Group no :2
1 MBA – B
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
10. Monopolistic Competition
14. Comparison and conclusion
1-6 MUHAMMED SUHAIL PS
7 MUHAMMED SHANOOB
8-10 PAUL BABU
11 JACKSON P JACKOB
“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.”
FEATURES OF MARKET
1. An area
2. One commodity
3. Buyers and sellers
4. Free competition
5. One price
IMPORTANCE OF MARKET?
1. Determining the price of the traded item
2. Communicating the price information
3. Facilitating deals and transactions
4. Effective distribution
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.
DETERMINANTS OF MARKET
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
FORMS OF MARKET STRUCTURE
1. Perfect competition
3. Monopolistic competition
Perfect competition describes a market structure where
competition is at its greatest possible level.
Helps in economic analysis rather than an actual goal for
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.
ASSUMPTIONS BEHIND A PERFECTLY
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.
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.
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.
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
Pig farming, cattle.
Farmers markets for apples, tomatoes.
Wholesale markets for fresh vegetables, fish, flowers.
Street food markets in developing countries.
PURE COMPETITION V/S PERFECT
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.
THE EQUILIBRIUM OF THE FIRM UNDER PERFECT
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.
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.
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.
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
All firms in the industry are working under same cost conditions-price is OP, all will earn super-normal profits equal to the area
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
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.
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
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.
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
Good to continue when, TR > TVC
and P > AVC
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.
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.
In Perfect competition, demand is perfectly elastic ( Ed= infinite )
For perfect competition it will be a fine value
“Monopoly is a market situation in which a
single seller (firm or monopolist) controls the
entire supply of a commodity which has no
Monopoly comes from Greek,
‘Mono’ - Single and ‘poly’ – to sell
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
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
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
PROFIT UNDER CONDITION OF COST
Difference b/w TR and TC shows the
For Qty less than Q2 and greater than
Q3, TC >TR , profit is negative
EQUILIBRIUM USING AVERAGE AND
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
o Monopolistic competition is a market situation characterised by competition
among fairly large number of firm selling differentiated products which are
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
FEATURES OF MONOPOLISTIC
Very large number of buyers and sellers
Blend of monopoly and competition
Freedom of entry and exit
PROS AND CONS
Unlike Monopoly and Perfect Competition, best thing about
monopolistic competition is product differentiation.
Therefore, both the producer and consumer have market
However, like a monopoly, there is some inefficiency, and there
are not long term profits.
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.
MODELS OF OLIGOPOLY
Price and output determination under collusion
Price output determination under non-collusion
Price leadership model
There are only 3 firms in the industry and
they form a cartel
The products of all the the 3 firms are
The cost curves of these firms are identical
PRICE AND OUTPUT DETERMINATION UNDER
PRICE OUTPUT DETERMINATION UNDER
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
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