Module-4

Market Structures.
A market is a place where parties can gather to facilitate the exchange of goods
and services. The parties involved are usually buyers and sellers. The market may be
physical like a retail outlet, where people meet face-to-face, or virtual like an online
market, where there is no direct physical contact between buyers and sellers.

Definition:

“A market is that mechanism by which buyers and sellers are brought together. It
is not necessarily a fixed place.”Professor J.C. Edwards

“The term market refers not necessarily to place but always to a commodity and
the buyers and sellers who are in direct competition with one another.”Professor
Chapman

Features of Market
Essential characteristics of a market are as follows:

1. One commodity
In practical life, a market is understood as a place where commodities are bought and
sold at retail or wholesale price, but in economics “Market” does not refer to a particular
place as such but it refers to a market for a commodity or commodities i.e., a wheat
market, a tea market or a gold market and so on.

2. Area:
In economics, market does not refer only to a fixed location. It refers to the whole area
or region of operation of demand and supply

3. Buyers and Sellers:

To create a market for a commodity what we need is only a group of potential sellers
and potential buyers. They must be present in the market of course at different places.

4. Perfect Competition:
In the market there must be the existence of perfect competition between buyers and
sellers. But the opinion of modern economist is that in the market the situation of
imperfect competition also exists, therefore, the existence of both is found.
5. Business relationship between Buyers and Sellers:
For a market, there must exist perfect business relationship between buyers and sellers.
They may not be physically present in the market, but the business relationship must be
carried on.

6. Perfect Knowledge of the Market:

Buyers and sellers must have perfect knowledge of the market regarding the demand of
the customers, regarding their habits, tastes, fashions etc.

7. One Price:
One and only one price be in existence in the market which is possible only through
perfect competition and not otherwise.

8. Sound Monetary System:

Sound monetary system should be prevalent in the market, it means money exchange
system, if possible, be prevalent in the market.

9. Presence of Speculators:
Presence of seculars is essential just to supply business information’s and prices
prevalent in the market.

Classification of Markets
Markets can be classified on different bases of which most common bases are: area,
time, transactions, regulation, and volume of business, nature of goods, and nature of
competition, demand and supply conditions. This classification is off-shoot of traditional
approach.

Traditionally, a market was a physical place where buyers and sellers gathered to buy
and sell the goods. Economists describe a market as a collection buyers and sellers
who transact over a particular product or product class.

A. On the Basis of Area:

Using area, there can be local, regional, national and international markets. Local
markets confine to locality mostly dealing in perishable and semi-perishable goods like
fish, flowers, vegetables, eggs, milk, and others.

Regional market covers a wider area may be a district, a state or inter-state dealing in
durables both consumer and non durables and industrial products, including agricultural
produce.

In case of national markets the area covered are national boundaries dealing in durable
and non-durable consumer goods, industrial goods, metals, forest products, agricultural
produce.
In case of world or international market, the movement of goods is widespread
throughout the world, making it as a single market. It should be noted that due to the
latest technologies in transport, storage and packaging, even the most perishable goods
are sold all over the world, not that only durables.

B. On the basis of Time:

The time duration is the factor. Accordingly, there can be short period and long period
markets. Short-period markets are for highly perishable goods of all kinds and long-
period markets are for durable goods of different varieties may be produced or
manufactured.

C. On the basis of Transactions:

Taking the nature of transactions, these can be ‘spot’ and ‘future’ markets. In ‘spot’
market, once the transaction takes place, the delivery takes place, while in case of
future markets, transactions are finalized pending delivery and payment for future dates.
D. On the basis of Regulation:
Taking regulation, markets can be regulated and non-regulated. A ‘regulated market’ is
one in which business dealings take place as per set rules and regulations regarding,
quality, price, source changes and so on.

These can be in agricultural products or produce and securities. On the other hand,
unregulated market is a free market where there are no rules and regulations; even if
they are there, they are amended as per the requirements of parties of exchange.

E. On the Basis of Volume of Business:

Taking volume of business as a basis, there can be two types of markets namely,
“Wholesale” and “Retail”. Wholesale markets are featured by large volume business .

On the other hand, ‘Retail’ markets are those where quantity bought and sold is on
small-scale. The dealers are retailers who buy from wholesalers and sell back to
consumers.

F. On the basis of Nature of Goods:

Taking the nature of goods, there can be commodity markets, capital markets.
‘Commodity’ markets deal in favour of material, produce, manufactured goods may be
consumer and industrial and bullion market dealing precious metals.

