D.C.

SCHOOL OF MANAGEMENT AND TECHNOLOGY

Project on Micro economics ASSINGMENT Various form of Submitted to- Mr. Mohan Kumar sir.

Submitted by- Prabhakar Mishra DCSMAT 2011-13

Forms of market Executive summaryAfter seeing the various forms of market we can understand that perfect, monopoly, monopolistic ,oligopoly etc are the form of market prevails. but mainly we will found perfect and monopoly form of market in the competative world. Whereas imperfect competition a firm has some control over the price a fact seen as a downward sloping demand curve for the firms output. In addition to declining costs,other forces leading to imperfect competition are the barriers to enter in the form of legal restrictions,i.e.patents or government regulations. These market are differentiated on the basis of their similar kind of products available in the market, and various similar kind of the product available in the market. Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products. Oligopoly , in which a market is dominated by a small number of firms that together control the majority of the market share. Duopoly , a special case of an oligopoly with two firms. Oligopsony , a market where many sellers can be present but meet only a few buyers. Monopoly, where there is only one provider of a product or service.

Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. Monopsony, when there is only one buyer in a market. Perfect competition is a theoretical market structure that features unlimited contestability (or no barriers to entry), an unlimited number of producers and consumers, and a perfectly elastic demand curve.

Perfect competition
Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific characteristics may include: Infinite buyers and sellers Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. Zero entry and exit barriers It is relatively easy for a business to enter or exit in a perfectly competitive market. Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions.

Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. Homogeneous products The characteristics of any given market good or service do not vary across suppliers. Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry.

In the short term, perfectly-competitive markets are not productively efficient as output will not occur where marginal cost is equal to average cost, but allocatively efficient, as output will always occur where marginal cost is equal to marginal revenue, and therefore where marginal cost equals average revenue. In the long term, such markets are both allocatively and productively efficient. Under perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost. This implies that a factor's price equals the factor's marginal revenue product. This allows for derivation of the supply curve on which the neoclassical approach is based. (This is also the reason why "a monopoly does not have a supply curve.") The abandonment of price taking creates considerable difficulties to the demonstration of existence of a general equilibrium except under other, very specific conditions such as that of monopolistic competition. Results-

In the short-run, it is possible for an individual firm to make an economic profit. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C .

However, in the long period, economic profit cannot be sustained. The arrival of new firms or expansion of existing firms (if returns to scale are constant) in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point. Another very near example of perfect competition would be the fish market and the vegetable or fruit vendors who sell at the same place.

1. There are large number of buyers and sellers. 2. There are no entry or exit barriers. 3. There is perfect mobility of the factors, i.e. buyers can easily switch from one seller to the other. 4. The products are homogenous.
.Equilibrium in Perfect Competition

Equilibrium in perfect competition is that point where market demands will equal to market supply. Firm's price will be determined at this point. In short run, equilibrium will be affected from demand. In long run, both demand and supply of product will affect the equilibrium in perfect competition. Firm will receive only normal profit in long run at the equilibrium point.

Imperfect markets includes monopoly , monopolistic and Oligopoly Monopoly marketA monopoly (from Greek monos / (alone or single) + polein / (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity. (This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry). Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a company gains much greater market share than what is expected with perfect competition. A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or

other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra A monopoly is be distinguished from monopsony, for which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), for which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in a game theoretic manner - meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition such that companies are "price takers" and do not have market power. Monopolies typically maximize their profit by producing fewer goods and selling them at greater prices than would be the case for perfect competition. (See also Bertrand, Cournot or Stackelberg equilibria, market power, market share, market concentration, Monopoly profit, industrial economics). Sometimes governments decide legally that a given company is a monopoly that doesn't serve the best interests of the market and/or consumers. Governments may force such companies to divide into smaller independent corporations as was the case of United States v. AT&T, or alter its behavior as was the case of United States v. Microsoft, to protect consumers.

Difference between perfect and monopoly form of market-

Marginal revenue and price - In a perfectly

competitive market price equals marginal revenue. In a monopolistic market marginal revenue is less than price.

Product differentiation: There is zero product

differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is not any available substitute for a monopolized good. The monopolist is the sole supplier of the good in question. A customer either buys from the monopolizing entity on its terms or does without.

Number of competitors: PC markets are

populated by an infinite number of buyers and sellers. Monopoly involves a single seller.

Barriers to Entry - Barriers to entry are factors

and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets

have free entry and exit. There are not any barriers to entry, exit or competition. Monopolies have relatively great barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.

Elasticity of Demand; the price elasticity of

demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.

Excess Profits- Excess or positive profits are

profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors which can enter the market freely and decrease prices, eventually reducing excess profits to zero. A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.

Profit Maximization - A PC company

maximizes profits by producing such that price equals marginal costs. A monopoly maximizes profits by producing where marginal revenue equals marginal costs. The rules are not equivalent. The demand curve for a PC company is perfectly elastic - flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve.

P-Max quantity, price and profit - If a

monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase

prices, reduce production, and realize positive economic profits.

Supply Curve -In a perfectly competitive market

there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both." Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply "curve" would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply "point" would be established. The locus of these points would not be a supply curve in any conventional sense. The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC Company. Practically all the variations above mentioned relate to this fact. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve. A pure monopoly has the same economic rationality of perfectly competitive companies, i.e. to optimize a profit function given some constraints. By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of production. Nonetheless, a pure monopoly can -unlike a competitive company- alter the market price for its own convenience: a decrease of production results in a greater price.

Surpluses and dead weight loss created by monopoly price setting.

Monopolistic marketMonopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes but, because of differences such as branding, not exactly alike). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market

and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson is also credited as an early pioneer of the concept. Monopolistically competitive markets have the following characteristics:

There are many producers and many consumers in the market, and no business has total control over the market price. Consumers perceive that there are non-price differences among the competitors' products. There are few barriers to entry and exit. Producers have a degree of control over price.

The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. Oligopoly In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly; an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The

prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well. In an oligopoly, firms operate under imperfect competition. With the fierce price competitiveness created by this sticky-upward demand curve, firms use non-price competition in order to accrue greater revenue and market share. "Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend"kink". Thus the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upwardsloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity. The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices. However, even a large price decrease will gain only a few customers because such an action will begin a price

war with other firms. The curve is therefore more price-elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run.

Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support.

CONCLUSIONAfter seeing the various forms of market we can understand that perfect, monopoly, monopolistic ,oligopoly etc form of market prevails. but mainly we will found perfect and monopoly form of market in the competative world.

Whereas imperfect competition a firm has some control over the price a fact seen as a downward sloping demand curve for the firms output. In addition to declining costs,other forces leading to imperfect competition are the barriers to enter in the form of legal restrictions,i.e.patents or government regulations.