Market structure
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The document discusses market structures, focusing on perfect competition, which is characterized by many buyers and sellers trading a homogeneous product at a market-determined price. It outlines features of perfect competition, such as free entry and exit, perfect knowledge, and mobility of factors, while explaining how firms in this market are price takers. The document also differentiates between normal and super-normal profits and concludes with a description of the relationship between demand, supply, and price determination in a competitive market.
Market structure
- 1. Market structures – Perfect competition
- 2. MARKET A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
- 3. The essential constituents of a market can are : Area Buyers and sellers Commodity Competition
- 4. Market Structures(market morphology) Market structure refers to the number and size of buyers and sellers in the market for a good or service.
- 5. Major features that determine market structure Number of buyers and sellers Nature of commodity Freedom of movement of firms Knowledge of market condition Mobility of goods and factors of production
- 6. Classification of market structures 4 broad categories – 1. Perfect competition 2. Monopoly 3. Monopolistic competition 4. Oligopoly
- 7. PERFECT COMPETITION It refers to a market situation where there are very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the market.
- 8. It is rare to find a pure example of perfect competition But there are some close approximations: – Foreign exchange dealing • Homogeneous product - US dollar or the Euro • Many buyers & sellers • Usually each trader is small relative to total market and has to take price as given • Sometimes, traders can move currency markets EXAMPLES
- 9. – Agricultural markets • Pig farming, cattle • Farmers markets for apples, tomatoes • Wholesale markets for fresh vegetables, fish, flowers • Street food markets in developing countries
- 10. Perfect competition Features – 1. Large number of buyers and sellers 2. Products are perfect substitutes of each other; homogeneous products 3. Free entry and exit from the market 4. Perfect knowledge of the market to both buyers and sellers 5. Perfect mobility of factors of production 6. Absence of transportation costs 7. Absence of selling costs
- 11. Profit Normal Profit : That part of the cost that is paid to the entrepreneur as a part of his compensation. Super-normal Profit : The profit that the entrepreneur may get over and above the compensation he gets from the firm, for his contribution. REFERENCE
- 12. Perfect competition and pure competition Perfect competition is used in wider sense as compared to pure competition. The competition is said to be pure when the following three fundamental conditions exist: Large number of buyers and sellers Products are perfect substitutes of each other; homogeneous products Free entry and exit from the market
- 13. Firm is a price taker Under this an individual firm is a very small unit of the entire market . Therefore, a firm plays no role in price determination . So, firm is a price-taker and industry is the a price-maker. Price is determined at a point where market demand curve intersects supply curve.
- 14. Q Qe Pe P S D $ q Firm- price takerIndustry – price maker E AR=MR
- 15. In the above figure , the intersection of demand(D) and supply curve(S) at point e, at which OP price is determined. The price is adopted by the firm , at this price and firm is free to sell any quantity. This makes AR curve completely elastic and thus parallel to the X-axis. According to AR and MR relation , when AR is constant , MR=AR. So, AR curve is also the MR curve of the firm .
- 16. THANK YOU