UNIT 4

Market structures

In economics market are characterized based on the competition level & the nature of their market such as the nature of a
product, the No. sellers & buyers.
There are 4 major types of market structure i.e;
*Perfectly competitive market * Pure monopoly market *
monopolistically competitive market *Oligopoly market
1. Perfectly competitive market
In micro eco. Perfect competition refers a market in which a buyer or seller has no market power or where all buyers &
sellers are price takers.
The difference b/n perfectly competitive market from imperfectly competitive ones is;
-A perfectly competitive market has is characterized by the fact that no single firm has any influence on the price of the
product it sells.
The characteristics(assumption) of perfect competition .
Large No. of buyers & sellers in the market . Free entry & exit of a
firm . Homogeneous products i.e its quality,colour, design ,size
. There are perfect substitution for one . perfect knowledge(information)-for both buyers&sellers in price &cost
. Perfect mobility & absence of transport cost
The major objective of a firm is to maximixe profit( by increasing revenue & minimizing cost)
Perfect competition demand and revenue function
A. DEMAND
The assumption of large No. of sellers& product homogeneity together impliy that an individual firm operatig in a perfectly
competitive market is a price taker.
A competitive firm faces a completely horizontal demand curve for its product market,indicating that it can sell any amount of out
put only at the ongoing market price.

B. Revenue function The

revenue of a firm are the receipts that it obtain from selling its products.
Revenue have three main categories; Total Revenue, Average Revenue, marginal Revenue
. Total Revenue; is the total amount of money recived by a company from the sale of a specific qty of its product.
TR= P.Q
. Average product; is the revenue per unit of item sold.
AR= TR/Q = P.Q/Q = AR=P
N.B The average revenue(AR) and the price of a product have the same meaning
. Marginal revenue; is the change in total revenue resulting from one unit increase in sales.
MR= ∆ TR /∆ Q
 In a perfectly competitive market, a firm’s AR=MR=P
In perfectly competitive market a firm sell any amount of out put at a given market price.it means a firm’s additional
revenue(MR) from the sale of every additional unit of the commodity is equal to market price.
2. Pure monopoly market
The term’monopoly’ is derived from two Greek words i.e ’monos’ (single) and ‘polus’(a seller)
A Monopoly is a market structure in which there is only one supplier in a given market.for no other commodity to
work as a substitute for this commodity.
When there is only one firm in the market the firm is the price marker, where as consumers are the price takers. EX.
ELPA, Ethio telecom
The main characteristic(assumption) of pure monopoly
A Pure monopoly exist when a single firm is the only producer of a product for which there are no close substitute.
A. A single seller & many buyers; a one firm that produces or sells the product to many buyers.
B. No close substitute; A product produced by a monopolist has a close substitute.it means consumers have no
alternative to choice to substitute one product for another.
C. Price maker; the monopolist are price maker for their products.
D. Price discrimination; A monopolist can sell its product at different prices to different customers.
E. Restriction on entry; In monopoly new competitors can not freely enter the market due to some strict
barriers( due to legal restriction like licencing or patent right).
Factors for the existence of monopolies are;
A. Absence of close substitute B. Ownership of strategic or key resource
C.Patent right for products or production process
D.Economies of scale in production; a firm is said to have economic of scale if its long term average cost is declining.
E. A campany may develop or invent a unique product or manufacturing technique & take steps to prevent
competitors from copying it by obtaining patent or copy right Ex. MOHA & Coca campany
The Demand & Revenue functions of the monopoly firm
a. Demand ; a monopoly firm faces a down ward sloping market of demand curve. As a result the monopoly has
to accept a lower price if it wants to sell more out put.if the monopolist decides to raise the price of the
product,it will reduce the quantity of supply.
Mathematically; p= a-Bq Where p= is the markt price & Q= quantity of sales(demanded)
‘a’ and ‘b’= are any positive constants
b. Revenue function
The revenue of a firm are the receipts that it obtains from selling its products. Revenue have three
main catagories; Total Revenue(TR), Average Revenue(AR),Marginal Revenue
TR= P.Q From demand function p= a-Bq
Substituting (a-bq)Q
TR= Aq – bq2
Average Revenue(AR);is the revenue per unit of item sold. AR=TR/Q = P.Q/Q =aq-bq2/q =a-bq
N.B the AR&the price of the product(p) are the same.
 Marginal Revenue; is the change in TR resulting from one increase in sales.
It is the additional amount of mney or revenue the monopolist firm recives by saling one unit of the product.
MR= TR/Q = (P.Q)/Q =P
The TR,AR AND MR UNDER MONOPOLY CONDITION
Qua price TR AR MR
ntity
0 11 0 - 0
1 10 10 10 10
2 9 18 9 8
3 8 24 8 6
4 7 28 7 4
5 6 30 6 2
6 5 30 5 0
7 4 28 4 -2
8 3 24 3 -4 The TR Curve of a monopolist firm has an inverse u-shape.

