OLABISI ONABANJO UNIVERSITY, COLLEGE OF AGRICULTURAL SCIENCES

DEPARTMENT OF AGRICULTURAL ECONOMICS AND FARM MANAGEMENT

2022/2023 HARMATTAN SEMESTER
AEC 201: INTRODUCTION TO MICROECONOMICS 2 UNITS

COURSE OBJECTIVE: This course will enable students to understand the basic problems of an economy
and the economic actions of individuals and groups of individuals in the society. These include the study
of firms, households, relative prices of particular goods and services, income distribution and how
resources are allocated to the production of goods and services within the households.

S/N Module Lecture Semester

Hour Week
1 1.0. Introduction to Agricultural Economics. 2 1
1.1. Definition of economics and Agricultural economics.
1.2. The scope and Methods.
2 2.0 Nature of economics and economic problems. 2 2
2.1. The meaning of an economy.
2.2. The central problems of an economy.

3 3.0. Price Theory. 2 3

3.1 The meaning of price theory. The price mechanism.
3.2 The role of prices in a free market economy as a case study.

4 4.0 Supply and Demand and Application to Agricultural problems. 4 4-5

4.1 The meaning of demand and supply.
4.2 Factors influencing demand and supply.
4.3 The laws of demand and supply.
4.4 An individual’s demand schedule and market demand schedule.
4.5 Elasticity of demand.

5 5.0 The Theory of Agricultural Production. 4 6-7

5.1 Meaning of and factors of agricultural production.
5.2 The concept of production function.
5.3 Features of the production curve. The concept of isoquant.

6 6.0 Theory of Cost. 4 8-9

6.1 Basic definitions of cost. Social and private costs.
6.2 Short-run and long-run cost.
6.3 The nature of cost and cost curves.

7 7.0 Types of market. 6 10-12

7.1 Perfect Competitive market.
7.2 Imperfect markets e.g. Monopoly, Monopsony. Monopolistic
competition, Duopoly and Oligopoly.

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 AEC 201
THEORY OF COST
Introduction
 Let us understand that economic efficiency of any firm operating in the market is
determined by the ability of the firm to minimize its costs and maximize its profits.
 We also need to understand that cost is a function of Output.
 As the output of a firm changes the cost pattern of a firm also undergoes change.
 Study of cost and its behavior as production pattern changes in the short run and the long
run, gives useful insight into issues like:
 How the cost pattern of a firm changes in case a firm is operating in the short run?
 How the cost changes along with the change in the scale of production?
 How the cost of operation can be minimized?
 What is the optimum level of operation of any firm (at optimum level the cost of the firm
is generally reaches its minimum level)?
The objectives of this Topic are to
a. Define correctly the following concepts: total, average and marginal costs.
b. Differentiate between the following: accounting and economic costs, real and nominal
cost, private and social cost, sunk and incremental cost.
c. Appreciate the necessity of proper identification of costs in business decision-making.
d. Illustrate the total, average and marginal cost curves for both the short run
Basic definitions of cost.
 A cost is an expenditure required to produce or sell a product or get an asset ready for
normal use.
 In other words, it’s the amount paid to manufacture a product, purchase inventory, sell
merchandise, or get equipment ready to use in a business process.
 The amount of money paid to acquire something, or spent in producing something.
 Cost is best described as a sacrifice made in order to get something. In business, cost is
usually a monetary valuation of all efforts, materials, resources, time and utilities
consumed, risk incurred and opportunities forgone in production and delivery of goods and
services.

