[Link].

[ F I R S T-Y E A R ]

BASIC ECONOMICS
 • Perfect competition
• Monopoly
T YPES OF
MARKET S • Monopolistic competition
• Oligopoly
 A market is a place or a context
where buyers and sellers come
in contact for transactions.

WHAT IS A In Economics, the concept of a

market is any structure that allows
MARKET? buyers and sellers to exchange goods,
services and information.

The buyers and sellers are assumed to

be well-informed about prices
prevailing in the market and other
conditions.
 MEANING AND CHARACTERISTICS OF
PERFECT COMPETITION
• Perfect competition describes a market structure where competition is at its
greatest possible level. Perfect competition describes a market structure where
competition is at its greatest possible level.

• To make it more clear, a market which exhibits the following characteristics in

its structure is said to show perfect competition:
A Large Number of Buyers and Sellers: The numbers of buyers are so many that a single buyer buys a very small part of
the market supply. Similarly, a single seller supplies a very small part of the total output. For this reason, the size of a competitive
firm becomes very small in relation to the industry to which it belongs.

An Identical or a Homogeneous Product: All the sellers in a perfectly competitive market supply an identical product. In
other words, the products of all the competitive firms are the same.

Perfect Knowledge: Again, both buyers and sellers have a perfect or full knowledge relating to the price prevailing in the
market. For this reason, there can exist only one price in a perfectly competitive product market. a

Free Entry and Free Exit of Firms: In this type of market new firm can freely enter the industry or an existing firm can freely
leave the industry in the long run.

Perfect Mobility of the Factors of Production and Goods: There should be perfect mobility of goods and factors between
industries. Goods should be free to move to those places where they can fetch the highest price.

Absence of Transport Cost: There must be absence of transport cost. In having less or negligible transport cost will help
complete market in maintaining uniformity in price.
 MEANING AND CHARACTERISTICS OF
MONOPOLY
• A market structure characterized by a single seller, selling a unique product in the
market. In a monopoly market, the seller faces no competition, as he is the sole seller of
goods with no close substitute.

• In a monopoly market, factors like government license, ownership of resources,

copyright and patent and high starting cost make an entity a single seller of goods. All
these factors restrict the entry of other sellers in the market.

• The characteristics are explained below:

Only One Producer or Seller: There is only one seller or producer of the product and goods in the market which means
there is absence of competition. The one seller or producer who controls the supply and price of the product in the market. So,
they are also known as the price maker of the market. When there are numerous buyers in the market, the importance of a
single buyer becomes negligible and the competition found among the buyers in monopoly.

Absence of Close Substitute goods: There is absence of substitute goods in Monopoly. But in reality, it is imperfect
monopoly as there is absence of the close substitutes but there is rare possibility that similar products are available.

Restriction over the entry of New firms: Monopoly means there is an existence of only one seller and to sustain his
monopoly for a longer duration it is necessary to restrict the entry of new firms. The monopolist restricts newer firms by factors
like natural, law, skills and [Link] barriers to entry could also be economic, institutional, legal or artificial.
Control over the price or sale to gain Maximum profits: The seller controls the supply of the products. But the seller
cannot control both the price and the sales of the products. To gain more profit sell, the firm sets higher prices and end up selling
less units or products, while to sell more units of products the firm must set lower price of product. To sell large number of units
of product with high price is not possible.
Super Normal Profit in a Monopoly market: The producer and seller are the same in monopoly market. The seller can gain
super normal profits without any competition in both shorter and longer time periods. The seller can put high price on the
products as compared to the total expenses of production and thus he can gain super normal profits.

Price discrimination due to absence of any competition: The seller can set different prices on the same product or
services depending upon its use utility or form utility. The seller can gain higher profit using the concept of price discrimination
For example; Doctor could charge different fees for the same service depending upon financial situation of patient.
 MEANING AND CHARACTERISTICS OF
MONOPOLISTIC COMPETITION
• In monopolistic competition, the market has characteristics of both perfect
competition and monopoly. A monopolistic competition is more common
than pure competition or pure monopoly.
• Firms offer products or services that are similar but not perfect
substitutes. Barriers to entry and exit in a monopolistic competitive
industry are low, and the decisions of any one firm do not directly affect
those of its competitors.
Product Differentiation: Firms operating under the monopolistic competition, produces the product
which is not identical but is slightly different from each other. The products remain close substitutes of
each other and hence cannot be priced very differently from each other.