3. Monopolistically competitive market

It refers to a market structure where there are large No of sellers & buyers and there is a free entry & exit of firms
producing & selling differentiated(heterogeneous) products.
A seller of differentiated product has limited monopoly power over customer who prefer his/her product to others.
The market is competitive due to the existence of large No. of firms & there is no barrier to entry/ exit.
Characterstics of monopolistically competitive
A. Product differentiation; each firm produces a product differ from those of firms.i.e in style,brand,name,quality.
Different firms produce products like pen,biscuits,soap etc
B. Many buyers & sellers; but relatively less than perfectly competitive market
C. Free entry & exit of firms; new firms can to enter & exit
D. The existence of non-price competition: due to product differentiation, in addition to price competition,
there is also non-price competition.Non-price competitions take the form of product quality, advertising,
brand name, customer service
The Demand & Revenue function
a. Demand
As a result of product differentiation firms are price maker & each firms faces a down ward sloping demand curve.this
implies firms in monopolistically market has few rivals.
 The demand curve of a firm under monopolistic is flatter than that of a monopoly firm.

b. Revenue Function
In a perfect competitive market and a monopoly market, the revenues of a firm are the receipts that it obtains
from selling its products.

The demand curve of a firm is also its AR curve.

AR and MR Curves under Monopoly and Monopolistic Competition

3.Oligopoly Market
An oligopoly is a market organization in which there are few firms that produce identical or closely substituted
products (identical or differentiated). An oligopoly is said to exist when there is more than one seller in the
market, but their number is not so large as to make the contribution of each firm negligible.

Characteristics of the Oligopoly market

An oligopoly market describes a market with the following characteristics:
Few dominant firms: the number of firms is small enough that each firm recognizes the actions of other firms,
implying that firms are mutually interdependent.
Entry barrier: in an oligopoly market, the barrier to entry is difficult or impossible for new firms to enter to market. .
Barriers to entry may arise as a result of; scale of economics and large capital requirements compared to other markets,
except monopoly.
yPatents or access to technology or raw materials may exclude potential competitors.
yProducts may be homogenous or differentiated.
yThere is interdependence among the firms. The decision of one firm affects all .
A duopoly is the simplest type of oligopoly. A duopoly is a special case of oligopoly in which there are only two firms
in the industry. The oligopoly market is categorized into non-collusive oligopoly and collusive oligopoly markets
The Demand and Revenue Functions
a. Demand
As a result of product differentiation, characteristic of an oligopoly market, firms are price-makers, and each firm faces
a downward-sloping demand curve. An important feature of oligopoly is that the demand curve faced by an oligopolist
firm is indeterminate. Due to the interdependence of the firms, an oligopolist firm cannot ignore the reactions of rival
firms. Any change in price by one firm may result in price changes by rival firms. As a result, the demand curve faced
by an oligopolist firm Keeps shifting.
b. Revenue Function
the revenues of a firm in an oligopoly are the receipts that it obtains from selling its products. The AR curve of
a firm is also the same as its demand curve. Thus, the firm has a downward sloping AR curve. The marginal
revenue curve less than average revenue.

unit 5
Banking and Finance
Introduction to Financial Intermediaries
Banks are one of the financial institutions that are used to transfer finance from those who have in excess
to those that are in need of it.