Overview
• Market: This is a mechanism or arrangement that brings buyers and sellers of a commodity or service together and allows them to complete act of selling and buying commodity or service at mutually agreed prices. market is classified into perfect and imperfect competition.
• Perfect competition market structure is approximated by a market satisfying following conditions:
(1) Perfect competition is a market structure characterised by complete absence of rivalry among individual firms.
(2) Perfect competition is defined as a market structure in which an individual firm cannot influence prevailing market price of product on its own.
(3) There exists a very large number of firms and consumers of commodity, such that output sold by each firm is negligibly small as compared to total output of all firms combined, and similarly, amount purchased by each consumer is extremely small in comparison to quantity purchased by all consumers together;
(4) Firms are free to start producing commodity or to stop production; i.e., entry & exit is free;
(5) output produced by each firm in industry is indistinguishable from others’, and output of any other industry cannot substitute for this output;
(6) Consumers and firms have perfect knowledge of output, inputs & their prices, and
(7) It means knowledge is perfect, there is absence of selling and transportation costs and there is perfect mobility in factors of production.
• In economics, imperfect competition refers to a situation where characteristics of an economic market do not fulfil all necessary conditions of a perfectly competitive market. This is classified into three parts which are as follows:
(1) In extreme case a market may have only one firm. Such a market, where there is one firm and many buyers is known as a monopoly.
(2) ‘Mono’ means one and ‘poly’ means seller. Monopoly is a market structure in which there is a single firm producing all output.
(3) Oligopoly is a market situation in which an industry has only few firms [or few firms producing most of its output] mutually dependent for taking decision about price and output.
(4) Monopolistic Competition is defined as a market structure in which there are many firms selling closely related but non-identical commodities.
(5) major features of monopolistic competition are; a large number of buyers and sellers, product differentiation; freedom of entry and exit; imperfect knowledge; and selling cost.
Simple Monopoly in Commodity Market
• A market structure in which there is a single seller is known as a monopoly. A monopoly market structure requires that there be a single producer of a particular commodity; no other commodity works as a substitute for this commodity; and for this situation to persist over time, sufficient restrictions are required to be in place to prevent any other firm from entering market and to start selling commodity.
Competitive Behaviour versus Competitive Structure
• A perfectly competitive market has been defined as one where an individual firm is unable to influence price at which product is sold in market.
• Thus, competitive behaviour and competitive market structure are, in general, inversely related; more competitive market structure, less competitive firms’ behaviour.
• On other hand, less competitive market structure, more competitive is behaviour of firms towards each other. In a monopoly there is no other firm to compete with.
Market Demand Curve is Average Revenue Curve:
• market demand curve expresses price that consumers are willing to pay for different quantities supplied. This idea is reflected in statement that monopoly firm faces market demand curve, which is downward sloping.
Total, Average & Marginal Revenues:
• values of MR curve are given by slope of TR curve. slope of any smooth curve is defined as slope of tangent to curve at that point.
• When total revenue is rising, marginal revenue is positive, and when total revenue shows a fall, marginal revenue is negative.
• If AR curve [i.e., demand curve] is falling steeply, MR curve is far below AR curve. On other hand, if AR curve is less steep, vertical distance between AR and MR curves is smaller.
Marginal Revenue and Price Elasticity of Demand:
• MR values have a relation with price elasticity of demand.
• price elasticity of demand is more than 1 when MR has a positive value and becomes less than unity when MR has a negative value.
• As quantity of commodity increases, MR value becomes smaller and value of price elasticity of demand becomes smaller.
• Example: Recall that demand curve is known as elastic at a point where price elasticity is greater than unity, inelastic at a point where price elasticity is less than unity and unitary elastic when price elasticity is equal to 1.
• When quantity is less than 10 units, MR is positive and demand curve is elastic. When quantity is of more than 10 units, demand curve is inelastic. At quantity level of 10 units, demand curve is unitary elastic.
Short Run Equilibrium of Monopolist with Zero Costs
• monopolist’s profit is maximised at that level of output for which total revenue is maximum.
Equilibrium of Monopolist in terms of Total Curves:
• monopolist’s profit is maximised at level of output for which vertical distance between TR and TC is a maximum and TR is above TC
Equilibrium of Monopolist in terms of Average and Marginal Curve
• monopolist’s profit is maximised at that level of output for which MR = MC and MC is rising.
• At qo firm will make maximum profits. It has no incentive to change from qo. This level is known as equilibrium level of output. Since this equilibrium level of output corresponds to point where MR equals MC, this equality is known as equilibrium condition for output produced by a monopoly firm.
Other Non-perfectly Competitive Markets Monopolistic Competition
• A market structure where number of firms is large, there is free entry and exit of firms, but goods produced by them are not homogeneous. Such a market structure is known as monopolistic competition. This kind of structure is more commonly visible.