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market structure


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different types of market structure and their feature

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market structure

  1. 1. Managerial Economics Presentation Group no :2 1 MBA – B SMS CUSAT
  2. 2. CONTENTS 1. Market 2. Features Of Market 3. importance of market 4. Market Structure 5. Determinants Of Market Structure 6. Forms Of Market Structure 7. Perfect Competition 8. Imperfect Competition 9. Monopoly 10. Monopolistic Competition 11. Oligopoly 12. Duopoly 13. Monopsony 14. Comparison and conclusion TOPICS PRESENTOR 1-6 MUHAMMED SUHAIL PS 7 MUHAMMED SHANOOB 8-10 PAUL BABU 11 JACKSON P JACKOB 12-14 GISHNU
  3. 3. MARKET “An actual or nominal place where forces of demand and operates and where buyers and sellers interact (directly or through intermediaries) to trade goods, services or contracts instruments, for money or barter.”
  4. 4. FEATURES OF MARKET 1. An area 2. One commodity 3. Buyers and sellers 4. Free competition 5. One price
  5. 5. IMPORTANCE OF MARKET? 1. Determining the price of the traded item 2. Communicating the price information 3. Facilitating deals and transactions 4. Effective distribution
  6. 6. MARKET STRUCTURE The inter connected characteristics of a market. Such as number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation and ease of entry into and exit from the market.
  7. 7. DETERMINANTS OF MARKET STRUCTURE 1. Number of buyers and sellers 2. Nature of the commodity 3. Freedom of movement of firms 4. Knowledge of market conditions 5. Mobility of goods and factors of production
  8. 8. FORMS OF MARKET STRUCTURE 1. Perfect competition 2. Monopoly 3. Monopolistic competition 4. Oligopoly. 5. Duopoly 6. Monopsony
  10. 10. Perfect competition describes a market structure where competition is at its greatest possible level. Helps in economic analysis rather than an actual goal for businesses. No mitigating factors are in play, such as one business that has a dramatically better product or an industry that has developed to create severe impediments to free entry into the market. economists to analyze members of an industry as equals. Rare in real life, Fullerton College states that agricultural industries are good real-life examples of perfect competition.
  11. 11. ASSUMPTIONS BEHIND A PERFECTLY COMPETITIVE MARKET  Suppliers with insignificant share of market .  Each individual firm is a price taker.  Identical output produced by each firm.  Consumers have complete information about prices.  Transactions are costless in making an exchange .  All firms (industry participants and new entrants) have equal access to resources (e.g. technology).  No barriers to entry & exit of firms in long run.  No externalities in production and consumption.
  12. 12. CHARACTERISTICS 1. Large number of buyers and sellers 2. Homogenous product is produced by every firm 3. Free entry and exit of firms 4. Zero advertising cost 5. perfect knowledge about market conditions 6. perfect mobility in factors of production 7. No government intervention 8. No transportation costs 9. Each firm earns normal profits and no firms can earn super-normal profits. 10. Every firm is a price taker.
  13. 13. DESCRIPTION Ideally, perfect competition is a hypothetical situation which cannot possibly exist in a market. However, perfect competition is used as a base to compare with other forms of market structure. No industry exhibits perfect competition in India.
  14. 14. EXAMPLES OF PERFECTLY COMPETITIVE MARKETS  It is rare to find a pure example of perfect competition.  But there are some close approximations: –  FOREIGN EXCHANGE DEALING  Homogeneous product - $  Many buyers & sellers .  Usually each trader is small relative to total market and has to take price as given.  AGRICULTURAL MARKETS  Pig farming, cattle.  Farmers markets for apples, tomatoes.  Wholesale markets for fresh vegetables, fish, flowers.  Street food markets in developing countries.
  15. 15. PURE COMPETITION V/S PERFECT COMPETITION Pure competition in market where  (a) Large number of buyers and sellers  (b) Products homogeneous  (c) Freedom of entry and exit of buyers and sellers. In perfect competition, +  (d) Perfect knowledge of the buyers and sellers regarding market conditions  (e) Perfect mobility of FOP.  (f) Absence of transport cost and  (g) Uniform price.  Thus, perfect competition is not only pure but also free from other imperfection. It is a broader concept than pure competition.
