The document provides an overview of different market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It discusses key features such as number of firms, product differentiation, entry/exit conditions, and price determination for each market structure. Equilibrium analysis using total revenue-total cost and marginal revenue-marginal cost approaches is also covered for perfect competition and monopoly.

1. Managerial
Economics
Module 5
Neha Aggarwal

2. Topics to be covered
– Market & Pricing : Types of Market, Equilibrium Price Determination (TC-TR & MC-MR approach)
– Perfect Competition - Equilibrium of Firm and Industry under Perfect competition
– Monopoly - Price Determination under Monopoly
– Monopolistic Competition
– Price and Output Determination under Monopolistic Competition

3. Market- Structure
– Market is a machanism or arrangement through which the buyers and sellers of a commodity or
service come into contact with one another and complete the act of sale and purchase of the
commodity or service on mutually agreed prices.
– A market is an arrangement between buyers and sellers to exchange goods or services for money.
Markets are the fundamental means by which scarce resources are allocated a price, and are
essential to the operation of the price mechanism.
– In common parlance by market is meant a place- Where commodity is bought and sold-but it is rough
interpretation of the term.
– In economics the term market does not refer to a particular place but it refer to a commodity. e.g. when we say
wheat market. We do not refer to a particular place. The market is a set of conditions in which buyers and
sellers come in contact for the purpose of exchange
– Economics usually classify market structure on the basis of two criteria- (1)The number of firms working in the
market. (2)The characteristics of product. On the basis of these criteria economics consider four important
types of market

4. Features of Market
– The essential features of a market are:
– (1) An Area:
– In economics, a market does not mean a particular place but the whole region where sellers and buyers of a product ate spread. Modem
modes of communication and transport have made the market area for a product very wide.
– (2) One Commodity:
– In economics, a market is not related to a place but to a particular product.
– Hence, there are separate markets for various commodities. For example, there are separate markets for clothes, grains, jewellery, etc.
– (3) Buyers and Sellers:
– The presence of buyers and sellers is necessary for the sale and purchase of a product in the market. In the modem age, the presence of
buyers and sellers is not necessary in the market because they can do transactions of goods through letters, telephones, business
representatives, internet, etc.
– (4) Free Competition:
– There should be free competition among buyers and sellers in the market. This competition is in relation to the price determination of a
product among buyers and sellers.
– (5) One Price:
– The price of a product is the same in the market because of free competition among buyers and sellers.

5. Equilibrium Determination
– Producer’s equilibrium is the level of the output of a commodity which gives the maximum profit
to the producer of the commodity. A firm is in equilibrium if there is no scope for either increasing
the profit income or reducing its loss by changing the quality of the output. Therefore, we have
– Profit (π) = Total Revenue – Total Cost = TR – TC
– Hence, the output level at which the total revenue minus the total cost is maximum is the
equilibrium level of the output. There are two approaches to arrive at the producer’s equilibrium:
• Total Revenue – Total Cost (TR-TC) Approach
• Marginal Revenue – Marginal Cost (MR-MC) Approach

6. TR-TC Approach
– In the figure above, the X-axis shows the levels of
output and Y-axis shows total costs and total
revenues. TC is the Total Cost Curve and TR is the
Total Revenue Curve. Also, P is the equilibrium
point where the distance between TR and TC is
maximum.
– Further, you can see that before the point P’ and after the
point P”, TC>TR. Therefore, the producer must produce
between P’P” or M’M”. At the point P, a tangent drawn to TC
is parallel to TR. In other words, at point P, the slope of TC
is equal to the slope of TR. This equality is not achieved at
any other point.

