MARKET STRUCTURES

CONCEPT OF MARKET
Market is associated with a place where transaction occurs between sellers and buyers. It is defined as an area where a large number of shops sell a particular product. In economic terms, market is defined as a system under which buyers and sellers negotiate the price of a product, settle the price, and transact their business. Following are the essentials of a market:
Products which are dealt with Presence of buyers and sellers A place, whether a certain region, country, or the whole world A type of interaction between buyers and sellers, so that the same price prevails for same products at the same time

T YPES OF MARKET STRUCTURES

Types of Market Structures

Perfectly Competitive Market

Imperfectly Competitive Market

PERFECTLY COMPETITIVE MARKET

A purely competitive market is one in which there are a large number of independent buyers and sellers dealing in standardized products. Under pure competition, sellers cannot influence the market price of products, thus they are price takers. In pure competition, the average revenue curve or demand curve is represented by a horizontal straight line

PERFECTLY COMPETITIVE MARKET

In the words of Prof. Leftwitch, Perfect competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price. Features of perfect competition:
Large Number of Buyers and Sellers Homogeneous Products Free Entry and Exit Perfect Knowledge Absence of Transport Cost Perfect Mobility of Factors of Production

IMPERFECTLY COMPETITIVE MARKET

Imperfect competition is a market situation under which the conditions necessary for perfect competition are not satisfied. Imperfect competition is characterized by dif ferentiated products. Under imperfect competition, buyers and sellers do not have any information related to the market as well as prices of goods and services. Dif ferent forms of imperfect competition:
Monopoly Monopolistic Competition Oligopoly

MONOPOLY
Monopoly refers to a market structure in which there is a single producer or seller that has a control on the entire market. In monopoly, the slope of the demand curve is downward to the right. Features of the monopoly market structure:
Single Seller No Substitutes of the Product Barriers to Entry Restriction on Information Legal Restrictions Resource Ownership Efficiency in Production Economies of Scale

MONOPOLISTIC COMPETITION
Monopolistic competition refers to a market situation in which there are a large number of buyers and sellers of products . The products produced by the sellers in monopolistic competition are close, but not perfect substitutes of each other. Characteristics of monopolistic competition:
Large Number of Sellers and Buyers Differentiated Products Free Entry and Exit Restricted Mobility of Factors of Production Price Policy

OLIGOPOLY
Oligopoly refers to a market form in which there are few sellers dealing either in homogenous or dif ferentiated products. In oligopoly market structure, the price and output decided by a seller af fects the sales and profit of its competitors. This may either lead to a situation of conflict or cooperation among sellers. Characteristics of oligopoly:
Few Sellers and Many Buyers Homogeneous or Differentiated Products Barriers in Entry and Exit Mutual Interdependence Lack of Uniformity Existence of Price Rigidity

PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETITION

Under perfect competition, the buyers and sellers cannot influence the market price by increasing or decreasing their purchases or output, respectively. In perfect competition, the market price of products is determined by taking into account two market forces, namely market demand and market supply. In perfect competition, the price of a product is determined at a point at which the demand and supply curve intersect each other. This point is known as equilibrium point as well as the price is known as equilibrium price. At this point, the quantity demanded and supplied is called equilibrium quantity.

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DEMAND UNDER PERFECT COMPETITION

Under perfect competition, the demand curve (DD) slopes downward. A consumer demands more quantity at lower price and less quantity at higher price. Therefore, the demand varies at dif ferent prices.

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SUPPLY UNDER PERFECT COMPETITION

Under perfect competition, the supply curve (SS) slopes upward. The supply of a product increases at high price and decreases at low price.

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EQUILIBRIUM UNDER PERFECT COMPETITION

In perfect competition, the equilibrium is achieved at a point at which the demand and supply curve intersect each other . In Figure, it can be seen that at price OP 1 , supply is more than the demand. Therefore, prices will fall down to OP. Similarly, at price OP 2 , demand is more than the supply. Similarly, in such a case, the prices will rise to OP. Thus, E is the equilibrium at which equilibrium price is OP and equilibrium quantity is OQ.

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TIME ELEMENT UNDER PERFECT COMPETITION

Price determination under perfect competition can be analyzed into three periods: Ver y Short Period
Refers to a time period in which quantity supplied of a product cannot be increased with increase in its demand (the supply of a product is fixed). The price determined in very short period is known as market price.

Short Period
Refers to a time period in which the level of supply of a particular product can be increased, but only as per the production capacity of an organization. The supply is fixed in short period and the price determined in this period is known as sub-normal price.

Long Period
Refers to a period in which the supply of a product can be increased or decreased with the changing level of demand. The price in the long period is called normal price.

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PRICE DETERMINATION IN SHORT PERIOD

In short period, organizations neither exit the industry nor do new organizations enter the industry. In this period, it is possible to increase or decrease the supply of variable inputs. Thus, supply curve is elastic in nature.

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