G. On the basis of Nature of Competition:

Based on competition or competitive forces, there can be variety of markets for a
product or service. However, only two are the most important namely, perfect and
imperfect.
A ‘perfect’ market is one which is characterized by:
(a) Large number of buyers and sellers
(b) Prevalence of single lowest price for products those are ‘homogeneous’
(c) The perfect knowledge on the part of buyers and sellers
(d) Free entry and exit of firms in market. These types for markets exist hardly.

The other one is ‘imperfect’ which is featured by:

(a) Products may be similar but not identical
(b) Different prices for a class of goods
(c) Existence of physical and psychological barriers on movement of goods
(d) No perfect knowledge of products and other dimensions on the part of buyers and
sellers.

Market structure
The structure of market is based on the following features

1.The degree of seller concentration: This refers to the number of sellers and their
market share for a given product or service in the market.

2.The degree of buyer concentration: This refers to number of buyers and their extent
of purchases of a given product or services in the market.

3.The degree of product differentiation: This refers to the extent by which the product
of each trader is differentiated from that of the other.

4.The condition of entry in to the market: More often, there could be certain
restrictions to enter in to or exit from the market. The degree of ease with which one can
enter the market or exit from the market also determines the market structure.

Perfect competition or Perfect Market:

A market structure in which all firms in an industry are price takers and in which
there is freedom of entry in to and exit from the industry is called perfect competition.

Features:
1. Large number of Buyers
2. Homogeneous products or services
3. Freedom to enter or exit from the market
4. Perfect information available to the Buyers and sellers
5. Perfect mobility of factors of production
6. Each firm is a price taker
Price Output Determination and Equilibrium of the Firm in the Short Run
A company is a cost taker instead of an individual price maker in the marketplace. The
difference in the role of industry competitive to the role of a company in determining
price and output determination under perfect competition is apparent in the below
diagram:

A business may make unusual profits at the equilibrium level of output when its average
earnings exceed the cost of production by an average. In diagram 6.7, the firm’s
equilibrium is at point E when the MC curve meets with the MR curve. When the firm is
at OP prices, the company generates OQ output. The company’s average income (AR)
equals EQ when it produces OQ output. Its average cost (AC) will be BQ because AR is
higher than AC. Firms get abnormal profits. In the end, companies experience abnormal
profits (EB) in unit output. It is the total profits (PABE), the per-unit profit divides by total
output.

Price output determination under Perfect market in the Long Run

The ability to enter or leave firms is not a problem in a highly competitive market. The
firms that are inefficient are then able to lose money and close the business or improve
their effectiveness. New companies attract profit-driven firms to establish because of the
entrance of new producers, the quantity of the commodity rises, and the cost of the
commodity falls.
All firms are at break-even because of the loss of profits. It results from the long-term
equilibrium between the industry and firm in a perfect market. Also, price and output
determination under perfect competition, whereas all firms break even and make regular
profits in the long term. Firms operate in a zero-loss-no-profit scenario where AR=AC is
graphically plots in Figure 6.10.

In figure 6.10 In this output stage, the price and output determination under perfect
competition is as the average revenue and average cost are the same as QS, while OQ
represents the equilibrium value. Because of this, the firm will only earn regular profits.
In this case, as the average cost is low, the average and marginal costs will remain the
same, so the long-term equilibrium conditions for a business will be: MR=LMC=LAC=
Price.

Monopoly Market or Competition

Monopoly refers to a situation where single firm is in a position to control either supply
or prices of a particular product or service. It cannot control both price and supply. If he
decides on the price , it can determine the quantity supplied at a given price. If the
quantity is decided ,the price can be determined.

Features :

1. There is a single firm dealing in a particular product or service.

2. There are no close substitutes and no competitors.
3. The monopolist can decide either price or quantity, not both.
4. The products and services provided by the monopolist bear inelastic demand
5. Monopoly may be created through statutory grant of special privileges such as
licenses, permits, patent rights and so on.
 Price Output Determination Under Monopoly
The demand curve for the company is identical to the demand curve for market services
under the monopoly. Market demand curves tend to slope downwards as monopolists
confront downward-sloping demand curves. To maximize profits, firms must operate at
a maximum output level at which margin revenue and marginal cost are equal. Price
makers are firms in monopoly, and setting market prices influence the production
decisions of the companies

In a trust, the price and output determination under monopoly never surpasses marginal
revenue, as illustrated by a downward-sloping demand curve. The price here is the
average revenue since the downward slope of a demand curve’s requirements is that
MR is lower than AR. The following are the criteria helpful to calculate the price-output
of monopoly:

Conditions for Price and Output Determination Under Monopoly and Equilibrium
The following are the two conditions for price and output determination under monopoly
and achieve the equilibrium of a monopoly market which form the basis of price-output
decision-making:

