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Market StructuresGroup 8SheyenAnjumBrendinaNikhilRaufSnehal

The Four Types of Market Structure Tap water RailwayMonopoly Novels MoviesMonopolisticCompetition Tennis balls Crude oilOligopolyNumber of Firms?Perfect Wheat MilkCompetitionType of Products?IdenticalproductsDifferentiatedproductsOnefirmFewfirmsManyfirmsMonopolyOne producerConsiderable power over priceUnique productVery high barriers to entryWHY MONOPOLIES ARISEThe fundamental cause of monopoly is the existence of barriers to entry.Government-Created MonopoliesGovernments may restrict entry by giving one firm the exclusive right to sell a particular good in certain markets. Example: Patent and copyright laws are two important examples of how governments create monopoly to serve the public interest.

Natural MonopoliesAn industry is a natural monopoly when one firm can supply a good or service to an entire market at a smaller cost than could two or more firms.Example: delivery of electricity, phone service, tap water, etc. HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONSMonopoly versus CompetitionMonopolyIs the sole producerFaces a downward-sloping demand curveIs a price makerCan reduce its sales to increase priceoligopolyIt refers to a market situation where there are few sellers selling homogeneous or differentiated products.Essentials of oligopolyPrice makersFew number of dominant sellersLong run supernormal profitsStrategic interdependence

Characteristics of oligopolyFew sellersInterdependenceHigh cost elasticity'sCompetitionHomogenous or differentiated productsUncertaintyPrice rigidityInterdependent decision

DuopolyMarket structure where the industry is dominated by two large producersCollusion may be a possible featurePrice leadership by the larger of the two firms may exist the smaller firm follows the price lead of the larger oneHighly interdependentHigh barriers to entryIn reality, local duopolies may existMONOPOLISTIC COMPETITIONMany firms sell similar but not identical products.

Major SectorsMonopolistic competition is commonly found in many field in retail, service and manufacturing industries.Examples of retail:- clothe stores, electrical appliances, etc.Service Industry:- restaurants, beauty saloons, health clubs, etc.Manufacturing:- shoes, garments, cosmetics, furniture manufacturing , etc. 26-1314Characteristics & Examples of Monopolistic CompetitionCharacteristics:Many sellersProduct differentiationFree entry and exitLarge number of buyers01414Monopolistic Competition Many SellersThere are many firms competing for the same group of customers.Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.Monopolistic Competition Product DifferentiationEach firm produces a product that is at least slightly different from those of other firms.Rather than being a price taker, each firm faces a downward-sloping demand curve.Monopolistic Competition Free Entry or ExitFirms can enter or exit the market without restriction.Monopolistic Competition Large number of buyers: Unlike perfect competition, here buying is by choice and not by chance

Special cases of competitive marketsConstant CostIncreasing Costs and Diminishing ReturnsFixed Supply and Economic RentBackward bending supply curveShifts in SupplyA constant-cost industry occurs because the entry of new firms, prompted by an increase in demand, does not affect the long-run average cost curve of individual firms, which means the minimum efficient scale of production does not change.

As the marginal product of the variable input decreases, due to the law of diminishing marginal returns, a firm must hire increasingly more of the variable input to get the same increase in output. This means that the incremental cost of producing an additional unit of output increases. In other words, decreasing marginal returns causes increasing marginal cost. With a decreasing marginal product, marginal cost increases. The prime conclusion is that the positively-sloped portion of the marginal cost curve is directly attributable to the law of diminishing marginal returns. With decreasing marginal returns, marginal cost increases. Because each additional worker is less productive, a given quantity of output needs more variable inputs.

Wen quantity supplied is contant at every price the payment for the use of such a factor of production is called rent/ pure economic rent. Wen supply is independent of price the supply curve is vertical in the relevant region. An increase in demand for a fixed factor only affetcs price.

workers supply larger quantities of labor in response to a higher wage when the wage is relatively low. However, when the wage reaches a relatively high level, further increases in the wage entice workers to reduce the quantity supplied. The supply curve thus bends back on itself. The reason for the negatively-sloped, backward-bending segment rests with the tradeoff between labor and leisure. Workers decide to "spend" a portion of their higher wage "buying" more leisure time, and thus working less. The end result is that the higher wage decreases the quantity of labor supplied.

the position of a supply curve will change following a change in one or more of the underlying determinantsof supply. For example, a change in costs such as a change in labour or raw material costs, will shift the position of the supply curve.