7. MR-MC Approach- Perfect Competition
– The MR-MC approach is
derived from the TR-TC
approach. The two conditions
of equilibrium under the MR-
MC approach are:
• MR = MC
• MC cuts the MR curve from
below

8. MR-MC Approach in Imperfect
Competition

9. Schedule of TR/TC- MR/MC Approach

10. Forms of Market

11. Perfect Competition
– Perfect competition- It is a market structure where there are large number of buyers and sellers
selling identical products at uniform price with free entry and exit of firms and absence of govt. control.
– Under perfect competition, price remains constant therefore, average and marginal revenue curves
coincide each other i.e., they become equal and parallel to x-axis.
– Under perfect competition price is determined by the industry on the basis of market forces of
demand and supply. No individual firm can influence the price of the product. A firm can takes the
decision regarding the output only. So industry is price maker and firm is price taker.
– Feature of perfect competition :
– (a) Very large no. of buyers and sellers.
– (b) Homogeneous product.
– (c) Free entry and exit of firms in the market.
– (d) Perfect knowledge.
– (e) Perfect Mobility.
– (f) Perfectly elastic demand curve.
– (g) No transportation cost

12. Features of Perfect Competition
– The following are the features of perfect competition are as follows:
i. Large number of buyers and sellers - Under perfect competition, there are a large number of buyers and
sellers. The number of sellers is so large that no individual firm has control over the market price of the
commodity.
ii. Free entry and exit of firms - There is no restriction on the entry and exit of firms. This free entry and exit of
the firms ensure that no firm earns either abnormal losses or abnormal profits in the long run.
iii. Homogeneous product - The product of each and every firm in the perfectly competitive market is a perfect
substitute to others’ products in terms of quantity, quality, colour, size, features, etc.
iv. Perfect knowledge - In a perfectly competitive market, the buyers are aware of the prevailing market price
of the product at different places and the sellers are aware of the prices at which the buyers are willing to buy
the product.
v. Perfect mobility of factors of productions: In a perfect competition the factors of production are perfectly
mobile. Such mobility implies that there is optimum utilization of the factors of production.
vi. Absence of transport cost: In a perfect competition it is assumed that there is no transport cost. This
further ensures that there is uniform price in the market.

13. Price Determination under Perfect
Competition
– Perfect competition is defined as a market structure that consists of a large number of buyers and sellers such that
no individual seller can influence the existing market price of the product. All the sellers in a perfect competition
market produce homogenous products; that is, the output of all sellers is similar to each other and each firm sells
its output at a uniform price.
Price Determination under Perfect Competition
Under perfect competition, the market price, or the equilibrium price, is determined in the industry. Individual firms
have no influence on this price. In the industry, the price is determined by the intersection of the market supply and
market demand curves. In other words, the price under perfect competition is set at the point where the market
supply of the good is equal to the market demand for the good. The individual firms take the market price so
determined as fixed and adjust their supply accordingly.
– Under perfect competition commodities are homogeneous in nature.
Under perfect competition, commodities are homogeneous in nature. In other words, the product of each and
every firm in the market is a perfect substitute to others’ products in terms of quantity, quality, colour, size, features,
etc.

14. Price Determination

15. – In the figure, part A depicts the infinitely elastic demand curve faced by an individual firm in a
perfect competition market. Part B depicts how the market demand and market supply curves
interact to determine the market price. The market price OP is determined by the intersection
of market (industry) demand curve DD and market (industry) supply curve SS. The market
equilibrium is at point E, where OQx (amount of output) is supplied at the equilibrium market
price OP. The price for the commodity is given to an individual firm and no single firm can
influence the market price. The firm faces an infinitely elastic demand curve, which suggests
that no matter how many units of output are supplied, the price will remain the same. Hence,
we can conclude that under a perfect competition market, an individual firm is a price taker
and not a price maker.

16. Monopoly
– MONOPOLY MARKET
– Monopoly is that type of market where there is a single seller and large number of buyers. There
is absence of close substitutes to the products.
– The term monopoly is made up of two words. Mono and Poly.
– Where Mono means Single and Poly means to Sell.
– Monopoly thus means power to sell alone, in other words when there is only one single seller of a
product in the market, that situation will be referred to as monopoly. But this is only a literal meaning of
the term Monopoly.

