MARKET STRUCTURE

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 Introduction: Market Structure
 Market is the process of planning and executing the
conception, pricing, promotion, and distribution
of goods, services and ideas to create exchanges
that satisfy individual and organizational objectives.
• Digital marketing is the marketing of products or
services using digital technologies, mainly on the
internet but also including mobile phones, display
advertising, and any other digital media.
• Physical market is a set up where buyers can
physically meet their sellers and purchase the desired
merchandise from them in exchange of money. 2
 Perfectly competitive market (PCM)
 Perfect competition is a market structure characterized by a
complete absence of rivalry among the individual firms.
 A very large number of buyers and sellers of a product.
 Firms producing a standardized(homogenous) product (that is, a
product identical to that of other producers)
Assumptions of PCM
• Large number of sellers and buyers:
• Homogeneous product:
• Perfect mobility of factors of production
• Free entry and exit
• Perfect knowledge about market conditions
• No government interference
 Perfect knowledge or perfect information

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 Cont’d
 A single producer under perfectly competitive market is a price-taker.
 That is, at the market price, the firm can supply whatever quantity it
would like to sell.
 PCM firm faces a completely horizontal or perfectly elastic demand curve.
 For its product indicating that it can sell any amount of output only at
the ongoing market price ( P ).
 The DD curve is also the average revenue (AR) and marginal revenue (MR)
curve.

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 Short Run Equilibrium of The Firm
 In the short run, the firm has a fixed plant. It can adjust its output only
through changes in the amount of variable resources and it adjusts its
variable resources to achieve the output level that maximizes its profit.
 Total Revenue (TR): It is the total amount of money a firm receives
from a given quantity of its product sold.

TR=P X Q
 Average revenue (AR):It is the revenue per unit of item sold.
 It is calculated by dividing the total revenue by the amount of the
product sold.

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 Marginal Revenue: It is the additional amount of money/ revenue the firm receives
by selling one more unit of the product.

 In a PCM, a firm‘s average revenue, marginal revenue and price of the product are
equal, i.e. AR = MR = P =DD.
 Since the purely competitive firm is a price taker, it will maximize its economic profit
only by adjusting its output.
 In the short run, the firm has a fixed plant. Thus, it can adjust its output only through
changes in the amount of variable resources.
 It adjusts its variable resources to achieve the output level that maximizes its profit.
 Two ways to determine the level of output of firm will realize maximum profit or
minimum loss.

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 Total Approach (TR-TC approach): A firm maximizes
total profits in the short run when the (positive)
difference between total revenue (TR) and total costs
(TC) is greatest.

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• 2. Marginal Approach (MR-MC): In the short run, the firm
will maximize profit or minimize loss by producing the output
at which marginal revenue equals marginal cost.
• More specifically, the perfectly competitive firm maximizes
its short-run total profits at the output when the following two
conditions are met:
1. MR = MC

2. The slope of MC is greater than slope of MR; or MC is

rising) (that is, slope of MC is greater than zero).

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Proof !

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• The firm in the short- run gets positive or zero or negative
profit depends on the level of ATC at equilibrium.
• Depending on the relationship between price and ATC, the firm
in the short-run may earn;
– Economic profit,

– Normal profit or incur loss and

– Decide to shut-down business.

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1. Economic/positive profit: If the AC is below the
market price at equilibrium, the firm earns a positive
profit equal to the area between the ATC curve and the
price line up to the profit maximizing output.

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2. Loss: If the AC is above the market price at
equilibrium, the firm earns a negative profit (incurs a
loss) equal to the area between the AC curve and the
price line.

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3. Normal Profit (zero profit) or break- even point:
If the AC is equal to the market price at equilibrium,
the firm gets zero profit or normal profit.

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4. Shutdown point: If P is smaller than AVC, the firm
minimizes total losses by shutting down. Thus, P =
AVC is the shutdown point for the firm.

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Short Summery Tables of the above Graph

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 Example
 Suppose that the firm operates in a PCM. The market
price of its product is $10.
 The firm estimates its cost function is TC=2+10q-
4q2+q3

A. What level of output should the firm produce to

maximize its profit?

