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Market
Market
Market is an area where buyers and sellers
come in contact with each other to
determine a single price of a product in a
whole of area at a time.
Kinds of Market
Market can be classified according to
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Time
Space
Commodities
Competition
According to Time
• Day to day market
• Short period market
• Long period market
According to Space
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Local Market
Regional Market
National market
International market
According to Commodities
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General Market
Specialized Market
Capital Market
Stock Exchange Market
Factor Market
Money Market
Foreign Exchange Market
According to Competition
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Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Duopoly
Monophony
MARKET STRUCTURE
• Market structure – identifies how a market
is made up in terms of:
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The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms’ behaviour – pricing strategies, non-price competition,
output levels
– The extent of barriers to entry
– The impact on efficiency
MARKET STRUCTURE
Perfect
Competition
Pure
Monopoly
More competitive (fewer imperfections)
Market Structure
Perfect
Competition
Pure
Monopoly
Less competitive (greater degree
of imperfection)
Market Structure
Pure
Monopoly
Perfect
Competition
Monopolistic Competition
Oligopoly
Duopoly Monopoly
The further right on the scale, the greater the degree
of monopoly power exercised by the firm.
MARKET STRUCTURE
Importance:
• Degree of competition affects
the consumer – will it benefit
the consumer or not?
• Impacts on the performance
and behaviour of the company/companies
involved
MARKET STRUCTURE
• Characteristics of each model:
– Number and size of firms that make up
the industry
– Control over price or output
– Freedom of entry and exit from the industry
– Nature of the product – degree of homogeneity
(similarity) of the products in the industry (extent to
which products can be regarded as substitutes for
each other)
– Diagrammatic representation – the shape
of the demand curve, etc.
PERFECT COMPETITION
A market situation in which
no firm or individual is able
to influence the working of
the market.
PERFECT COMPETITION
• Characteristics:
– Large number of firms
– Products are homogenous (identical) – consumer has no reason
to express a preference for any firm
– Freedom of entry and exit into and out of the industry
– Firms are price takers – have no control over the price they
charge for their product
– Each producer supplies a very small proportion of total industry
output
– Consumers and producers have perfect knowledge about the
market
• PC imply that no firm can influence the
price at which it sells output. They are
price-takers.
• A Price –Taker is a firm that cannot
influence the price of a good or service.
• Firms are price takers because it produces
a tiny proportion of the total output of a
particular good and buyers are well
informed about the prices of other firms.
DECISIONS IN SHORT RUN
 Price is usually constant in perfect
competition and only the quantity changes.
 Competitive firms always need to maximize
its economic profit and therefore firms makes
4 key decisions: 2 in short run and 2 in long
run.
 Short run decisions – is a time frame in which
each firm has a given plant and the number of
firms in the industry is fixed.
1. whether to produce or to shutdown.
2. if the decision is to produce, what quantity to
produce.
DECISIONS IN LONG RUN
 Long Run is a time frame in which each firm can
change the size of its plant and decide whether to
leave the industry or let other firms enter into the
industry.
 In LR, firms plant size can change, number of firms can
change and even the constraints faced by firms can
also change. For example the demand for goods can
permanently fall or technological advancement can
change the industries cost. In LR:
1. Firms need to decide to increase or decrease its plant
size or
2. stay in the industry or leave it.
ADVANTAGES OF PERFECT COMPETITION
(i) optimal allocation of resources
(ii) competition encourages efficiency
(iii) consumers charged a lower price
(iv) responsive to consumer wishes: Change in
demand, leads extra supply
DISADVANTAGES OF PERFECT
COMPETITION
(i) insufficient profits for investment
(ii) lack of product variety
(iii) lack of competition over product design and
specification
(iv) unequal distribution of goods & income
MONOPOLISTIC /IMPERFECT
COMPETITION
MONOPOLISTIC OR IMPERFECT
COMPETITION
• Where the conditions of perfect competition
do not hold, ‘imperfect competition’ will exist
• Varying degrees of imperfection give rise to
varying market structures
• Monopolistic competition is one of these –
not to be confused with monopoly!
MONOPOLISTIC OR IMPERFECT
COMPETITION
• Characteristics:
– Large number of firms in the industry
– May have some element of control over price due to
the fact that they are able to differentiate their product
in some way from their rivals – products are therefore
close, but not perfect, substitutes
– Entry and exit from the industry is relatively easy –
few barriers to entry and exit
– Consumer and producer knowledge imperfect
• No one firm can influence what other firms
can do because all firms are small.
• Products are differentiated - a slight
difference from the products of competing
firms.
• Demand curve is downward sloping due to
Product differentiation. Increase in price
will usually lead to decrease in demand
and switch to substitute good.
PROFIT DECISIONS
Profit is maximized by choosing its price.
LR – economic profit cannot be made
because of firms free entry and exit.
Economic profit – new firms enter, price
decreases and eliminated profit.
Economic losses – firms leave the industry,
price increases and profits and thus
eliminates loss.
LR- firms neither enter or leave, zero
economic profit.
