Market Structure

Lecture- 3
 What is Market?

• Market is a place where buyers and sellers come together to

exchange goods and services.
• In the product market the individuals and households are buyers and
firms are seller.
For Examples - airline travel, clothing, banking services etc.
• On the other hand in the factor market households are important sellers
and firms and government agencies are the primary buyers.
For example, markets for Web page designers, for accountants, and
for factory workers.
 Demand and Supply
• When you come to a market as a buyer, what is your goal?
• Well off as possible
• You face constraints. First, price. Second, you have a limited income
• The constraints of buyers play a role in determining the demand side of a market.
• A seller, comes to a market with a goal—to make as much profit as possible.
• He faces an important constraint: Producing output (goods and services) requires
the use of inputs. The quantities of those inputs needed are determined by the firm’s
production technology.
• The supply and demand model is designed to explain how prices are determined
 Law of Demand

• The law of demand states that when the price of a good rises and
everything else remains the same, the quantity of the good demanded
will fall.
 Changes in quantity demanded
• A change in a good’s price causes to move along the demand curve.
We call this a change in quantity demanded.
• A rise in price causes a leftward movement along the demand curve—
a decrease in quantity demanded. A fall in price causes a rightward
movement along the demand curve—an increase in
quantity demanded.
• A change in any determinant of demand—except for the good’s
price—causes the demand curve to shift. We call this a change in
demand.
• If buyers choose to purchase more at any price, the demand curve
shifts rightward—an increase in demand. If buyers choose to purchase
less at any price, the demand curve shifts leftward—a decrease in
demand.
Determinant of demand
increase Income and Wealth
1. The demand for most goods (normal goods) is positively related to
income or wealth. A rise in either income or wealth will increase demand
for these goods, and shift the demand curve to the right.
2. inferior goods—a rise in income or wealth will decrease demand
3. A substitute is a good that can be used in place of another good and that
fulfills more or less the same purpose. when the price of a substitute rises,
the demand for a good will increase, shifting the demand curve to the
right.
4. A complement is the opposite of a substitute: It’s used together with the
good we are interested in. A rise in the price of a complement decreases
the demand for a good, shifting the demand curve to the left.
Population. As the population increases in an area, the number of
buyers will ordinarily increase as well, and the demand for a good will
increase.
Expectations. Expectations of future events—especially future changes
in a good’s price—can affect demand. For example, if buyers expect the
price of dollar to rise next month, they may choose to purchase more
now to stock up before the price hike. The demand curve would shift to
the right and vise versa.
Tastes, Weather etc.
 Quantity Supply
• A firm’s quantity supplied of any good is the amount it would
choose to produce and sell at a particular price.
• when a competitive firm comes to a market as a seller, it wants to
make the highest possible profit.
• The firm can choose the level of output it wants to produce, but it
faces three constraints: (1) its production technology, (2) the prices
it must pay for its inputs, and (3) the market price of its output.
 Law of Supply
• The law of supply states that when the price of a good rises, and
everything else remains the same, the quantity of the good supplied
will rise.
 Changes in quantity supplied
• A change in a good’s price causes us to move along the supply curve.
We call this a change in quantity supplied.
• A rise in price causes a rightward movement along the supply curve—
an increase in quantity supplied.
• A fall in price causes a leftward movement along the supply curve—a
decrease in quantity supplied.
Changes in quantity supplied
Changes in quantity supplied
Market Equilibrium
Market Equilibrium
Shift of Supply and New Equilibrium
Shift of Demand and New Equilibrium
 Market Structure

• Market structure, mean all the characteristics of a market that

influence the behavior of buyers and sellers when they come together
to trade.
• To determine the structure of any particular market, begin by asking
three simple questions:

1. How many buyers and sellers are there in the market?

2. Are there significant differences between the products of different
firms?
3. Are there any barriers to entry or exit, or can outsiders easily enter
and leave this market?
• The answers to these questions help us to classify a market into one of
five basic types

1. Perfect Competition
2. Monopoly
3. Duopoly
4. Oligopoly
5. Monopolistic Competition
 1. Perfect Competition

• Perfect competition A market structure in which there are many

buyers and sellers, the product is standardized, and sellers can
easily enter or exit the market.
 Characteristic of Perfect Competition

1. Large Number of Buyers and Sellers

In a perfectly competitive market, the number of buyers and sellers is so
large that no individual decision maker can significantly affect the price
of the product by changing the quantity it buys or sells.
2. Homogenous Product Offered by Sellers
In a perfectly competitive market, buyers do not perceive significant
differences between the products of one seller and another.
For example, buyers of wheat will ordinarily have no preference for one
farmer’s wheat over another’s, so wheat would surely pass the
standardized product test.
 Characteristic of Perfect Competition

3 Easy Entry into and Exit from the Market.

Entry into a market is rarely free—a new seller must always incur some
costs to set up shop, begin production, and establish contacts with
customers. But a perfectly competitive market has no significant
barriers to discourage new entrants: Any firm wishing to enter can do
business on the same terms as firms that are already there.
4. Absence of Artificial Restrictions
there is complete openness in buying and selling of goods. Sellers are
free to sell their goods to any buyers and the buyers are free to buy from
any sellers.
 Goals and Constraints to Competitive Firms

• Reduced the losses and maximize profit are the main objective of
firms
• Production technology to produce its output and pay some given prices
for its inputs are the constraints of the firms
Profit Maximization
Profit and Loss
 2. Monopoly

What Is a Monopoly?
• A monopoly is a single firm that serves an entire market. This single
firm faces the market demand curve for its output. The firm may
choose to produce at any point on the market demand curve.

• A monopoly firm is the only seller of a good or service with no close

substitutes. The market in which the monopoly firm operates is called
a monopoly market.
 Characteristic/ Sources of Monopoly

(1) Barriers to Entry

• Barriers to entry are the source of all monopoly power. If other firms
could enter a market, then the firm would, by definition, no longer be a
monopoly.
• Technical barriers to entry
A primary technical barrier is that the production of the good may
exhibit decreasing marginal and average costs over a wide range of
output levels.
• Relatively large-scale firms are low-cost producers.
 Characteristic of Monopoly

Legal barriers to entry

• Many pure monopolies are created as a matter of law rather than as a
matter of economic conditions. One important example of a
government-granted monopoly position is the legal protection of a
product by a patent or copyright.
For example Prescription drugs, computer chips,

(2) price maker.

 Characteristic of Monopoly

Creation of barriers to entry

• Some barriers to entry may be independent of the monopolist’s own
activities, other barriers may result directly from those activities.
For example, firms may develop unique products or technologies
and take extraordinary steps to keep these from being
copied by competitors.

(2) Monopolist firms are price Maker.

 Monopoly Goals and Constraints
The goal of a monopoly—is to earn the highest profit

The monopolist faces two sorts of constraints when it chooses its price
and output levels.

• First, it faces the standard technological constraints -there are only

certain patterns of inputs and outputs that are technologically feasible.

• The second set of constraints that the monopolist faces is that

presented by the consumers behavior. The consumers are willing to
purchase different amounts of the good at different prices.
Profit Maximization and Price Determination
Monopoly profit and loss
Equilibrium
 Types of Market

• Labor Markets
• Goods Markets
• Money Markets