You are on page 1of 25

Market

Structures
And Price Out
Determination

Market

Structures

represents by four basic market models.


Theoretical frameworks for existing firms and
industries in the real world.

Firms

and industries

play a vital role in our economy. They always seek


ways of reducing costs of production and of
improving the quality of their goods and services,
especially in a competitive market.
In the view of the scarcity of resources, they should
strive to maximize their employment and
production. It is their responsibility to pursue
economic efficiency as their objective.

Economic

efficiency

the relationship between input (factors of


production) and output (goods and services
produced by the factors of production).

Basic Market Models

Perfect/pure types

perfect or pure competition


pure monopoly

Imperfect/non-pure

type

monopolistic competition
oligopoly

Market Models Defined


Pure competition
is a market situation where
there is a large number of
independent sellers offering
identical products.

Pure

monopoly

refers to a market situation


where there is only one seller
or producer supplying unique
goods and services.

Monopolistic

competition

pertains to a market situation where


there are a relatively large number of
small producers or suppliers selling
similar but not identical products.

Oligopoly

is associated with a market situation


where there are few firms offering
standardized or differentiated goods
and services.

Market models
characteristics

Pure competition
There is a large number of independent
sellers.
Products are identical or homogeneous.
No single seller and no single buyer can
influence the change in the market price of
product.
It is easy for new firms or sellers to enter
the market and for existing firms or sellers
to leave the market.
There is no non-price competition like
advertising, sales promotion, or packaging.

Pure monopoly
There

is only one producer or seller.


Products are unique in the sense that
there are no good or close substitutes
available.
The monopolist makes the price.
It is extremely difficult for new firms to
enter the market.
There may be or no extensive
advertising or sale promotion depending
on the goods or services of the
monopolists.

There

Monopolistic
competition

are a large number of


sellers acting independently.
Products are differentiated.
There is a limited control of price.
Entry of new firms in the market
is relatively easy.
There is an aggressive non-price
competition in the product
quality, credit terms, services,
locations, and physical

Oligopoly
There

are very few firms which


dominate the market.
Products are identical or
differentiated.
There is a price agreement
among the producers to promote
their own economic interests.
The entry of a new competitor in
the market is difficult.
There is a strong advertising

DETERMINANTS OF
MARKET STRUCTURE
Government

laws and policies

Technology
Business

policies and practices


Economic freedom

PRICE OUTPUT
AND
DETERMINATION

Pure Competition
The demand curve of an individual
firm under a purely competitive
industry is perfectly elastic. This is
because the decrease or increase of
the output of a single seller has no
effect on the total supply and
market price.
o In the case of market demand curve
(demand curve of all producers of a
particular product), it is elastic.
o

o All

producers acting at the


same time can affect total
supply, and therefore also
market price.
o They can sell more units of
their output at a lower price.
This is the law of demand.

Table
5.1
Price

Quantity demanded

TR

MR

AR

P5

P5

P5

P5

10

15

20

25

Demand and revenue schedule of a


purely competitive firm

Figure Demand, marginal


revenue and total revenue
5.1
of a purely competitive
firm .
TR
Price
and
revenu
D=MR
e

Quantity
demanded

Graphical Analysis
Price

and output determination in


a purely competitive firm is shown
and explained through graphical
illustrations. Such graphs indicate
the most profitable output and
least loss output. The equilibrium
of the firm (through thee MR=MC
approach) under the short run and
long run are also presented.

Figure 5.2 : Short-run equilibrium of a firm


under pure competition which indicates 80
units at a price of P4 per unit as the most
profitable output. This is determined by the
intersection of MR and MC curves where MR
=MC (or the equilibrium of the competitive
firm which is also profit maximization.
P4

MC

AC

MR=Price

Most profitable output

Pure monopoly
There

is only one firm that


produces the product.
The demand for the product of
the firm is the same as the
market demand for the product.
Since there is only one firm, it is
also industry.
Its demand curve is the industry
demand curve which is down
sloping. This means a monopolist

QD

Price

TR

MR

1
2
3
4
5
6
7

P50
45
40
35
30
25
20

P50
90
120
140
150
150
140

P40
30
20
10
0
-10

Table 5.2 : Demand and revenue


schedule of a pure monopolist.

Figure 5.2: Demand, marginal revenue


and total revenue of an imperfect type
of market structure like the monopolist.

TR

Pric
e

D
Unit
s

Graphical Analysis
Price

and output determination


under pure monopoly is show and
explained through graphical
illustrations. The graphs indicate the
profit-maximizing and loss
minimizing positions of a pure
monopoly profit.
The first graph shows that the pure
monopolist enjoys a monopoly
profit. This is the profit which is over
and above the normal profit. The

Unlike

under pure
competition, the existence of
pure profits attracts the entry
of more new firms.
This results to lesser profits
until the point where only the
normal profits remain.
However, despite the
advantages of a monopolist,
he does not charge the
highest price because this

The

Monopolistic
Competition

demand curve of a firm under


this market structure is highly
elastic (but not perfectly elastic
like that of the firm under pure
competition)because
of
the
presence of a relatively large
number of competitors selling
close-substitute product.
More rivals make the demand
curve more elastic. Compared

OLIGOPOLY
Under

this market structure, there are


very
few
firms
which
produce
homogeneous or differentiated products.
Collusion is a common practice among
the oligopolists. This is a secret
agreement among them to have a
common price and to manipulate their
output for their own business interest.
Thus their individual profits are the
same as those enjoyed by pure
monopolists.

You might also like