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  More explicitly, the costs attached to resources that a firm uses to produce its product are
divided into explicit costs and implicit costs. All expenses are costs but not all costs are
expenses. Those costs incurred in the acquisition of incomegenerating assets are not
considered as expense
TYPES OF COSTS
Costs can be categorized into seven types:
1) Accounting and economic costs: To an accountant or any other individual other than an
economist, cost refers to the monetary expenses incurred by a firm in the course of producing a
commodity. Accounting cost (money or explicit) is the total monetary expenses incurred by a firm
in producing a commodity and this is what an entrepreneur takes into consideration in making
payments for various items including factors of production (wages and salaries of labour),
purchase of raw materials, expenditures on machine, including on capital goods, rents on buildings,
interest on capital borrowed, expenditure on power, light, fuel, advertisement, etc. Money costs
are known also as explicit costs that an accountant records in the firm's books of account. Explicit
costs are the payments to outside suppliers of inputs.
To the economists, the cost of any good or service is the totality of all sacrifices made to bring the
good or service into existence. Therefore, the “economic cost” (opportunity cost of production) is
made up of both the explicit and the implicit cost. Implicit cost, are the imputed value of the
entrepreneur’s own resources and services. “implicit costs are the value of owned inputs used by
the firm in its production process”. These include the salary of the owner-manager who is content
with having normal profits but does not receive any salary, the estimated rent of the building (if it
belongs to the entrepreneur), etc. While explicit cost is monetarily valued, implicit cost is the
forgone alternative or opportunity cost which the accounting cost didn't take note of.
2) Production cost: In the production process, many fixed and variable factors (inputs) usually
capital equipment used. They are being employed at various prices. The expenditures incurred on
them are the total costs of production of a firm. Such costs are divided into two: total variable cost
and total fixed costs.
3) Real costs: It tells us what lies behind money cost, since money cost are expenses of production
from the point of view of the producer. Thus, the efforts and sacrifices made by various members
of the society in producing a commodity are the real costs of production. The efforts and sacrifices

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made by business men to save and invest, workers foregoing leisure, and by the landlords in the
use of land, all these constitute real cost.
4) Opportunity cost: This is the cost of the resources foregone, in order to get or obtain another.
The opportunity cost of anything is the next best alternative that could be produced instead by the
same factors or by an equivalent group of factors, costing the same amount of money. E.g. the
real cost of labour is what it could get in some alternative employment. Opportunity cost includes
both explicit and implicit cost.
5) Private and social cost: Private costs are the costs incurred by a firm in producing a commodity
or service. It includes both implicit and explicit cost. However, the production activities of a firm
may lead to economic benefit or harm for others. For instance, production of commodities like
steel, rubber and chemical pollute the environment which leads to social costs. The society suffers
some inconveniences as a result of the production exercise embarked upon by the firm.
6) Sunk costs: This refers to all the costs that have been incurred and definitely not recoverable
or changeable whether the particular project or business goes on or not. For instance, if a road
project already commissioned is abandoned or not, the money has already been spent and there is
no way of recovering it. This cost is undiscoverable if not considered in economic decision making.
7) Incremental cost: This is the change in cost owing to a new decision. For example, a firm may
decide to buy its equipment instead of leasing it and because of this the expenditure made in the
production process will alter. If cost increases because of the change, the incremental cost will be
positive. If the new decision does not alter the overall cost, then, the incremental cost will be
negative.

COST FUNCTIONS
Cost functions are derived functions. They are derived from the production function which
describes the available efficient methods of production at any given period of time. Cost function
expresses a functional relationship between total cost and factors that determine it. Usually, the
factors that determine total cost of production (C) of a firm are the output (Q), level of technology
(T), the prices of factors (Pf), and the fixed factors (K). Economic theory distinguishes between
short-run costs and long-run costs.
The short run is a period in the production process, which is too short for a firm to vary all its
factors of production. Short-run costs are the cost over a period during which some factors of

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production (usually capital equipment and management) are fixed. It is the cost at which the firm
operates in any one period, where one or more factors of production are in fixed quantity. On the
other hand, the long-run costs are costs over a period long enough to permit a change in all factors
of production. The long-run costs are planning costs or ex ante costs, in that they present the
optimal possibilities for expansion of the output and thus help the entrepreneurs to plan their future
activities. In the long-run, there are no fixed factors of production and hence, no fixed costs. In the
long-run, all factors are variable, all costs are also variable.
Symbolically, we may write the long-run cost function as:
C = f (Q,T,Pf,)
and short-run cost function as;
C = f (Q,T,Pf,K)
Where C is total cost, Q is output, T is technology, Pf is prices of factor inputs, and K is fixed
factors of production.
Graphically, costs are shown on two-dimensional diagrams. Such curves imply that cost is a
function of output, i.e. C = f(Q), ceteris paribus. The clause ceteris paribus implies that all other
factors which determine costs are held constant. If these factors do change, their effect on costs is
shown graphically by a shift of the cost curve. This is the reason why determinants of cost, other
than output, are called shift factors. Mathematically, there is no difference between the various
determinants of costs. The distinction between movements along the cost curve (when output
changes) and shifts of the curve (when the other determinants change) is convenient only
pedagogically, because it allows the use of two dimensional diagrams. But it can be misleading
when studying the determinants of costs. It is important to remember that if the cost curve shifts,
this does not imply that the cost function is indeterminate. The factor technology is itself a
multidimensional factor, determined by the physical quantities of factor inputs, the quality of the
factor inputs, the efficiency of the entrepreneur, both in organizing the physical side of the
production (technical efficiency of the entrepreneur), and in making the correct economic choice
of techniques (economic efficiency of the entrepreneur). Thus any change in these determinants
(e.g. the introduction of a better method of organization of production, the application of an
educational programme to the existing labour) will shift the production function, and hence will
result in a shift of the cost curve. Similarly, the improvement of raw materials, or the improvement
in the use of some raw materials will lead to a shift of the cost function.