1. MC=MR
2. The MC curve must cut the MR curve from below.

Price and Output Determination Under Monopoly During Short-Run

The monopoly-owned firm achieves price and output determination under monopoly and
equilibrium in the short run at the point when profits are the highest and losses are
minimal.
Super-Normal Profit

In the short-run, SAC and SMC are the marginal and short-run average revenue curves,
while AVC represents the mean variable cost curve for the company. For a variety of
reasons, it is the case the AVC curve is not available in figure 6.14. The price and
output determination under monopoly. The curve of demand D=AR whose marginal
revenue curve can describe as MR. At the point the point. The short-run equilibrium at
which the SMC curve cuts into the MR curve below. The Monopolist can sell OM output
at the MP Price. This price is MP. is higher than the cost of short-run MA. The
Monopolist makes AP Profit per Unit of Output. So total profits from monopolies include:

Price and Output Determination Under Monopoly During Long-Run

At that point in production, the marginal cost is more significant than the marginal
revenue, and the long-term equilibrium of the firm in the monopoly model is achievable.
To determine price and output determination under monopoly, you have to use it. Due
to the inability of new companies into markets, the income of the monopoly company is
not as high in the long term. Despite this the fact that there is no loss for the monopoly
firm since, over time, everything is reversible and is recoupable. Supposing that, in the
end, the monopoly firm can’t cover the variable cost, the firm should cease production
and exit the market.

In diagram 6.17, M is the point at which the firm is at equilibrium when LMC for the
company merges with MR. OQ output generates the firm in the price of equilibrium OK
that is acceptable. The profit PR per unit reaches the production level, OQ, when the
company’s average revenue is more significant than its cost of production.
 Monopolistic Market or Competition

Monopolistic competition is said to exist when there are many firms and each one
produces such goods and services that are close substitutes to each other.They are
similar but not identical. There are no restrictions on the entry and exit.

Price out put determination under Monopolistic competition in short run

As there is product differentiation between firms in a monopolistic competitive market, a

perfectly elastic demand is not available to the firm for its products. Each firm can
determine its product’s price, and thus each firm is termed a price maker. Now, we will
come to know about the price and output determination in monopolistic competition.
Generally, a firm’s demand curve for its products is downward sloping. Also, with lesser
product differentiation compared to competitors, the car will have more elasticity.

Conditions for the Price and Output Determination in Monopolistic Competition

Equilibrium of an Individual Firm
The price and output determination in monopolistic competition and equilibrium
conditions of an individual firm may be as follows:

1. Marginal Cost = Marginal Revenue, and MC = MR

2. There must be an intersection of the MR curve and MC curve from below.

Short-Run Price and Output Determination in Monopolistic Competition and

Equilibrium of the Industry
The analysis in the short-run of the firm under monopolistic competition is based on
some assumptions. These assumptions are as follows:

1. There are large numbers of sellers who act independently of each other. These sellers
are monopolists in their sphere.
2. Each seller’s product shows differentiation from other products.
3. A firm attains a determinate elastic demand curve (AR).
4. A perfectly elastic supply of factor services to produce the question product.
5. Each firm’s short-run cost curves differ from each other.
6. There is a restriction to entering new firms in the industry

Under these assumptions, each firm’s price and output are fixed to maximize profits.
There is an equilibrium point of price and output at which the Short-Run Marginal Cost
(SMC) equals marginal revenue. Since, in the short-run Price and Output Determination
in monopolistic competition, there is a difference in cost, the firm with lower unit costs
earns only average profits. There will be a loss if it can cover the average va riable cost.
1. Supernormal Profit

In figure 6.18, the SMC (short-run marginal cost) curve cuts the MR curve at point E.
This point E shows the output OQ and price QA (= OP). This results in the firm earns
supernormal profit, represented by the area PABC.

Price output determination under monopolistic competition in long run

There is exit and entry of the firms in the long run in a monopolistic competitive industry.
The process of adjustment will lead to the existence of average profits only. In the long
run, this is a realistic assumption for price and output determination in monopolistic
competition that no firm can incur losses or earn supernormal profits. It is because of
similar products in the market.
In a monopolistic competitive industry, if the firms in the short-run earn supernormal
profits, there will be an incentive to enter new firms. Profits per firm will keep decreasing
with the entry of more firms as there will be sharing of product demand among many
firms. It happens till wiping off all profits, and then all firms earn only average profits.

Thus, it is clear that all firms will earn only average profits in the long run. In figure 6.21,
in the long run, all firms are at equilibrium at point E where (1) LMC = MR, (2) MR is cut
by LMC from below, and the curve LAC is tangent at point A to the D/AR curve. Since at
point A, price-QA = LAC, average profits are earned by each firm, and there is no
tendency for firms to enter or exit the industry.