19Efficiency and equity of competitive marketsConcept of efficiencyEfficiency of competitive equilibriumEquilibrium with many consumers and marketsCentral role of marginal cost pricingMarket failures:Imperfect competitionExternalitiesImperfect information

Economy is efficient wen it provides its consumers with the most desired set of goods and services given the resources and technology of the economy. Allocative efficiency occurs wen no possible reorganization of production can make anyone better off without making someone else worse off. One persons satisfaction can be increased by lowering someone elses utility.Analysis of the competitive equilibrium shows that it maximizes the economic surplus available in that industry. At the competitive equilibrium the representative consumer will have higher utility/ economic surplus than would be possible with any feasible allocation of resources. A perfectly competitive market is efficient wen marginal private costs equals marginal social costs and wen both equal marginal utility. Under certain conditions competition guarantees efficiency in which no consumers utility can be raised without lowering another consumers utility.

Using marginal cost to achieve production efficiency holds for any society trying to make the most effective use of its resources. Only wen prices are equal to marginal costs is the economy squeezing the maximum output and satisfaction from its scarce resources of land labor and capital.

Market FailuresCompetitive markets achieve an efficient allocation of resources as long as othermarket failures are not present. The lack of competition, also termed market control, is one key market failure. Three noted market failures are externalities,public goods, and imperfectinformation. Externalitiesarise if the demand price does not fully reflect the value generated by the good or if the supply price does not fully reflect the opportunity cost production. As a result, the market equilibrium does not include all of the information about value and cost needed to achieve efficiency.Public goodsare goods characterized bynon-rival consumptionand the inability to exclude non-payers. The use of the good by one does not impose a cost on others and no onecan be prevented from consuming the good.Imperfect informationoccurs if buyers or sellers do not know as much about the good as they should for an efficient allocation. In other words, buyers are not aware of the full value they obtain from consuming the good or sellers are not aware of all opportunity cost incurred in production.

20Perfect competition A market with many buyers and sellers trading homogenous products so that each buyer and seller is a price taker.

Perfect CompetitionCharacteristics:Large number of firmsProducts are homogenous (identical) consumer has no reason to express a preference for any firmFreedom of entry and exitFirms are price takers have no control over the price they charge for their productEach producer supplies a very small proportion of total industry outputConsumers and producers have perfect knowledge about the market

22EXAMPLE

The fish marketThe vegetable or fruit vendors who sell at the same placeOUTPUT DECISION IN A PERFECT COMPETITIONThe goal of the firm is to maximize profits.Profit = Total Revenue Total Cost

24PROFIT MAXIMISATION

The firm has to decide whether to produce at all, and if so what output to produce.The firm will produce in the short run so long as its variable costs can be covered.Assuming the firm produces at all, the profit maximizing output is where there is the maximum excess of TR over TC or where MR = MC.

TOTAL COST AND SHUTDOWN CONDITION SHUTDOWN POINT: It comes where revenues just cover variable costs or where losses are equal to fixed costs. When the price falls below average variable costs, the firm will maximize profits by shutting down.A firm should continue to produce as long as price is greater than average variable cost.If price falls below that point it makes sense to shut down temporarily and save the variable costs.

If total revenue is more than total variable cost, the firms best strategy is to temporarily produce at a loss.

26SR.NO. CHARACTERISTICS PERFECT COMPETITIONMONOPOLY MONOPOLISTIC OLIGOPOLY1Number of FirmsManyOneManyFew2Types Of ProductsHomogeneous Unique/ Single/ LimitedDifferentiated Differentiated 3Entry condition Very easy Impossible Easy Difficult4PricingPrice Taker Price MakerPrice Taker Price maker5Examples Agriculture, Stock Market, Currency Market, Bond marketPublic Activities.

Retail Trade Steel, Oil, Milk, Soft Drinks, Airlines