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ASSUMPTIONS OF THE COST- FUNCTION
In order to simplify the cost-analysis, certain assumptions are made:
1. Firms produce a single homogeneous good (X) with the help of certain factors of production.
2. Some of these factors are employed in fixed quantities, whatever the level of output of the firm
in the short-run. So they are assumed to be given.
3. The remaining factors are variable whose supply is assumed to be known and available at fixed
market prices.
4. The technology which is used for the production of the good is assumed to be known and fixed.
5. The firm adjusts the employment of variable factors in such a manner that a given output(X) of
the good 'X' is obtained at the minimum total cost, C.
THEORY OF COSTS
The theory of costs analyses the behaviour of cost curves in the short-run and long-run and arrives
at the conclusion that both the short-run and long-run cost curves are U-shaped but the long-run
cost curves are flatter than short-run cost curves.
SHORT-RUN COSTS THEORY
In the theory of the firm, in the short run, there are variable inputs and at least one fixed input.
This suggests that short run costs are divided into fixed costs and variable costs. Thus, there are
three concepts of total cost in the short run: Total fixed costs (TFC), total variable costs (TVC),
and total costs (TC).
TC = TFC + TVC.
1. Total Fixed Cost: These are costs of production that do not change (vary) with the level of
output, and they are incurred whether the firm is producing or not. They are independent of
the level of output and it is the sum of all costs incurred by the firm for fixed inputs, and it is
always the same at any level of output. It includes; (a) salaries of administrative staff (b)
depreciation (wear and tear) of machinery (c) expenses for building depreciation and repairs
(d) expenses for land maintenance and depreciation (if any). Another element that may be
treated in the same way as fixed costs is the normal profit, which a lump sum including a
percentage return on is fixed capital and allowance for risk. Total Fixed Cost (TFC) is
graphically denoted by a straight line parallel to the output axis.

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 Figure1: Total Fixed Cost

2. Total Variable Cost: These are costs of production that change directly with output. They
rise when output increases and fall when output declines. They include (a) the raw materials
(b) the cost of direct labour (c) the running expenses of fixed capital, such as fuel, ordinary
repairs and routine maintenance. It is the total cost incurred by the firm for variable inputs.
TVC = f (Q)
In the traditional theory of the firm, the total variable cost (TVC) has an inverse-S-shape,
graphically shown below, and it reflects the law of variable proportions.
Figure 2: Total Variable Cost

3. Total Cost: The firm's short run total cost is the sum of the total fixed cost (TFC) and total
variable cost (TVC) at any given level of output. Total cost also varies with the level of the
firm's output.
TC = TFC + TVC …………………………2
TC = f(Q) …………………………………3
From Equation 2, it follows that:
TFC = TC – TVC………………….. 4
TVC = TC - TFC ……………………5
According to the law of variable proportions, at the initial stage of production with a given
plant, as more of the variable factor(s) is employed; its productivity increases and the average

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variable cost fall. This continues until the optimal combination of the fixed and variable
factors is reached. Beyond this point, as increased quantities of the variable factor(s) are
combined with the fixed factor(s) the productivity of the variable factor(s) decline (and the
AVC rises). By adding the TFC and TVC we obtain the TC of the firm.
Figure 3: Total Cost

OTHER COST CONCEPTS

From the Total-Cost curves we obtain Average-Cost curves.
a. Average Fixed Cost (AFC): The AFC at any given level of output is total fixed cost divided
by output. In symbol, this becomes:
𝑇𝐹𝐶
𝐴𝐹𝐶 = > 0………………………. 6
𝑄

