E

5 Market Structures

5.1. MARKET STRUCTURE

5.1.1. Mleaning and Definitionof Market
Aspecific place for
purchasing and selling of goods is termed
Conomcs, the use of this tern is not limited to a as
wider scope as it refers to the whole area
products are spread.
particular
where the buyersplace rattber
and
"market"
sellers
According to Prof. R. Chapnman, The
place but always to a commodity and theterm market refers not
competition with one another".
buyers and sellers who
are in necessarilydire
According to A.A. Cournot, "Economists understand by
any particular place in which things are bought and soldthe term 'market'
region in which buyers and sellers are in such free but the whole
that the price of the same goods tends to intercourse with one of any
equality, easily and quickly". another
5.1.2. Meaning of Market Structure
The classification of market from the
the industry structure serving the point of view of economics depends unom
the market variables market. The industry structure depends upon
competition. Thus, marketdetermining
the magnitude and
structure depends upon the
characteristics of
the magnitude and variables that
of competition. Thus, the nature and deternine
characteristics
competition for goods and services in the market degree of
structure. Here, it is significant to emphasise that the determine the market
competition for goods and services in the market determine the nature and degree of
for not onlythe goods market, but also market structure
its distinct feature. Besides this, the for the services market. Every market has
the industry are affected by the behaviour and performance the fims in
of
market structure.
5.1.3. Determinants of Market
For aparticular product, the numbers of Structure
) determinants of market
Number and Nature of Sellers: The number and nature of structure are:
affects the structure of market. A market structure willsellers be saidin theas pertêut
maIN
competition - when there are several number of sellers, as duopoly - whenthere
are two sellers, and as oligopoly - when there are
certain number of sellers.
2) Number and
Nature of deternined by
the nature and number of Buyers:
buyers The
in themarket structure
market. is alsostructure
A market willbe
said as monopsony - when there is one buyer, as duopsony - when there are
two buyers and oligopsony - when there are
certain numbers of buyen
 Module S1

dealtIProduct:
a l tof 165
The market
in the
market Amarketstncture is also determined hy the nature of
when the nature of prodrtstcture will he satd as the
lable mit.
etect
when the comeiton
is snch that the moneplstc
when there is ts prrxluxtcoce asttitistes are
oduct cOmpBetcly
s ifferentiafion anal
and different from
FxitConditios:
husiness imit Ihe extent of tter prrhkts
fhnthe market also dificulty regarding the entry and exn
from the detenines
cnier the narket f exit the markct
maket A ertet market depends structure. The
there are omeitive market upKn the prcofits
allows freedom of entry or exit of firrs
bamecrs to cntry of new firms
in the
Feononiies of in monopoly and
pdition, grow
Scale: Firms which arc achieving large ol1gopoly rarkets
larger than other firms
working economies of ifn
in an industry. Thesecale
alctndeney to uproot other firms
and firns
t another
resulting in the emergence of leaving few firms to compete with
ahen coOnOMies of scale
are oligopoly. There exists monopoly
mect the total market demand. exceedingly attained by a single firm and can
K14. Types of Market
a degree of Structures
competition is an important factor which affects the market types.
alowing are the two types of competition on which the types of market
depend:
Types Market Structures
of