Large number of firms: A large number of firms operate under the monopolistic competition, and
there is a stiff competition between the existing firms.

Free Entry and Exit: With an intense competition among the firms, the entity incurring the loss can
move out of the industry at any time it wants. Similarly, the new firms can enter into the industry freely,
provided it comes up with the unique feature and different variety of products to outstand in the market

Some control over price: Since, the products are close substitutes for each other, if a firm lowers the
price of its product, then the customers of other products will switch over to it. Conversely, with the
increase in the price of the product, it will lose its customers to others.

Heavy expenditure on Advertisement and other Selling Costs: Since the products are different
and are close substitutes for each other; the firms need to undertake the promotional activities to
capture a larger market share.

Product Variation: To meet the needs of the customers, each firm tries to adjust its product
accordingly. The changes could be in the form of new design, better quality, new packages or container,
better materials, etc.
 MEANING AND CHARACTERISTICS OF
OLIGOPOLY

• Oligopoly is defined as a market structure with a small number of firms,

none of which can keep the others from having significant influence.
Here the industry is dominated by a few firms. Also, as there are few sellers
in the market, every seller influences the behavior of the other firms and
other firms influence it.
• An Oligopoly market situation is also called ‘competition among the few’.
• Characteristics of oligopoly are explained below:
Few firms: Under Oligopoly, there are a few large firms although the exact number of firms is undefined. Also, there is severe
competition since each firm produces a significant portion of the total output.

Barriers to Entry: Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry like
patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into the industry.

Non-Price Competition: Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence depend
on non-price methods like advertising, after-sales services, warranties, etc. This ensures that firms can influence demand and build
brand recognition.

Interdependence: Under Oligopoly, since a few firms hold a significant share in the total output of the industry, each firm is
affected by the price and output decisions of rival firms. Therefore, there is a lot of interdependence among firms in an oligopoly.
Hence, a firm takes into account the action and reaction of its competing firms while determining its price and output levels.

Nature of the Product: Under oligopoly, the products of the firms are either homogeneous or differentiated.

Selling Costs: Since firms try to avoid price competition and there is a huge interdependence among firms, selling costs are
highly important for competing against rival firms for a larger market share.

No unique pattern of pricing behavior: Under Oligopoly, firms want to act independently and earn maximum profits on
one hand and cooperate with rivals to remove uncertainty on the other hand. Depending on their motives, situations in real-life
can vary making predicting the pattern of pricing behavior among firms [Link] firms can compete or collude with other
firms which can lead to different pricing situations.
Market Structure: In a nutshell
Form of Number of Nature of Price Elasticity Degree of
Market Firms Product of Demand for Control over
Structure an Individual Price
Firm
Perfect Large Homogeneous Perfectly elastic None
Competition number of
firms
Monopoly Single Firm Unique product Inelastic Considerable
without close
substitute
Monopolistic Large Differentiated Elastic Some
Competition number of
firms
Oligopoly Few Firms Homogeneous Indeterminate Some
or
Differentiated
EXAMPLES:

Perfect Monopoly Monopolistic

competition Oligopoly
National Railways, competition
Agricultural Airline Industry,
Licensed Monopolies Dry cleaners, Coffee
markets (like crops shops, Grocery stores, Health Insurance
and dairy), foreign (specific technology or
exchange markets, resource-based Pharmacies, Gas Companies,
companies), stations, Hotels,
and Online Hardware/home Automobile
marketplaces Govt monopolies improvement stores, industry, where a
These markets are not (National Security) Furniture stores, FMCG handful of companies
perfectly competitive in Companies like and salons, where many control most of the
reality, but they closely Microsoft, Google (in firms sell similar but market
approximate the model differentiated
search), and De Beers
because they feature
(in diamonds) are often products and compete Mass Media, where
numerous buyers and a few corporations own
sellers, homogeneous cited as examples, by differentiating
their offerings a large percentage of
products, easy entry and though the market
through unique news outlets and
exit, and perfect structure can change
branding, style, price, entertainment
information. due to competition and
or service. channels.
regulation
Interesting videos:
Monopoly vs. Oligopoly vs. Competition: Monopolies and
Oligopolies Defined, Explained and Compared
[Link]

Barriers to Entry Explained in One Minute: Definition, Examples

and Monopoly/Competition Concerns
[Link]

Why do competitors open their stores next to one another?

[Link]

The Importance of Competition