Graphically, the AFC is a rectangular hyperbola, showing at all its points the same magnitude,
that is, the level of TFC.
Figure 4: Average Fixed Cost

b. Average Variable Cost (AVC): The average variable cost at any given level of output is
total variable cost divided by output. In symbol, it becomes:
𝑇𝑉𝐶
𝐴𝑉𝐶 = ………………………..7
𝑄

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The SAVC curve falls initially as the productivity of the variable factor(s) increases, reaches
a minimum when the plant is operated optimally (with optimal combination of fixed and
variable factors), and rises beyond that point, due to law of diminishing returns.
Thus, the SAVC curve is therefore U-shaped as seen below:
Figure 5: Short-run Average variable Cost

c. Average Total Cost (ATC): In the short-run analysis, average cost is more important than
total cost. The units of output that a firm produces do not cost the same to the firm, but must
be sold at the same price.
Therefore, the firm must know the per-unit cost or the average cost. Thus, the short-run
average cost of a firm is the average fixed costs, the average variable cost and average total
costs. The short run average total cost (SAC) at any given output level is obtained by simply
dividing total cost by the output level:
𝑆𝑇𝐶
𝑆𝐴𝐶 = ………………………8
𝑄

Since STC  TFC  TVC

Then,
𝑇𝐹𝐶 + 𝑇𝑉𝐶
𝑆𝐴𝐶 =
𝑄

𝑇𝐹𝐶 𝑇𝑉𝐶
+ 𝑆𝐴𝐶 =
𝑄 𝑄
SAC  AFC  AVC……………………………9

Graphically, the ATC curve is derived in the same way as the SAVC. The shape of the ATC
is similar to that of AVC (both being U-shaped). Initially, the ATC declines, it reaches a
minimum at the optimal operation of the plant (Qm) and subsequently rises again, as seen in
Figure 6.

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 Figure 6: Short-run Average Total cost

From Equation 9 we know that the SAC can be alternatively defined as the sum of AFC and
AVC. Therefore,
AFC = SAC – AVC………………………… 10
and AVC = SAC – AFC……………………. 11
The U-shape of both the AVC and the ATC reflects the law of variable proportions or law of
diminishing returns to the variable factor(s) of production.
d. Short run Marginal Cost (SMC): Marginal Cost is the addition to total cost resulting from
the production of an additional unit of output. The short-run marginal cost is defined as a
change in total cost (TC) which results from a unit change in output. Mathematically, the
Marginal Cost is the first derivative of the TC function. Marginal Cost is the addition to Total
Cost by producing an additional unit of output.
Therefore, if
𝜕𝑇𝐶 𝜕𝐶
𝑀𝐶 = 𝑆𝑀𝐶 = 𝑂𝑅 𝜕𝑄 ………………..12
𝜕𝑄

𝜕𝑇𝑉𝐶 + 𝜕𝑇𝐹𝐶
𝑆𝑀𝐶 =
𝑄
But since it is zero (fixed costs being fixed)
𝜕𝑇𝑉𝐶
𝑆𝑀𝐶 = …………………….13
𝜕𝑄

However, to derive the marginal cost from a total cost function, we find the derivative of total cost
(TC) with respect to output (Q):

𝜕𝑇𝑉𝐶
𝑆𝑀𝐶 = > 0…………………….14
𝜕𝑄

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Graphically, the MC is the slope of the TC curve (which of course is the same at any point as the
slope of the TVC). The slope of a curve at any one of its points is the slope of the tangent at that
point.

Thus, the SMC curve is also U-shaped, as seen above. Therefore, the traditional theory of costs
postulates that in the short-run, the costs curves (AVC, ATC and MC) are U-shaped reflecting the
law of variable proportions. In the short-run with a fixed plant there is a phase of increasing
productivity (falling unit costs) and the phase of decreasing productivity (increasing unit costs) of
the variable factor(s). Between these two phases of plant operation there is a single point at which
unit costs are at a minimum. When this point on the SATC is reached the plant is utilized optimally,
that is, with optimal combination (proportions) of fixed and variable factors.

