FORMS

MARKET

OF

• Market is the place where exchange of goods and services and money takes place amongst sellers and buyers and is an important feature of microeconomics.

Market-Introduction

The major market forms are:

• Perfect Competition • Monopolistic Competition• Oligopoly• Duopoly• Monopoly

Perfect competition market form is a highly competitive market in which an optimal allocation of resources is achieved.

The following conditions for perfect competition• Large number of firms.• Each firm produces exactly the same product.• Customers have perfect information.• Customers act rationally.• Free entry and exit of firms.• There are a large number of consumers.• Factor markets, i.e. markets for land, labour and

capital, are subject to perfect competition.• There are no taxes, other than lump sum taxes.• There are no transaction costs (e.g. transport costs)

Perfect Competition

• The firm in perfect competition is a price taker. It takes the market price as given. It faces an infinitely elastic demand curve.

• In long run equilibrium no profits are earned nor any losses are incurred, this is dueto large number of sellers &free entry and exit of firms.

• Monopoly is a firm which is the sole supplier of a good and which faces no potential rivals.

• Since there is only one supplier, the demand curve for the product is likely to be relatively inelastic.

Conditions responsible for Monopoly:

• Large scale industry: like iron and steel industry since it is highly demanded and firms are few.

• Patents: these are exclusive rights given to inventor.

• Licensing: this refers to sole right to produce a commodity.

In long run equilibrium, the firm in monopolyearns abnormal profits due to single firm controlling the priceand no competition faced by the firm.

Because monopolies do not face any competition they may be able to charge different prices to different groups of customers. This is termed as Price discrimination .

Monopolistic CompetitionIn monopolistic competition:• There are many firms supplying in the market.• Each firm has a small enough share of the market

that it can change its actions without influencing the behaviour of other firms.

• There is free entry and exit of firms into the industry.

• Each firm sells a differentiated product and faces a downward-sloping demand curve.

Difference between perfect and monopolistic competition:

Monopolistic competition is similar to

perfect competition. The main difference is that the firms in perfect competition are selling exactly the same product whereas firms in monopolistic competition are all selling something slightly different.

IT’S A FACT!

PERFECT COMPETITION FORM OF MARKET RARELY EXISTS, THE IMPERFECTLY

COMPETITIVE MARKET FORMS EXIST AND DOMINATE THE MARKET CONDITIONS.

The demand curve of monopolisticcompetition is less elastic than thatof a monopoly. The long-run equilibrium of a firm in monopolistic

competition occurs when firms are making only normal profits.

Oligopoly• Oligopoly describes a market in which there is a small

number of competing firms, each of which believes that its own actions will lead to some form of non-negligible reaction from the other firms.

Collusion: Two (or more) firms jointly set their prices or outputs, divide the profit

among them.

If they all abide by arrangement, they maximise joint profit. If they all cheat in the hope of increasing profit joint profits will be low.

CARTELS: A REAL LIFE OLIGOPOLY

• Its an association by producers established to coordinate price and quantity produced.

Example: OPEC (An international cartel)

EFFORTS BY:

APOORVA SINGH(149)ANOUSHKA PRADHAN(187)SUKRITI BHARDWAJ(177)

APOORVA SRIVASTAVA(162)