MARKET STRUCTURE

Presented by : Aditi Auddy

WHAT IS KNOWN AS MARKET STRUCTURE?

• The conditions which exist in a market

including the number of firms.
 WHAT IS COMPETITIVE MARKET?

• A market with a number of firms that compete

with each other.
 CHARACTERISTICS OF COMPETITIVE
MARKET

• In Competitive Markets, there is usually relatively free

entry into and exit from the market. This means that there
must not be anything which makes it difficult for the firms
to enter or leave the industry , that is to start or stop
producing the product.
 THE BEHAVIOUR OF COMPETITIVE FIRMS:

• In a Competitive market, there is pressure for firms to

keep prices low. If an individual firm charges a higher
price, it runs the risk of losing all of its sales to its rivals
as the products are likely to be close substitutes.
• Firms may seek to gain a competitive advantage by
improving their products. They are likely to respond
quickly and fully, to any changes in demand.
• Easy entry and exit will mean that in the long run firms will probably earn relatively low profits. In some
cases , this may be just enough profit to keep them producing the product.
• In the short run they may earn more profits or less profits, than this level of profit which is referred to as
normal profit.
• If the demand for the product rises, the firms in the industry will make higher than normal profit. This level
of profit called Supernormal profit or abnormal profit.
• This Supernormal profit or abnormal profit will attract the new firms in the industry.Their entry will
increase supply which, in turn, will lower the price and return profit to the normal level.
• If on the other hand the demand falls , firms should initially make a loss. This will force some firms to move
out of the industry. The exit of the firms will reduce supply , cause prices to rise and restore normal profits.
 PERFORMANCE OF COMPETITIVE FIRM:

• A high level of competition is usually expected to promote efficiency.

• It provides firms with both incentive and a threat to produce according to
consumer’s wants at the lowest possible cost.
• Any firm that can respond more quickly to consumers’ demand, or can cut its
costs, should gain a competitive advantage and earn higher profits.
• The threat arises because any firm that is not efficient, produces at a higher
cost , or does not respond to changes in consumers tastes, will be driven out of
the market.
• A high level of competition may drive the price down to a
level, which just covers the cost. That price, however, may
not be that low. This is because Competitive firms are
likely to be small and often production on a large scale
reduces unit costs.
 KEY TERMS:

• Normal Profit: The minimum level of profit required to keep a firm in the industry in the long run.
• Supernormal Profit: Profit above that needed to keep a firm in the market in the long run.
• Monopoly: A market with a single seller.
• Barrier to entry: Anything that makes it difficult for a firm to start producing the product.
• Barrier to exist: Anything that makes it difficult for a firm to stop making the product.
 WHAT IS MONOPOLY MARKET?

• The usual meaning of a monopoly ia a sole supplier of a product having 100%

share of the market. This is often referred to as a Pure Monopoly.
• Some Governments define a monopoly as a firm that has 25% or more share of
the market, and a dominant monopoly, when a firm has a 40% share of the
market.
 CHARACTERISTICS OF A MONOPOLY:

 The firm is the industry. It has a 100% share of the market.

There are high barriers to entry and exit , making it difficult for other firms
to enter the market.
A monopoly is a price maker. It’s output is the industry’s output and so
changes in it’s supply affect the market price.
 WHY DO MONOPOLIES ARISE?

In some cases , a monopoly may develop over time. One firm may have
been so successful in cutting its costs and responding to changes in the
consumer tastes in the past, that it has driven out rival firms and captured the
whole of the market. Also, mergers and takeovers may result in the number
of firms being reduced to one.
 WHY DO MONOPOLIES ARISE?

• Alternatively, a monopoly may exist from the start. One firm may own, for
example, all the gold mines in a country or it may have been granted
monopolistic powers by a government, which makes it illegal for other firms to
enter the market.
• A patent would also stop other firms from producing the product.