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Note that in some cases, the AFC, and AVC do not add up exactly to the SAC. This is due to the
fact that figures are rounded up. Table 5.1 reveals two important information which must be
emphasized; to give an insight into management strategies for profit maximization, or loss
minimization.

a.) When output is zero, TFC and TC are equal to each other. This implies that a firm incurs a loss
which is equal to the TFC if nothing is produced after the firm's plant has been installed. Such a
loss will likely be in terms of rent on factory building, if not owned by the firm, interest on money
borrowed from the bank, and wear and tear (depreciation) of fixed assets as a result of being
neglected or exposed to unfavorable weather conditions.

b.) Average fixed cost (AFC) falls as output (Q) is increased. This occurs because TFC is the same
at any level of output. Therefore, the larger the output level, the more these overhead costs are
spread out.

Types of market.
Definition of Market:
 A Market which can be defined as a total number of buyers and sellers in the region or area
covered by the attention.
 The value of the items and cost or price is traded by people mainly depends on supply and
demands in the markets.
 The nature of different markets can be a physical body or might be virtual, it may also be
a global market or local market, perfect market, and imperfect market.
 As we have different types of markets and all the different markets are not the same and
similar.
Types of Markets
1. Physical Markets - Physical market is a set up where buyers can physically meet the
sellers and purchase the desired merchandise from them in exchange of money. Shopping
malls, department stores, retail stores are examples of physical markets.
2. Non Physical Markets/Virtual markets - In such markets, buyers purchase goods and
services through internet. In such a market the buyers and sellers do not meet or interact

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 physically, instead the transaction is done through internet. Examples - Rediff shopping,
eBay etc.
3. Auction Market - In an auction market the seller sells his goods to one who is the highest
bidder.
4. Market for Intermediate Goods - Such markets sell raw materials (goods) required for
the final production of other goods.
5. Black Market - A black market is a setup where illegal goods like drugs, fuel, weapons
are sold.
6. Knowledge Market - Knowledge market is a set-up which deals in the exchange of
information and knowledge based products.
7. Financial Market - Market dealing with the exchange of liquid assets (money) is called a
financial market. Financial markets are of following types:
a. Stock Market - A form of market where sellers and buyers exchange shares is
called a stock market.
b) Bond Market - A market place where buyers and sellers are engaged in the exchange of
debt securities, usually in the form of bonds is called a bond market. A bond is a contract
signed by both the parties where one party promises to return money with interest at fixed
intervals.
c) Foreign Exchange Market - In such type of market, parties are involved in trading of
currency. In a foreign exchange market (also called currency market), one party exchanges
one country’s currency with equivalent quantity of another currency.
d) Predictive Markets - Predictive market is a set up where exchange of good or service
takes place for future. The buyer benefits when the market goes up and is at a loss when
the market crashes.
Market Structure
 Market structure entails those characteristics of the organization of a market which are
believed to be influencing the nature of competition and the process of price formation.
 Market structure, in economics, refers to how different industries are classified and
differentiated based on their degree and nature of competition for goods and services.
 It is based on the characteristics that influence the behavior and outcomes of companies
working in a specific market.

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Understanding Market Structures
In economics, market structures can be understood well by closely examining an array of factors
or features exhibited by different players. It is common to differentiate these markets across the
following distinct features.
1. The extent or degree of product differentiation: The degree of product differentiation often
determines the types of behaviour that can be anticipated under different market situations.
For instance, since most agricultural commodities are similar, both physically and in
content, it is very likely that they command the same (or fairly close) market prices. In the
contrary, livestock feeds that have different brands in the market (differentiated) will likely
command different market prices since these brands appear different to the buyers.
Examples of livestock feeds are Capsfeeds, sanders feeds etc
2. The number of players in the market: naturally, the number of buyers and sellers determines
the market price of products. A single large seller, lacking any close competitor and
offering a highly desired product to many small competing buyers has the capacity to set a
very high price. In the contrary, when a single large buyer buys from many small competing
sellers, it is possible for such buyer to set a buying price that is lower than if several other
buyers were competing in the same market.
3. The ease of entry and exit of buyers and sellers: some industries are easy for new entrants
and exit of old members while others are difficult to join and leave after practicing for some
time. Firms that have patent rights enjoy monopoly of the market because they are
protected by legal restrictions.
4. The nature of costs of inputs, prices and market conditions: both buyers and sellers need to
have adequate information about the costs, prices and general market conditions. This
information normally guides them in decision making relating to market issues.
5. Vertical integration (Vertical integration is when a firm extends its operations within its
supply chain. It means that a vertically integrated company will bring in previously
outsourced operations in-house) extent in the same industry
6. The largest player’s market share
7. The industry’s buyer structure
8. The turnover of customers
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.
 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.