17. – Types of Monopoly:-Actually the term Monopoly in economics is linked with the degree of competition
prevailing in the market. on the basis of degree of competition we can classify Monopoly in to two types.
– They are as under:
– (i)Pure or Perfect or absolute Monopoly:- If in a market there is one single seller of a product and there is
no competition at all. The situation will be known as pure-perfect or absolute Monopoly In technical
language we may define pure Monopoly as single firm industry.
– Where the cross elasticity of demand between the product of the firm and that of other commodity in the
market is zero.
– Zero cross elasticity implies that there is no substitute (close or far)available in the market and
monopolist has perfect control over the supply of product But in reality there is no pure Monopoly in the
market in any commodity.
– (ii)Limited, imperfect or relative Monopoly:- Limited Monopoly is very much realistic market situation-
limited monopoly may define as a market situation in which there is a single seller of the product for
which there are no close substitute. In other words the substitute of the product is available in the market
but they are not close substitute. In this way under imperfect monopoly far substitute are available and
therefore the monopolist is not so powerful as the pure monopolist.

19. Features of Monopoly Market
– Features :(a) Single seller and large number of buyers.
– (b) Restrictions on the entry of new firms.
– (c) Absence of close substitutes.
– (d) Full control over price
– (e) Price discrimination.
– (f) Price maker
– (g) Downward sloping less elastic demand curve.
– AR or MR Curve in Monopoly market :
– AR (Demand) Curve slopes downward from left to right and less elastic than that of monopolistic competition. It
means that to increase demand, he has to reduce the price.
– Given the demand for his product, the monopolist can increase his sales by lowering the price, the marginal
revenue also falls but the rate of fall in marginal revenue is greater than that in average revenue.

20. AR- MR Curve in Monopoly

21. Monopolistic Competition
– MONOPOLISTIC COMPETITION
– It is that type of market in which there are large number of buyers and sellers. The Sellers sell
differentiated product but not identical. The products are close substitutes of each other.
– Monopolistic competition refers to a market situation where there are many firms selling a
differentiated product. “There is competition which is keen, though not perfect, among many
firms making very similar products.” No firm can have any perceptible influence on the price-
output policies of the other sellers nor can it be influenced much by their actions. Thus
monopolistic competition refers to competition among a large number of sellers producing
close but not perfect substitutes for each other.

22. – Examples of monopolistic competition
• Restaurants – restaurants compete on quality of food as much as price. Product
differentiation is a key element of the business. There are relatively low barriers to entry in
setting up a new restaurant.
• Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
• Clothing. Designer label clothes are about the brand and product differentiation
• TV programmes – globalisation has increased the diversity of tv programmes from networks
around the world. Consumers can choose between domestic channels but also imports from
other countries and new services, such as Netflix.

24. Features of Monopolistic Competition
– Features :(a) Large no. of buyers and sellers
– (b) Product Differentiation: The products of each firm is differentiated from
the other on the basis of colour, taste, packing, trademark, size and shape.
– (c) Selling Cost: Cost on advertisement and sales promotion.
– (d) Free entry or exit of firms.
– (e) Lack of perfect knowledge.
– (f) Partial control over price.
– (g) Imperfect mobility: Factors of production and products are not perfectly
mobile.
– (h) Elastic and downward sloping demand curve.

25. – The following are the features of monopolistic competition:
i. Large number of buyers and sellers - There are a large number of buyers and sellers in a monopolistic
market.
ii. Differentiated product - Products of a firm are slightly different from those of other firms, but they are close
substitutes. Product differentiation is achieved through brand name, trade mark and advertisements.
iii. Selling cost - The need of the selling cost arises due to the sole aim of differentiating products. It is through
the help of advertisements that a monopolistic firm tries to convince the consumers by distinguishing its product
from its substitutes on qualitative basis.
iv. Free entry and exit of firms - There is no restriction on the entry and exit of firms in this form of market. But
at certain times, due to some legal barriers and patent rights, it is not so free for the new firm to enter the market.
v. Imperfect Knowledge- Both the buyers and the sellers do not have complete knowledge about the prevailing
market conditions. Due to product differentiation, it is very difficult to acquire complete knowledge about prices
and quantities of different products.

