence of large number of buyers and sellers.
2. No product differentiation.
3. Firms are free to enter or leave the industry.
4. Buyers and sellers have Perfect knowledge on market
conditions.
5. Perfect mobility of factors of production.
6. No transport cost.
7. Only one price for the commodity.

5. IMPORTANCE
 A perfectly competitive firm is known as a price taker because
the pressure of competing firms forces them to accept the
prevailing equilibrium price in the market.
 A perfectly competitive firm will not sell below the equilibrium
price either.
 In the short run, the perfectly competitive firm will seek the
quantity of output where profits are highest or—if profits are
not possible—where losses are lowest.
 A long-run equilibrium will be attained when no new firms want
to enter the market and existing firms do not want to leave the
market since economic profits have been driven down to zero.

6. EQUILIBRIUM IN PERFECT COMPETITION
Conditions (Short-run)
 MC = MR
 MC curve cuts the MR curve from below

7. The above figure shows, costs and revenue are on the Y-axis and
the Quantity is on the X-axis. Further, marginal costs cut the
marginal revenue curve from below at point A. At point ‘A’, P is the
equilibrium price and ‘Q’ is the equilibrium quantity.

8. Point ‘A’, P* and Q* are the equilibrium price and quantity
respectively. Also, corresponding to Q*, the average cost
is more than the average revenue.

9. The per unit revenue or average revenue is OP* while the
per unit cost or average cost is OP’. Therefore, the per unit
receipts are high in comparison with the per unit cost.

10. IMPERFECT COMPETITION
Meaning and Features
It is a market situation, where
The number of buyers and sellers is small
The factors of production are not free to move
The market is imperfect.

11. MONOPOLY
 Meaning:
Single seller of a product in the market, that is absence of
competition.
Features of Monopoly
1.Monopolist is a price maker.
2.Absence of competition.
3.Large number of buyers in the market.
4.No close substitutes.
5. Entrepreneur has no freedom to enter in the market.
6. Monopolist may use his power to get maximum profit.

12. EQUILIBRIUM
 Like in perfect competition, there are three
possibilities for a firm’s Equilibrium in Monopoly.
These are:
 The firm earns normal profits – If the average cost =
the average revenue
 It earns super-normal profits – If the average cost <
the average revenue
 It incurs losses – If the average cost >
the average revenue

13. The MC curve cuts the MR curve at the equilibrium point E.
Also, the AC curve touches the AR curve at a point
corresponding to the same point. Therefore, the firm earns
normal profits.

14. The price per unit = OP = QA. Also, the cost per unit = OP’. Therefore,
the firm is earning more and incurring a lesser cost. In this case, the per
unit profit is OP – OP’ = PP’
Also, the total profit earned by the monopolist is PP’BA.

15. The average cost curve lies above the average revenue curve for the
same quantity. The average revenue = OP and the average cost =
OP’. Therefore, the firm is incurring an average loss of PP’ and the
total loss is PP’BA.

16. MONOPOLISTIC COMPETITION
Meaning:
Monopolistic competition refers to a market situation where there
are many firms selling a differentiated product.
Features of monopolistic competition

17. EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION
In the short-run, a firm under Monopolistic Competition may
either earns super normal profit or suffers loss.
In the long-run, there is only normal profit.

18. OLIGOPOLY
Meaning:
Market situation where there are few sellers selling either
homogeneous or close substitute goods.
Features:

19. KINKED DEMAND CURVE

20. PRICE LEADERSHIP MODEL- OLIGOPOLY
Firm A is the price leader, therefore Firm B accepts the price fixed by
the firm A. Thus both the firms A and B will charge the same price OL
and sell the same output OM.

21. The End