DEPARTMENT OF LAW

ALIGARH MUSLIM UNIVERSITY

SESSION – 2020-21
SUBJECT –ECONOMICS
Assignment-IV for GCT II
TOPIC-STRUCTURE OF MARKET

SUBBMITTED BY;
ZISHAN JAMSHED
19BALLB080
GK1064
SUBBMITTED TO;
Dr.Md Rahmatullah
Associate professor
AMU , ALIGARH
 STRUCTURE OF MARKET

INTRODUCTION

As we have seen, in economics  the definition of market  has a very wide scope. So
understandably not all markets are the same or similar. We can characterize market structures
based on the competition levels and the nature of these markets. Let us study the four basic types
of market structure.
A variety of market structures will characterize an economy. Such market structures essentially
refer to the degree of competition in a market.

There are other determinants of market structures such as the nature of the goods and products
the number of sellers, number of consumers, the nature of the product or service, economies of
scale etc. We will discuss the four basic types of market structures in any economy.

One thing to remember is that not all these types of market structures actually exist. Some of
them are just theoretical concepts. But they help us understand the principles behind the
classification of market structures.

TYPES OF MARKET;

1 )PERFECT COMPETITION MARKET

In a perfect competition market structure, there are a large number of buyers and sellers. All the
sellers of the market are small sellers in competition with each other. There is no one big seller
with any significant influence on the market. So all the firms in such a market are price takers.

There are certain assumptions when discussing the perfect competition. This is the reasona a
perfect competition  market is pretty much a theoretical concept. These assumptions  are as
follows,

 The products on the market are homogeneous, i.e. they are completely identical

 All firms only have the motive of profit maximization

 There is free entry and exit from the market, i.e. there are no barriers

 And there is no concept of consumer preference

Perfect competition is a benchmark, or "ideal type," to which real-life market structures can
be compared. Perfect competition is theoretically the opposite of a monopoly, in which only a
single firm supplies a good or service and that firm can charge whatever price it wants since
consumers have no alternatives and it is difficult for would-be competitors to enter the
marketplace.
Under perfect competition, there are many buyers and sellers, and prices reflect supply and
demand. Companies earn just enough profit to stay in business and no more. If they were to
earn excess profits, other companies would enter the market and drive profits down.

2) Monopolistic Competition
This is a more realistic scenario that actually occurs in the real world. In monopolistic
competition, there are still a large number of buyers as well as sellers. But they all do not sell
homogeneous products. The products are similar but all sellers sell slightly differentiated
products.

Now the consumers have the preference of choosing one product over another. The sellers can
also charge a marginally higher price since they may enjoy some market power. So the sellers
become the price setters to a certain extent.

For example, the market for cereals is monopolistic competition . The products are all similar
but slightly differentiated in terms of taste and flavours. Another such example is toothpaste.

Monopolistic competition is a middle ground between monopoly and perfect competition  (a

purely theoretical state), and combines elements of each. All firms in monopolistic
competition have the same, relatively low degree of market power they are all price makets .
In the long run, demand is highly elastic, meaning that it is sensitive to price changes. In the
short run, economic profit  is positive, but it approaches zero in the long run. Firms in
monopolistic competition tend to advertise heavily.

Monopolistic competition is a form of competition that characterizes a number of industries

that are familiar to consumers in their day-to-day lives. Examples include restaurants, hair
salons, clothing, and consumer electronics. To illustrate the characteristics of monopolistic
competition, we'll use the example of household cleaning products.

3) Oligopoly
In an oligopoly , there are only a few firms in the market. While there is no clarity about the
number of firms, 3-5 dominant firms are considered the norm. So in the case of an oligopoly, the
buyers are far greater than the sellers.

The firms in this case either compete with another to collaborate together, They use their market
influence to set the prices and in turn maximize their profits. So the consumers become the price
takers. In an oligopoly, there are various barriers to entry in the market, and new firms find it
difficult to establish themselves.

The existence of oligopoly requires that a few firms are able to gain significant market power,
preventing other, smaller competitors from entering the market. One source of this power is
increasing returns to scale. Increasing returns to scale is a term that describes an industry in
which the rate of increase in output is higher than the rate of increase in inputs. In other
words, doubling the number of inputs will more than double the amount of output. Increasing
returns to scale implies that larger firms will face lower average costs than smaller firms
because they are able to take advantage of added efficiency at higher levels of production.

4) Monopoly
In a monopoly type of market structure, there is only one seller, so a single firm will control the
entire market. It can set any price it wishes since it has all the market power. Consumers do not
have any alternative and must pay the price set by the seller.

Monopolies are extremely undesirable. Here the consumer loose all their power and market
forces become irrelevant. However, a pure monopoly is very rare in reality.

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. Monopolies also possess some information
that is not known to other sellers.

Characteristics associated with a monopoly market make the single seller the market
controller as well as the price maker. He enjoys the power of setting the price for his goods.

Monopolies and competitive markets mark the extremes in regards to market structure. There
are a few similarities between the two including: the cost functions are the same, both
minimize cost and maximize profit, the shutdown decisions are the same, and both are
assumed to have perfectly competitive market factors.

Usually, a monopolist sells a product  which does not have any close substitutes. Therefore, the
cross elasticity of demand for such a product is either zero or very small. Also, the price elasticity
of demand for the monopolist’s product is less than one. Hence, in the monopoly market, the
monopolist faces a downward sloping demand curve.
Conclusion;

In conclusion, the concept of market structure is central to both economics and marketing.
Besides, there are difference feature in these four common types of market structure which is
perfect competition, monopolistic competition, oligopoly and monopoly. Perfect Competition
which is many sellers of a standardized product, Monopolistic Competition which has many
sellers of a differentiated product, Oligopoly has few sellers of a standardized or a
differentiated product, and Monopoly which is a single seller of a product for which there is
no close substitute.

These four market structures each represent an abstract (generic) characterization of a type of
real market. Market structure is important in that it affects market outcomes through its
impact on the motivations, opportunities and decisions of economic actors participating in the
market.