Market Structures &
Firm Equilibrium
Perfect Competition, Monopoly &
Monopolistic Competition
Importance of Markets
Market Structure → Business Conduct
or industry behavior→ Corporate
performance in terms of price, product
or profit
What is a Market
Market is a place where buyers and
sellers interact.
Benham says: Market is any area over
which buyers and sellers are kept in
close touch with each other, either
directly or through dealers, that the
price obtainable in one part of market
affects the prices in other parts.
Criteria for market
classification
Classification by area
Nature of transaction – spot vz future
Volume of business – wholesale vz
retail
Time period – very short, short vz long
run
Status of sellers – primary vz
secondary
Regulated vz unregulated market
Market Structures
This is the competitive environment in which
buyers and sellers operate. This influences
pricing of product
Determinants of market structure
– Number of buyers and sellers
– Freedom of entry and exit
– Nature of the product – homogenous (identical),
differentiated?
– Control over supply/output
– Control over price
– Barriers to entry
Classification of Market forms
Market No. of product Control barrier
structur firms over s
e price
Perfect large homogenous none none
Monopolis large differentiated some Easy
tic entry
Oligopoly few differentiated large No easy
entry
Monopoly one unique Very barriers
large
Market Structure
Less Competitive
More Competitive
Perfect Competition
Monopolistic
Competition
Oligopoly
Monopoly
Perfect Competition
There are large number of independent sellers
of a commodity, each too small to affect
the price
a. All firms sell homogenous products
b. Perfect mobility of resources & firms can
enter or leave the industry without much
difficulty
c. Firm is a price taker
d. Economic agents have perfect knowledge
Examples: stock market, agricultural
Monopoly
Single seller and many buyers
No close substitutes for product
Significant barriers to resource
mobility
– Control of an essential input
– Patents or copyrights
– Economies of scale: Natural monopoly
– Government franchise: Post office
Monopolistic Competition
Many sellers and buyers
Differentiated product
Perfect mobility of resources
Example: Fast-food outlets
Oligopoly
Few sellers and many buyers
Product may be homogeneous or
differentiated
Barriers to resource mobility
Example: Automobile
manufacturers
Perfect Competition:
Price Determination
Perfect Competition:
Price Determination
QD 625 5P QD QS QS 175 5P
625 5P 175 5P
450 10P
P $45
QD 625 5P 625 5(45) 400
QS 175 5P 175 5(45) 400
Profit Maximisation – Short
run
Marginal approach
In perfect competition, the firm can sell any
amount at prevailing market price. Hence
AR=MR. The demand curve is horizontal or
infinitely elastic.
How much quantity is to be produced in the
short run ?
A firm expands its output until
MR = rising MC
Total profits are maximised when difference
between TC and TR is greatest
Perfect Competition:
Short-Run Equilibrium
Firm’s Demand Curve = Market Price
= Marginal Revenue
Firm’s Supply Curve = Marginal Cost
where Marginal Cost > Average Variable Cost
Perfect Competition:
Short-Run Equilibrium
Short run profit
The firm maximises profits when P
exceeds AC, where MR=P=rising MC
If price = AC, the firm is breaking
even
If price > AVC but smaller than AC,
the firm minimises losses
If price is smaller than AVC, the firm
minimises total losses by shutting
down
Long run equilibrium
If firms in a perfectly competitive
industry are making short run profits,
more firms enter the industry
This increases market supply of
commodity and reduce the market
price until all profits are competed
away and firms just break even
In long run, firms produce where P =
lowest LAC
Perfect Competition:
Long-Run Equilibrium
Perfect Competition:
Long-Run Equilibrium
Quantity is set by the firm so that short-run:
Price = Marginal Cost = Average Total Cost
At the same quantity, long-run:
Price = Marginal Cost = Average Cost
Economic Profit = 0
Competition in the
Global Economy
Domestic Supply
World Supply
Domestic Demand
Competition in the
Global Economy
Foreign Exchange Rate
– Price of a foreign currency in terms of the
domestic currency
Depreciation of the Domestic Currency
– Increase in the price of a foreign currency
relative to the domestic currency
Appreciation of the Domestic Currency
– Decrease in the price of a foreign currency
relative to the domestic currency
Competition in the
Global Economy
R = Exchange Rate = Dollar Price of Pounds
Supply of Pounds
Demand for Pounds
Monopoly: Meaning and
Sources
Monopoly is that form of market structure in
which there is a single seller of a commodity
for which there are no close commodity
Monopoly may be due
- Increasing returns to scale
- Control over raw material supply
- Patents
- Government franchise
e.gXerox corp
Demand and marginal
revenue
Under monopoly, the firm is the
industry and faces the negatively
sloped demand curve for the
commodity
If the monopolist wants to sell more of
the commodity, it must lower its price
MR is lower than P
MR curve lies below D curve
Short Run Analysis of
monopoly
Profit maximisation is given at that
output where MR =MC. Depending on
the level of AC at this output, the
monopolist can have profits, break
even or minimise shortrun total losses
Monopoly
Short-Run Equilibrium
Q* = 500
P* = $11
Monopoly
Short-Run Equilibrium
Demand curve for the firm is the
market demand curve
Firm produces a quantity (Q*) where
marginal revenue (MR) is equal to
marginal cost (MR)
Exception: Q* = 0 if average variable
cost (AVC) is above the demand curve
at all levels of output
Monopoly
Long-Run Equilibrium
Q* = 700
P* = $9
Long run price and output
under Monopoly
In long run, all plants are variable and
monopolist can construct optimal scale
of plant. Output where P=LMC and
optimum scale of firm where SATC is
tangent to LAC curve
As entry is blocked, profits occur
also, monopolist does not produce at
lowest point
Control of monopoly
Government regulation
Banning of cartels
Antitrust laws
Social Cost of Monopoly
Monopolistic Competition
Many sellers of differentiated
(similar but not identical) products
Limited monopoly power
Downward-sloping demand curve
Increase in market share by
competitors causes decrease in
demand for the firm’s product
Monopolistic Competition -
Features
Many sellers
Product differentiation
Advertisement
Patent right and trade marks
Quality differentiation
Non price competition
Freedom of entry and exit
Higher elasticity of demand
Product differentiation
Patents, trademarks, copyrights,
brands
Difference in quality and durability
Diff in design, style, colour &
packaging
Factors as courtesy of sales personnel,
shopping location and shopping hours
Guarantee and warranty, return
policies
Method, time and cost of delivery
Non Price Competition
This refers to
-Sales promotion,
-customer services,
-advertising
-other schemes to promote sales of a good
ADVERTISING – Informative advertising
Competitive advertisement
Advertising & product differentiation alter the
Selling Costs
Selling costs include the costs on sales
network, advertisement and sales
promotion. They are incurred for
product differentiation
These costs add to a firm’s cost and
cause an upward shift in AC and MC
curves. These costs are incurred as
long TR>TC
Monopolistic Competition
Short-Run Equilibrium
Profit Maximisation in
monopolistic competition
The monopolistic competitor faces a
demand curve which is negatively sloped
(because of product differentiation) but
highly elastic (due to close substitutes)
Profits where MC =MR, provided P exceeds
AVC. In short run, firms can make profit,
break even or minimise losses
In long run, firms are attracted into industry
by short run profits or leave the industry if
losses. Till, P = AC
Monopolistic Competition
Long-Run Equilibrium
Profit = 0
Monopolistic Competition
Long-Run Equilibrium
Cost with selling expenses
Cost without selling expenses