  16. 16. THE EQUILIBRIUM OF THE FIRM UNDER PERFECT COMPETITION  Demand curve or ARC of the firm is a horizontal straight line (i.e., perfectly elastic) at the level of the prevailing price. Since perfectly competitive firm sells additional units of output at the same price, MR curve coincides with AR curve. MC curve, as usual, is U-shaped.  AR=MR=P  To decide about its equilibrium output, Compare MC with MR.  Equilibrium at the level of output -MC=MR & MC cutting MR from below.(Condition) At this level it will be maximizing its profits.  Since MR=AR=P, the firm will equalize MC with price to attain equilibrium output.
  17. 17.  As under perfect competition MR curve is a horizontal straight line, the MC curve must be rising so as to cut the MC curve from below. Therefore, in case of perfect competition the 2nd order condition of firm’s equilibrium requires that MC curve must be at the point of equilibrium. Hence the twin conditions of firm’s equilibrium under perfect competition are:  (1) MC=MR = Price  (2) MC curve must be at the point of equilibrium.  Above two conditions does not guarantee that profits will be earned by the firm. In order to know whether the firm is making profits or losses and how much of them, AC curve must be introduced in the figure.
  18. 18.  SAC and SMC curves ----  Profit per unit of output is the difference between AR(price) and AC.  The total profits will be equal to the area HFEP. Because normal profits are included in AvrgCost, the area HFEP indicates super-normal profits.  All firms in the industry are working under same cost conditions-price is OP, all will earn super-normal profits equal to the area HFEP.  Thus, while all firms in the industry- in short-run equilibrium, the industry will not be in equilibrium.(tendency for the new firms to enter the industry to complete away the super-normal profits.) - short run is not a period long enough for the new firms to enter.  The existing firms will earn super-normal profits equal to HEFP in the short period. It is evident that in the situation depicted in Fig. all firms will be in equilibrium at E and each will be producing OM output, but the tendency for the new firms to enter the industry will be present, though they cannot enter during the short period.
  19. 19. AC AR/MR Situation
  20. 20. Deciding to Shut Down:  Now, an important question is why a firm should continue operating when it is incurring losses.  Answer lies in the concept of fixed costs which have to be borne by the firm even if it stops production in the short run.  FIRM SHUT DOWN = VC=0, FC=REMAINS SAME  VC= labor, capital, telephone rent, etc.  FC = rent of factory building, costs on machinery purchased, wages of a certain minimum managerial staff  Therefore, it will be wise to continue operating in the short run when firm’s total revenue exceeds total fixed costs because in that case firm’s losses will be less than the fixed costs. To make analysis simple, we examine the question in two parts:  1. Situation when a firm decides to continue operating in the short run even when incurring losses.  2. Situation when a firm decides to shut down in the short run.
  21. 21. 1. Situation when a firm decides to continue operating when incurring losses:  Therefore, it is prudent on the part of the firm to continue producing in this situation when losses are less than total fixed costs. (P = MC).  OQ- equilibrium output, AVC is QL<OP. Firm recovering VC= part of FC  TR= OPEC , TC=ORTQ  When price is OP. TR<TC making loss of RTEP  AFC= TL , AFC(TL) * KL = RTLK  It is thus clear by working at point E and producing output OQ, the firm is recovering the entire variable costs equal to the area OQLK and a part of the fixed cost equal to the area KLEP.  Thus losses made equal to the area RTEP are less than the total fixed cost equal to the shaded area RTLK. If a firm shuts down in the short run and ceases to produce the product, its losses will be equal to the total fixed cost RTLK  To conclude, the firm will continue operating in the short run at a loss when total revenue exceeds total variable costs. This enables the firm to earn revenue to recover a part of the fixed costs.  Good to continue when, TR > TVC and P > AVC
  22. 22. 2. Situation when a firm decides to shut down in the short run:  This situation is depicted in Fig. 23.5(b) where it will be seen that price has fallen to the level OP1. With price OP1, equilibrium is attained at point D corresponding to output OQ1at which price is equal to both marginal cost (MC) and minimum average variable cost. By producing OQ, output and selling it at price OP1, the firm earns total revenue equal to the area OQ1 DP1.  The total cost of producing OQ1 output is equal to the area O0, HB. Thus with price OP, the firm is incurring losses equal to the area P1 DHB. It should be noted that average fixed cost is DH at OQ1 output, that is, the vertical distance between SAC and AVC.  The total fixed cost is then given by the area P, DHB. Here when Price is at OP1, Losses= TFC  If price falls below OP1, which is equal to the minimum possible average variable cost (AVC), the losses will become greater than the fixed costs and the firm will shut down. Point D which indicates the minimum possible average variable cost represents the shut-down point.