Perfect Competition/Market
Imperfect Competition/Market
Perfect Competition/Market: The most important characteristic of perfect
Tnarket structure is the sale of same type of product to large number of buyers. A
perfect market uses productive technique rather than factors of production for
producing products. This type of market is considered to be unrealistic but. it is
of special importance for hypothetical and theoretical reasons.
2) Imperfect Competition/Market: The situations pertaining to imperfect market
edifferent from perfect market. Amarket structure in which all or any one of
the necessary conditionsof perfect market structure is not satisfied is retered to
as imperfect market structure. Various forms of impertect competition are:
i) Monopoly
i) Monopolistic Competition
i) Oligopoly
iv) Duopoly
5.2, PERFECT COMPETITION
5.2.1. Meaning and Definition of Perfect Competition
sellers who are
h market which consists of a large number of buyers and
hvolved in buying and selling of homogeneous products with perfect knowledge
prominent example of
0 the market is called perfect competitive market. The
market.
Prect competitive market is fruit and vegetable
 Business Economic (MicToy
Aceording to A. Koutsoyiannis, "Perfect competition is a market
characterised by a complete absenceof rivalry among the individual firn.
According to R.G. Lipsey, "Perfect competition is a market
structure
in
structire
all firms in an industry are price-takers and in which there is
into, and exit from, industry". freedom whentircyh
Having perfect competition in the market is a myth. This is so
conditions of pertect competition do not apply to any market.
because the
whereHowperevfeercg,
acording to some economists, the agriculture market is a market
competition prevails. Actually, this fact is not correct and there is
which perfect competition subsists. no market
5.2.2. Characteristics of Perfect Competition
Following are the characteristics of perfect competition:
1) Large Number of Buyers and Sellers: The first
competition is the existence of large number ofcondition
of the nerf
otherwise the market price cannot be affected by buyers and sellers
purchaser whovaries his supply or demand. Any singleafirm single producer or
a small portion of its output with contributes only
respect to total output whereas out of the
total demand a single purchaser's demand is only a
small portion of it.
2) Homogeneous Product: The items
second condition of perfect competitionproduced by the firms satisfying the
that it must be uniform and alike s0
that none of the buyers may have any
seller which is superior to other sellers.choice for the product of any single
The products such as salt, wheat.
cotton, coal, etc., are the examples of
homogeneous products.
3) Free Entry and Exit: Under
earn common profit which canperfect competition, the fims in the industry
happen only if there is no
firms regarding their exit from the restriction on the
industry or
Therefore, new firms will enter if there is more profitentry itinto the industry.
for the extra profit. On the and will be contested
other
some firms where remaining firms hand, less profit will result in
will share the boosted profit. quitting by
4) Perfect Knowledge:
There should be perfect knowledge of the
buyers and sellers and they must have complete awareness of themarket to the
are being offered and prices that
an assurance of uniformaccepted. On the basis of this knowledge there will be
prices allover the market.
5) Absence of
Transport Costs: It is assumed that there are free
facilities.
It is not required to
incur transportation cost, if the transport
product are same. prices of the
6) Absence of
Artificial
their goods to any buyerRestrictions: There is
and the buyers are freefreedom to the sellers to sell
Both parties are not involving in any to purchase from any
selier:
7) Absence of kind of
discrimination.
by the firms, Selling Costs: Due to the production of
the cost of
perfect competition. advertising,sales homogeneous products
 . A Assumptions
siS IS
based on of Perfect I67
Free entry and exit the
of
fficiency ot all the firmslowing assCompet
thefolfirms.
umptions: ition
factors of is same
factors are production
in perfect
acquiredat fixed market are
'aifomty
Allthe fims
mOre alike.
in the cOst
are
curves of theprice.
using same
firme homogeneous in nature Thus.
Under pertect technology for production and their
prevailingcompet
in theition, alI firms are well plants are
cutputs
market. aware of the prices
and the
Advantages of Perfect
ing are the
Consumer advantages The perfectCompet
of the
i ti o n
COnsumer. Sovereignty:
The competit ion:
consumers are perfect competitive market is
about the
conditions of the rational and they are having dominated by
market. perfect
Durchase products at a higher price. Due to this reason, they knowledge
will never
: Beneficial to
Consumers: It is beneficial for the consumer that the
egual to the minimum
average cost in the perfect price is
Cost-Saving: The wastage of the competitive
resources is decreased as the
market.
incurexpenditure on advertisement to promote sales. This is dueproducers do not
competitive firms which are price-takers and products are to the perfectly
AEconomic
Effciency: The perfect competitive firm atainshomogeneous.
functioning in the long run. This means optimum level of
economic efficiency in production. The firmsthat the firms achieve maximum
the optimum output and hence, there is no actual produced output is equal to
unused, or idle or surplus capacity.
5.2.5. Disadvantages of Perfect Competition
Following are the disadvantages of perfect competition:
J) No Scope for Economies of Scale: Due to small amounts are being produced by
many small firms, there is no scope for economies of scale. Industries having
high fixed costs are specifically improper for perfect competition. Due to this
reason perfect competition does not exist in the real world.
2) Homogenous Products: Consumers have less of choice from boring
identical products whereas different products are of great importance in the
industry such as clothing and cars.
S) Insufficient Profits: Investment in R&D is required due to lack of
requiring
Supernormal profits which is important for pharmaceutical industry
meaningful investment.
of patents, there is no profit in
Free flow of Technology: Due to unavailability will use these technologies.
companies
developing new technology because other
without the interference of the
Externalities: Market would be a failure consumption.
production or
governmentdue to expense in
 demand prie
Determination & b:
Equilibrium of Firm
$.2.10.1.Price-Output
Short Run maker in the market. The
than a price
determining dithef ereprincece
rather
A fim is prièe taker industry and a firm in
hetwcen the role of a competitive
levelcan be seen through the diagram given below:
and output
1) atAbnormal Profit/ Supernormal Profit: Afirm may get abnormal profit
the equilibrium level of output if its average revenue exceeds
production. In the figure 5.12, firm's equilibriurthe
average cost of the MR curve A is
attained at point E where the MC curve intersects
price. firm produces 0Q output. At 0Q utput, firm's average revenue
(AR) is EQ, while its average cost (AC) is BQ. The firm can earn
abnormal profit, if average revenue is greater than the average cost. Thue
the firm gets abnormal profit EB per unit of output, total profit being
PABE, i.e., per unit profit multiplied by the total output.
2) Losses: At equilibrium output, a firm may suffer loss. In short run period. the
fixed cost incurred on a product is not recoverable. The firm will continue to
produce further as long as it is able torecover itsaverage variable cost. In the
figure 5.12, E is the equilibrium point and at this point AR = EQ and AC =
BQ since BQ> EQ, firm isearning BE per unit loss and total loss is ABEP.
3) Normal Profits or Break-Even: When the firm just meets its average total
cost, itearns normal profits. Here, AR = ATC The figure 5.12 shows that
MR = MC at E and the equilibrium output is 0Q. Because the average
revenue is equal to average total cost or OP= EQ, the firm is only receiving
normal profit from the sales.