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Types of Market Structures
1. Perfect Competitive market.
A market is said to be “perfectly competitive” if it meets several requirements, including: There
are many firms in the market, each of which produces an identical product, and each of which
represents only a very small portion of the total market. There are no “barriers to entry,” meaning
that firms are free to enter (or leave) the market as they please. Buyers and sellers each have
“perfect information,” meaning, for example, that each buyer knows exactly how much utility
he/she would derive from purchasing the good and each seller knows the most efficient way to
produce the good. There are no externalities. That is, the benefit of the good in question goes
entirely to the buyers of the good, and the costs of production are borne entirely by the producers.
Each firm in the market is chiefly concerned with maximizing profit. No market is perfectly
competitive, but some get closer to the ideal than others. Agricultural commodities (e.g., oranges)
are the classic example of a nearly perfectly-competitive market.
There are certain assumptions when discussing the perfect competition. This is the reason 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
2. Imperfect markets

Imperfect competition is a fairly common market structure in practice. It is defined by the

following characteristics:

 The goods that are sold are differentiated. That means, even though they mostly satisfy the
same needs, there are minor differences that allow customers to distinguish the products
from one another.
 Due to the differentiated goods, customers develop preferences for some sellers. Thus, they
are willing to spend more money on goods from specific sellers.
 As a result, the sellers may exert a certain degree of market power and charge a price
premium. Hence, they can directly influence the market price to a limited degree and are
no longer pure price takers.
Imperfect competition is a generic description of all market structures that lie anywhere between
perfect competition and a monopoly. Thus, monopolistic competition is a type of imperfect
competition along with oligopolistic market structures.

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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. There are many firms selling differentiated products. The
products are similar but all sellers sell slightly differentiated products. Monopolistic competition
builds on the following assumptions:

 all firms maximize profits

 there is free entry, and exit to the market,
 firms sell differentiated products
 consumers may prefer one product over the other.
Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition.
However, this market structures no longer results in a socially optimal level of output because the
firms have more power and can influence market prices to a certain degree.

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. In addition each firm makes independent decisions about price
and output, based on its product, its market and also its cost of production.For example, the market
for cereals is a monopolistic competition. The products are all similar but slightly differentiated in
terms of taste and flavors. Another such example is toothpaste, industries that are into restaurant
business, hotels and tours, customer services

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 oligopolistic market structure builds on the following assumptions:

 all firms maximize profits,

 oligopolies can set prices,
 barriers to entry and exit exist in the market,
 products may be homogenous or differentiated, and
 only a few firms dominate the market. Unfortunately, it is not clearly defined what a “few
firms” means precisely. As a rule of thumb, we say that an oligopoly typically consists of
about 3-5 dominant firms.
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

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takers. In an oligopoly, there are various barriers to entry in the market, and new firms find it
difficult to establish themselves.

Oligopsony: the market structure comprises of few large buyers and many sellers. It is the reversed
version of oligopoly which is characterized by few sellers and many buyers. The buyers dictate
market prices to the sellers since the sellers need to find outlets for their products. The following
assumptions are made when we talk about oligopsony

 Barriers to entry and exit in the market

 The buyers set the price
 Firms can influence the price and prices are differentiated
 Oligoponists tends to have better information than the sellers
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. The following assumptions are
made when we talk about monopolies:

 the monopolist maximizes profit,

 it can set the price,
 there are high barriers to entry and exit,
 there is only one firm that dominates the entire market.
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.

Monopsony: A monopsony is a market condition in which there is only one buyer, the
monopsonist. Like a monopoly, a monopsony also has imperfect market conditions. The
difference between a monopoly and monopsony is primarily in the difference between the
controlling entities. A single buyer dominates a monopsonized market while an individual seller
controls a monopolized market. Monosonists are common to areas where they supply most or all
of the region's jobs.

A monopsony refers to a market dominated by a single buyer.

In a monopsony, a single buyer generally has a controlling advantage that drives its
consumption price levels down.
 Monopsonies commonly experience low prices from wholesalers and an advantage in
paid wages.
Duopoly: A market dominated by two firms. This gives these firms a great deal of market power
such that markets can be viewed as inefficient. The following industries are commonly duopolies,

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depending on the nation and product category: Agricultural Biotechnology, Agrochemicals,
Aircraft, Energy, Information Technology, Mobile Devices, Telecom, Utilities

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