  23. 23. DISADVANTAGES  comprised of numerous small firms so, No scope for economies of scale. FC incurring when further developed.  lack of product differentiation : rice is rice, and iron is iron.  Homogeneity - reduced research and development expenditures.  Absent government intervention - reduced incentive to develop new technology and the potential for market failure.  Perfect competition is largely a theoretical concept.
  25. 25. IMPERFECT COMPETITION In Perfect competition, demand is perfectly elastic ( Ed= infinite ) For perfect competition it will be a fine value Monopoly Duopoly Monopolistic Competition Oligopoly
  26. 26. MONOPOLY “Monopoly is a market situation in which a single seller (firm or monopolist) controls the entire supply of a commodity which has no close substitutes“ Monopoly comes from Greek, ‘Mono’ - Single and ‘poly’ – to sell
  27. 27. PROPERTIES OF MONOPOLY Single Seller – only single seller, no choice other than to buy from the monopolist Control over the supply – therefore PRICE MAKER No close substitute – if so, monopoly power will be lost Restrictions on entry – difficult for new firms to enter as the monopolist will not let it happen No distinction between firm and industry
  28. 28. DEMAND CURVE FOR MONOPOLY  Cannot determine Price and Quantity at the same time  Slopes down from left to right  Means small quantity can be sold at very high prices  MR declines at a faster rate than AR  Max TR at MR = 0
  29. 29. PROFIT UNDER CONDITIONS OF ZERO COST  Zero refers to negligible cost  Occurs when owner gets raw materials without any cost  Eg: Mineral water  Profit = TR – TC, since TC=0, profit is max when TR is max ( at the point P )  At P, profit = AR * Qty = 10*2=20
  30. 30. PROFIT UNDER CONDITION OF COST  Difference b/w TR and TC shows the profit  For Qty less than Q2 and greater than Q3, TC >TR , profit is negative
  31. 31. EQUILIBRIUM USING AVERAGE AND MARGINAL CURVES  For a firm to be in equilibrium MR = MC  Profit = Area of OMQP – Area of OMRS  In short Run - Monopoly will have Loss or Normal Profit or Super normal profit  In long run – monopoly will retain Super profit ( IDEALLY), practically substitutes will be made
  32. 32. INTRODUCTION o Monopolistic competition is a market situation characterised by competition among fairly large number of firm selling differentiated products which are close substitutes. o It is a form of imperfect competition. o Many firms selling products that are similar but not identical. o Monopolistic competition is similar to perfect competition, some economist regard it as more realistic, because the products are differentiated
  33. 33. FEATURES OF MONOPOLISTIC COMPETITION Very large number of buyers and sellers Product differentiation Blend of monopoly and competition Selling costs Freedom of entry and exit
  34. 34. PROS AND CONS  Unlike Monopoly and Perfect Competition, best thing about monopolistic competition is product differentiation.  Therefore, both the producer and consumer have market sovereignty.  However, like a monopoly, there is some inefficiency, and there are not long term profits.
  35. 35. OLIGOPOLY
  36. 36. DEFINITION Oligopoly is a market structure in which a small number of firms has the large majority of market share. Similar to monopoly, except that rather than one firm, two or more firms dominate the market. Heterogeneous products Homogeneous product
  37. 37. MODELS OF OLIGOPOLY Price and output determination under collusion oligopoly Price output determination under non-collusion oligopoly Price leadership model
  38. 38. There are only 3 firms in the industry and they form a cartel The products of all the the 3 firms are homogeneous The cost curves of these firms are identical PRICE AND OUTPUT DETERMINATION UNDER COLLUSION OLIGOPOLY
  39. 39. PRICE OUTPUT DETERMINATION UNDER NON-COLLUSION OLIGOPOLY The kinked demand curve by paul sweezy  All the firms in the industry are quite developed with or without product differentiation  All the firms are selling the goods on fairly satisfactory price in the market  If any one firm lowers the price of its product to capture a larger share of the market, the other firms follow and reduce the price of their goods in order to retain their share of the market  If one firm raises the price of its good, the other firm will not follow the price increase. Some of the customers of the price raising firm will shift to the relatively low priced firms.
  40. 40. Explanation Price increase Price reduction Rigid prices
  41. 41. PRICE LEADERSHIP MODEL  There are two firms A and B in the market  The output produced by the firms is homogeneous  The firm ‘A’ being the low cost firm or dominant firm acts as a leader firm  Both of the firm face the same demand curve  Each of the two firm has an equal share in the market.
  42. 42. DUO POLY