Y MC MCATC Price
Supernormal Losses Normal
ATC
Profit A Profit MC
ATC
AR = MR = P Ep AR= MR P0 |EP= AR= MR
A B
X X
Q Quantity QOutput Q Output
Figure 5.12: Price-Output Determination and Equilibrium of the Firm in Short ku
 Strctures(Module 5)

(onclusion: 175
If AR = ACthe firmm
will get
will get nomal
AR> AC.the
) IAR. firm profit (he. brcakeven)
will sufferOnal
AR < AC, the firm protit
fAR <AVC,tthe
firm will stop loss.
jogRun
producion.
Price-Output Determination & Équilibrium
Cnay or exit of the firms is of Firm in
fins not
which ae inefficient then restricted in a perfectly
tts or enhance their efficiency. they incur losses and thencompetitive
either rnarket
caming firms attract new Price/Cost
Y close down
restablishment. Due to the firms LMC

the supply entry

producers, the of
of the
LC
a1modity increases and the
prices of
ecommodity decreases. All the firms
st break-even pOint as a result of P= AR = MR
anishing of the profit. This situation is
#long run equilibrium of fim and
Quantity
ndustry in a perfect market whereas all Figure 5.13: Price-Output
he firms only break-even and earn & Equilibrium of the FirmDetermination
in Long Run
sly normal profits in the long run. The
firms work on no-loss-no-profit situation
shere firrn's AR = ACwhich is graphícally plotted in the
figure 5.13.
nfigure 5.13, OQ is equilibrium
quantity and at this
revenue and average cost both are equal to QS. Due to thislevel of output average
nly normal profits. At this point, since the average cost is
reason firm is making
minimum, the average
cost and marginal cost will be identical, and hence, the long run
equilibrium
conditions for afirm willbe:
MR= LMC = LAC= AR= Price
170
Business Economics(Microy
5.2.8.1. LShort-Run Supply Curve for a Firm
Duing the period of short-run, the fixed factor are
unchangedvariable
factor changes so the change in supply depends on the change inin whereas
Hence, a fixed cost is necessary to occur even when the firms
are
down. As a result, the firms will supply the commodity till the point factovar
r ia bl
involved in shut.
only
e
greater than or equal to average variable cost. Till the point where when prices are
equal to price or average revenue,
the firms will constantly supply MC
marginal cost is
the commodity. B AC
P AVC
Price
P
Prof. Bilas has defined it in simple AR=MR
words, The Fim's short period
supply curve is that portion of its
marginal cost curve that lies-above M M,
the minimum point of the average Output
variable cost curve." However. Figure 5.4: Short-Rum Supply Curve for a Firm
short run supply curve of a firm can be shown with the help of figure. 5.4.
In the above figure, X-axis represents the output and Y-axis
represents the
revenue or price. Initially, at the given level of price OP, the commodity supplied
is OM. If the price becomes less than OP, the firms will not be able to cover its
average variable cost. Hence, there is |ero supply at a point below the OP level.
The MR and MCcurve meets at point A with the given level of equilibrium
output OM. As the prices increases from OP to OP, with the increase in given
level of output OM, the MC and ACcurve meets each other at point B.
 Practical Applications of Perfect Competition
naNOMucs, perfect cotmpetition isa theoretical concept illustrating an jdeal market
nune. Practically, it is very rare to find such market structure in its pure form but
alli tis very important to understand the principles of perfect competition for
ätaing the analysis and evaluation of market dynamics. Some practical applications
ilitating
eal-world scenarios exhibiting elements of perfect competition are as follows:
Earmers' Markets: The average farmers' market can be regarded as the
closest real-life example to perfect competition. The few characteristics that
make it an example of perfect competition include - it involves selling of
nearly identical products for very similar prices by small producers; the
Overall marketplace is not influenced by the entry and exit of some vendors;
and the prices and product information is clear and fairly uniform.
) E-Commerce Products: It is another real-world example where perfect
competition can be found. The competition in e-commerce sector is increasing
constantly. It can be observed that if a product becomes popular on e
commerce, it starts to be offered by different vendors. E-commerce platforms
enable the customer to compare prices and quality to have perfect knowledge
of the products. These platforms do not inyolve any entry or exit barriers.
3 Free Software: These also operate in the same way as that of agricultural
marketplaces. Here, software developers are free to enter and exit market on
their own will. The market conditions are responsible for deternining the prices.
9 Street Food Vendors: These are also regarded as the part of perfectly
competitive market. The products offered by these are homogeneous in
nature and are priced accordingly. Consumers are available with wide variety
of choices regarding vendors. Similar to that of perfectly competitive market,
this market also allows free entry and exit.
) Foreign Exchange Markets: These are regarded as part of perfectly
competitive market because the products (i.e., the currencies) are
homogenous. Moreover, these markets also have large number of buyers and
sellers, good information about relative price, and provide easy comparability
of prices while buying currencies.