B. Determine the level of profit at equilibrium.

C. What minimum price is required by the firm to stay

in the market?

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• B) Above, we have said that the firm maximizes its profit by
producing 8/3 units. To determine the firm‘s equilibrium profit we
have to calculate the total revenue that the firm obtains at this level of
output and the total cost of producing the equilibrium level of output.

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• C) To stay in operation the firm needs the price which equals at least
the minimum AVC. Thus, to determine the minimum price required to
stay in business, we have to determine the minimum AVC.

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Home Doing Exercise

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 Cont’d

Short Run Equilibrium of the Industry

Reading Assignment

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IMPERFECT MARKET STRUCTURE

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 Pure Monopoly
• The opposite end of the spectrum of market structures.

• Pure monopoly exists when a single firm is the only

producer of a product for which there are no close
substitutes.
• The main characteristics of this market structure
include:

1. Only one supplier of a product

2. The product has no close substitute (unique product)

3. Price maker

4. Blocked entry
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 Cont’d
 A pure monopoly firm is a price setter, not price taker

 Profit maximizing condition is MR=MC and MC is

rising
 Is a market structure in which one firm is the sole
seller of a product or service (for example, a local
electric utility).
 Since the entry of additional firm is impassable, one
firm constitutes the entire industry.
 Because the monopolist produces a unique product,
it makes no effort to differentiate its product and no
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close substitutes
 Sources of monopoly
 The emergence and survival of monopoly is
attributed to the factors which prevent the entry of
other firms in to the industry.
 The barriers to entry are therefore the sources of
monopoly power.
 The major sources of barriers to entry are:

1. Legal restriction

2. Control over key raw materials

3. Efficiency

4. Patent rights
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 Monopolistic Competition Market
 The market organization in which there are relatively many firms
selling differentiated products.
 The market relatively many sellers producing differentiated
products.
 The monopoly element results from differentiated products, i.e.
similar but not identical products.
 A seller of a differentiated product has limited monopoly power
over customers who prefer his product to others.
 His monopoly is limited because the difference between
his product and others are small enough that they are
close substitutes for one another.

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 Characteristics of Monopolistic Competition
 Differentiated product

 similar but not identical in the eyes of the buyers.

 Many sellers and buyers

 But not as large as that of the perfectly competitive
market.
 Easy entry and exit
 There is no barrier on new firms that are willing and able
to produce and supply the product in the market.
 Existence of non-price competition:

 In terms of product quality, advertisement, brand name,

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service to customers, etc.
 Oligopoly Market
 Involves only a few sellers of an differentiated or
similar product
 Each firm is affected by the decisions of its rivals and
must take those decisions into account in determining
its own price and output.
 A special type of oligopoly where there are only two
firms is called duopoly
Characteristics of Oligopoly Market
 Few dominant firms
 There are few firms although the exact number of
firms is undefined. 30
 Cont’d
 Interdependence
 Each firm is affected by the price and output
decisions of rival firms.
 Entry barrier
 There are considerable obstacles that hinder a new
firm from producing and supplying the product.
 Barriers may include economies of scale, legal,
control of strategic inputs.
 Products may be homogenous or differentiated.
 Lack of uniformity in the size of firms
 Non-price competition
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 Market Model
Characteristic
Pure Competition Monopolistic Competition Oligopoly Pure Monopoly

Number of firms A very large Many Few One

number

Type of product Standardized Differentiated Standardized or Unique; no close

differentiated substitutes

Control over price None Some, but within rather Limited by mutual Considerable
narrow limits interdependence;
considerable with
collusion
Condition of entry Very easy, no Relatively easy Significant obstacles Blocked
obstacles

Non price None Considerable emphasis Typically a great deal, Mostly public
competition on advertising, brand particularly with product relations,
names, trademarks differentiation advertising

Examples Agriculture Retail trade, dresses, Steel, automobiles, farm Local utilities
shoes implements, many
household appliances 32
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END!!!

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