MONOPOLISTIC OR IMPERFECT
• COMPETITION
Restaurants
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Plumbers/electricians/local builders
Private schools
Health clubs
Hairdressers
Estate agents
MONOPOLISTIC OR IMPERFECT
COMPETITION
• In each case there are many firms
in the industry
• Each can try to differentiate its product
in some way
• Entry and exit to the industry is relatively free
• Consumers and producers do not have perfect
knowledge of the market
ADVANTAGES OF MONOPOLISTIC
COMPETITION
• There are no significant barriers to entry;
therefore markets are relatively contestable.
• Differentiation creates diversity, choice and utility.
For example, a typical food street in any town will
have a number of different restaurants from which
to choose.
• The market is more efficient than monopoly but
less efficient than perfect competition
• However, they may be dynamically efficient,
innovative in terms of new production processes
or new products.
• For example, retailers often constantly have to
develop new ways to attract and retain local
custom.
DISADVANTAGES OF MONOPOLISTIC
COMPETITION
• competing firms are inefficient and the prices of
the products usually exceed the benefits or value
provided by the products or services.
• Government lacks the control because market is
huge and a large number of buyers and sellers
exist.
• emphasize on the advertisements and promotional
strategies which induces the customers to spend
more because of the brand names.
• no regulatory control over the prices therefore,
consumers suffer in a monopolistic competition.
OLIGOPOLY
• only a few firms in a market and entry is
difficult for other firms.
• Key feature – profitability of any one firms
actions depend on how the other firms
respond to those actions.
• Strategic behavior – when firms are aware of
other firms expected responses , they take
those expected responses into account when
making choices.
• Decide on how much to produce, what price
to charge, and how much to spend on
advertising.
OLIGOPOLY
• Features of an oligopolistic market structure:
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Profit maximization conditions: An oligopoly maximizes profits by
producing where marginal revenue equals marginal costs.
Ability to set price: Oligopolies are price setters rather than price
takers.
Entry and exit: Barriers to entry are high. The most important barriers
are economies of scale, patents, access to expensive and complex
technology etc.
Number of firms: "Few" – a "handful" of sellers. There are so few firms
that the actions of one firm can influence the actions of the other firms.
Long run profits: Oligopolies can retain long run abnormal profits.
High barriers of entry prevent sideline firms from entering market to
capture excess profits.
FEATURES….
• Product differentiation: Product may be homogeneous
(steel) or differentiated (automobiles).
• Perfect knowledge: Oligopolies have perfect
knowledge of their own cost and demand functions.
Buyers have only imperfect knowledge as to price, cost
and product quality.
• Interdependence: The distinctive feature of an oligopoly
is interdependence. Oligopolies are typically composed of
a few large firms. Each firm is so large that its actions
affect market conditions. Therefore the competing firms
will be aware of a firm's market actions and will respond
appropriately.
MONOPOLY
• Is an industry that produces a good or service for
which no close substitute exists.
• There is only one supplier/seller – protected from
competitions by barriers to entry of new firms.
2 key features:
1. No close substitutes – firms produces a product
for which there is no close substitute. E.g. water
supply.
2. barriers to entry – legal or natural constraints that
protect a firm from potential competitors.
CHARACTERISTICS
• One seller of a good or service.
• High degree of control over the price at
which the product is sold. Price –maker or
has market power.
• Barriers to entry by other firms. - Capital
cost can be seen as a strong barrier in the
case of big firms.
• Economies of scale – larger output with
least cost of production
2 TYPES OF BARRIERS
1. Legal barriers – occurs when a law, license
or patent restricts competition by preventing
entry. E.g. public franchise – exclusive right
given to a firm to supply good or service.
• Government license – controls entry into
particular occupations, professions, and
industries.
• Patent – exclusive right given to the inventor
of the product or service.
2. Natural Barriers to entry- where one firm can
supply the entire market at a lower price than
two or more firms can.
MONOPOLY PRICE SETTING STRATEGIES
• Monopoly uses two strategies –
1. Single price Monopoly - firm that must sell
each unit of output for the same price to all
the consumers.
2. Price discrimination- is the practice of selling
different units of the same good or service for
different prices. e.g. hairdresser, restaurant.
• Firms in Monopoly can also make positive
economic profits and this will not cause
other firms to enter like in PC due to
barriers to entry.
• Monopolists always produces output
where both MR=MC and are positive.
• The demand is elastic. They do not
produce in the inelastic range.
PRICE DISCRIMINATION
• Price discrimination is an attempt by the
monopoly to convert consumer surplus into
economic profit.
• A monopoly can price discriminate if it
a. Can identify and separate different buyer types.
b. Sells a product that cannot be resold.
c. Price discrimination usually increases economic
profit and decreases consumer surplus
ADVANTAGES OF MONOPOLY
• Monopolist will have better resources to
spend on research and development and will
be able to bring new techniques and products
to strengthen its position
• reacts to demand changes in a more effective
manner than other forms.
DISADVANTAGES OF MONOPOLY
• They charge higher prices as there is no
other competitor in the market
• Monopolist has the power to restrict market
supply
• because there is no competition monopolist
have little incentive to introduce new products
and techniques.
• Monopolies also restrict entries of new firms
and drive them out of business
• there is lack of choice for consumers in the
market.
Slides prepared by Bized