TYPES OF MARKET AND ITS

PRICE DETERMINATION
 What is market?

Market is a place in which buyers and sellers come into

contact for the purchase and sale of goods and
services.
Market
Economy

WHAT to HOW to FOR WHOM

produce produce to produce

Determined Determined Determined

by consumer’s by producer’s by purchasing
prefrences seeking profits power
TYPES OF MARKET

Perfect Competition

Monopoly

Monopolistic
Competition

Oligopoly
 PERFECT COMPETITION

 Perfect competition refers to a market situation in

which there are large number of buyers and sellers.
Firms sell homogeneous products at a uniform price.
 Features and Consequences Of Perfect
Competition

Features :
1. Very large number of buyers and sellers.
2. Homogeneous product.
3. Free entry and exit of firms.
4. Perfect knowledge and mobility of factors.
5. Firm is a price taker and industry is price maker.
6. Absence of government interference
7. Absence of transportation cost. Cost of
production

8. Uniform price
Consequences:
 Cost of production No effect of
Increasing
profits by
advertising Consequences selling more

 Increasing profits by selling more units units

 Price instability
 No effect of advertising Price
Instability
 Price Determination Under Perfet Competition

1. Equillibrium Price
2. Interaction of forces of demand & supply
3. Highest & lowest possible price

 Schedule -

Price Quantity Quantity

Demanded Supplied
20 10 40 Disequillibrium
10 30 30 Equillibrium
5 60 10 Disequillibrium
 MONOPOLY

 Monopoly is a market situation dominated by a

single seller who has full control over the price.
 Features Of Monopoly

1. Single seller of a commodity.

2. Absence of close substitute of the product.
3. Difficulty of entry of a new firm.
4. Monopoly is also an Industry
5. Price maker
 MONOPOLISTIC COMPETITION

 Monopolistic Competition refers to a market

situation in which there are many firms who sell
closely related but differentiated products.
 Features of Monopolistic Competition

1. Large number of buyers and sellers but less than

perfect competition.
2. Product differentiation.
3. Freedom of entry and exit.
4. Selling cost.
5. Lack of perfect knowledge.
6. Partial control over price.
DETERMINATION UNDER
MONOPOLISTIC
COMPETITON
 OUTPUT UNDER MONOPOLISTIC
COMPETITION

Firm under monopolistic competition produces up to

that limit where its marginal cost is equal to
marginal revenue, (MC=MR) and MC curve cuts MR
curve from below. In case of monopolistic
competition, price and equilibrium position of firm
and group will be studied in two parts: (1)Firm’s
equilibrium and (2) Group’s equilibrium.
 EQUILIBRIUM OF THE FIRM

SHORT PERIOD LONG PERIOD

SUPER NORMAL
NORMAL MINIMUM
NORMAL PROFIT
PROFIT LOSS
PROFIT
 EQUILIBRIUM OF THE FIRM

SHORT PERIOD LONG PERIOD

SUPER NORMAL
NORMAL MINIMUM
NORMAL PROFIT
PROFIT LOSS
PROFIT
 SHORT PERIOD EQUILIBRIUM

Short-run refers to that time period in which output

can only be increased by changing the quantity of
variable factors. there is no time to change in fixed
factors of production like machines, plants, factory,
building etc.
 SUPER
Y NORMAL PROFIT
MC
AC
A
P
C B
REVENUE

E AR

MR
O X
M
OUTPUT
Firm is in equilibrium at point E, because at this point MC=MR.
Point E indicates that the firm’s equilibrium output is OM. Price of
equilibrium output is OP(=AM). AM is greater than the BM. Hence
the firm earns super normal profit equivalent to difference
between AM and BM. Total super normal profit is ABCP.
 NORMAL PROFIT

Y MC

AC
A
P
REVENUE

E
AR

MR
O
M X
OUTPUT
Firm is in equilibrium at point E where MC=MR and OM will be
equilibrium output. Price of the equilibrium output is OP(=AM)
and average cost is also OP(=AM). It is so because, AR curve is
touching AC curve at point A. Hence AR=AC and firm earns
normal profit.
 MINIMUM LOSS
Y

LOSS SAC AVC

MC

P B
REVENUE A
P1

E MR=MC
AR
MR
O M X
OUTPUT

In this firm will be in equilibrium at point E and MC=MR. Price of

equilibrium output OM is OP1(=AM) and average cost OP(=BM)
and AC>AR. Hence a firm suffer a loss equivalent to BM-AM=AB
per unit. But price of equilibrium output OM=AVC as AVC touches
curve AR at point ‘A’ and at point A firm will have to incur loss of
fixed cost equivalent to AB per unit then the total
loss of firm will be BAP1P.
 LONG PERIOD EQUILIBRIUM

Long period refers to that time period in which

output can be increased by making changes in the
quantity of both fixed as well as variable factors
inputs. In long run each firm will produce up to that
limit where MR=long run MC. In long run firm earn
only normal profit.
 NORMAL PROFIT
Y
LMC

LAC
A
REVENUE P

E MR=MC AR

MR

O X
M
OUTPUT
In this MC=MR at point E which is equilibrium
point. OM is equilibrium output and OP(=AM) is
the price equilibrium output. At equilibrium output
OM, average revenue curve is tangent to LAC curve
at point A which means AR=LAC. Hence firms
earns only normal profit.
 OLIGOPOLY

 Derived from Greek word OLIGI + POLIEN

 Oligopoly is a market structure in which there are
few large sellers of a commodity and large number of
buyers.
 Features Of Oligopoly & its price determination

1. Few dominant firms who are large in size .

2. Mutual interdependence.
3. Barrier to entry.
4. Homogeneous or differentiated product.
5. Selling Cost.
6. Formation of Cartels.
7. Non Price Competition.

PRICE DETERMINATION -
 Prices are Stable.
 The Price Determination can be defined by Kinked Demand Curve.
 Price Rigidity
 Sudden change in demand curve.
Kinked Demand Curve

 We get such a curve when it is

assumed that rivals will lower their
price when oligopolists lower his
own price but that rivals will not
raise their own price when the
oligopolist does it.
 So there is Zero Elasticity In
Demand.
 CONCLUSION

 So we arrived to a conclusion that all types of market are

functioning differently in their manner and each one has
a big impact on economy.
 Market structure can be described with reference to
different characteristics of a market, including its size
and value, the number of providers and their market
share, consumer and business purchasing behaviour and
growth forecasts.
Market Seller Entry Seller Number Buyer Entry Buyer Number
Structure Barriers Barriers
Perfect No Many No Many
competition
Monopolistic No Many No Many
competition
Oligopoly Yes Few No Many

Monopoly Yes One No Many

Monopsony No Many Yes One
THANK YOU!