26. AR- MR Curve
– AR or MR in Monopolist Market:
– AR (Demand) Curve is left to right downward sloping curve and more
elastic / flatter than that of monopoly. It means that in response to change
in price, the change in demand will be relatively more for a monopolistic
competitive firm than a monopoly firm.
– AR and MR curves are both downward sloping because more units can
be sold only by lowering the price. MR lies below AR.

28. – Limitations of the model of monopolistic competition
• Some firms will be better at brand differentiation and therefore, in the real world, they will be able
to make supernormal profit.
• New firms will not be seen as a close substitute.
• There is considerable overlap with oligopoly – except the model of monopolistic competition
assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
• If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry.
A new firm can’t easily capture the brand loyalty.
• Many industries, we may describe as monopolistically competitive are very profitable, so the
assumption of normal profits is too simplistic.

29. OLIGOPOLY
– OLIGOPOLY
– Oligopoly is the form of market in which there are few sellers or few large firms, intensely
competing against one another and recognizing interdependence in their decision-making.

30. Types of oligopoly
– On the basis of product differentiation, Oligopoly, can be categorized in two categories:
– (i) Perfect Oligopoly: The Oligopoly is perfect or pure when the firms deal in the homogeneous
products.
(ii) Imperfect Oligopoly: Whereas the Oligopoly is said to be imperfect, when the firms deal in
heterogeneous products, i.e. products that are close but are not perfect substitutes.
– On the basis of production, oligopoly can be categorized in two categories:
– (i) Collusive oligopoly is that form of oligopoly in which all the firms decide to avoid
competition and determine the price and quantity of output on the basis of cooperative
behavior.
– ii) Non-collusive oligopoly is that form of oligopoly in which all the firms determine the price
and quantity of output according to the action and reaction of the rival firms.

31. Features of Oligopoly
– Features of Oligopoly
– (a) Few Sellers
– (b) All the firms produce homogeneous or differentiated product.
– (c) Under oligopoly demand curve cannot be determined. It has a kinked demand curve.
– (d) All the firms are interdependent in respect of price determination.
– (e) Price rigidity.

32. Profit maximization conditions
An oligopoly maximizes profits.
Ability to set price
Oligopolies are price setters rather than price takers.
Entry and exit
Barriers to entry are high. The most important barriers are government licenses, economies of scale, patents, access to expensive
and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional
sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to
enter the market.
Number of firms
"Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
Long run profits
Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess
profits.
Product differentiation
Product may be homogeneous (steel) or differentiated (automobiles).
Perfect knowledge
Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective.
Oligopolies have perfect knowledge of their own cost and demand functions, but their inter-firm information may be incomplete.
Buyers have only imperfect knowledge as to price,[4] cost and product quality.
Interdependence
The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so
large that its actions affect market conditions. Therefore, the competing firms will be aware of a firm's market actions and will
respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible
reactions of all competing firms and the firms' countermoves. It is very much like a game of chess, in which a player must
anticipate a whole sequence of moves and countermoves in order to determine how to achieve his or her objectives; this is
known as game theory.

33. Non-Price Competition
Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are
all examples of non-price competition.
Price and Output Determination under Oligopoly:
(a) If an industry is composed of few firms each selling identical or homogenous products and
having powerful influence on the total market, the price and output policy of each is likely to affect the
other appreciably, therefore they will try to promote collusion.
(b) In case there is product differentiation, an oligopolist can raise or lower his price without any fear
of losing customers or of immediate reactions from his rivals. However, keen rivalry among them may
create condition of monopolistic competition.

34. Telecom Sector

35. Demand Curve in Oligopoly

36. AR-MR curve in oligopoly