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Module 7 Market Structure
Module 7 Market Structure
Meaning of market:
Generally the term “Market” refers to
a place in which commodities are bought
and sold.
For ex, cotton market, gold market ,etc
John .f. Due defines market as “A
group of buyers and sellers who are in
sufficiently close contact with one
another so the exchange takes place
among them”.
Continued….
Thus a market is one which consists of limited
or unlimited no. of buyers and sellers who have
close contact either directly or indirectly so that
buying and selling of goods take place between
them.
Classification Of Markets:
Markets can be classified on the basis of
place, time or competition.
The following chart gives a clear picture
about the classification of markets.
CLASSIFICATION OF MARKETS
Pure Competition
• Characteristics:
This term is generally used by the American
Economists:
1. Existence of Large number of Buyers and
Sellers
2. Homogenous Products
3. Free Entry and Exit of Firms
Perfect Competition
• Features:
This term is traditionally used by the British
Economist:-
1. Existence of Large number of Buyers and
Sellers
2. Homogeneous product
3. Free entry and exit of firms
4. Uniform price
5. Perfect mobility of factors of production
6. Perfect knowledge of market
7. Full and Perfect Competition
8. No Transport Costs
9. No Government Intervention
Distinction Between Pure and
Perfect Competition
The pure competition is a part of perfect
competition .
the term “pure competition” is generally used
by the American economists.
The term “perfect competition” is used by the
British economist.
For a market to be highly competitive, 3
fundamental conditions are:
1. Existence of large no. of buyers and sellers
2. Homogenous product
3. Free entry and exit of firms
continued….
For the market to be perfectly competitive
6 more conditions must be added to the
above. They are:
1. Uniform price
2. Perfect knowledge of factors of production
3. Perfect mobility of factors of production
4. Full and perfect competition
5. No transport costs
6. No government intervention
Price–Output determination under
Perfect Competition in an Industry
(General model)
Under a perfectly competitive market, in case
of the industry market price of the product is
determined by the interaction of supply and
demand.
The market price is not fixed by either the
buyers or sellers, the firm or the industry.
It is only demand and supply that determines
the equilibrium price of the product.
Continued…
5 1000 5000
4 2000 4000
3 3000 3000
2 4000 2000
1 5000 1000
Price-output determination under
Perfect Competition
TR=OM x OP=OPEM
TC=OM x OC=OCAM
Total Profit=TR-TC
=OPEM-OCAM
=PEAC
(3) Equilibrium of a firm incurring
losses
TR=OM x OC=OCBM
TC=OM x OP=OPEM
Total Loss = TC-TR
= OCBM-OPEM
= PEBC
Normal Profit
Normal profit is the minimum reasonable
level of profit which the entrepreneur
must get in the long run so that he is
induced to continue the employment of his
resources in its present form.
Normal profit is regarded as a part of
factor cost.
When AR=AC it is implied that normal
profit is included in the TC.
Super Normal Profit
TR=OM x OP=OPQM
TC=OM x OS=OSRM
Total Profit=TR-TC
=OPQM-OSRM
=PQRS
(2) Normal Profits
Competition:
With the intention of elimination the other from the market and
setting himself as a monopolist. It may be ruinous for both.
Come to an understanding/ Come Together:
On the other hand they may come to an understanding and
fix a common price & restrict the competition to
advertisement only.
Oligopoly
Oligoi : a few ; Poly : to sell
Oligopoly is that form of imperfect
competition where there are a few firms in the
market producing either homogenous or
differentiated products which are close but not
perfect substitutes of each other.
Identical product : cooking gas, cement, cable
wire, Petroleum, Vegetable oil , etc.
Differentiated products : Cars, T.V Sets ,
Refrigerators, washing machines, scooters,
Fans, etc.
Features of Oligopoly:
1. Very few sellers
2. Interdependent
3. Indeterminant demand
4. Element of Monopoly
5. Price Rigidity
6. Selling Cost
7. Conflicting Attitude of Firms
8. Constant Struggle
PRICE LEADERSHIP