COLLEGE OF BUSSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Introduction to Economics Individual Assignment 1
By: Wondimu Desta

March, 2024
Durame, Ethiopia

1
 Chapter Five (5)
Market Structure
5.1. The concept of market in physical and digital space
 Physical marketing
-Is a set up where buyers can physically meet their seller and purchase the desired merchandise
from them in exchange of money.
-In physical marketing, marketers will effortlessly reach their target local customers and thus
they have more personal approach to show about their brands.
-The choice of the marketing mainly depends on the nature of the products and services.
 Digital marketing
-Is the marketing of products or services using digital technologies, mainly on the internet but
also including mobile phones, display advertising, and any other digital media.
-Digital marketing channels are systems on the internet that can create, accelerate and
transmit product value from producer to the terminal consumer by digital networks.
Perfectly competitive market
-Perfect competition is a market structure characterized by a complete absence of rivalry among
the individual firms.
Assumption of perfectly competitive market
-A market is said to be pure competition (perfectly competitive market) if the following
assumptions are satisfied.
- Large number of sellers and buyers:
- Homogeneous product
- Perfect mobility of factors of production:
- Free entry and exit
- Perfect knowledge about market conditions.
-No government interfere
 Short run equilibrium of the firm
The main objective of a firm is profit maximization. If the firm has to incur a loss, it aims to
minimize the loss. Profit is the difference between total revenue and total cost.
 Total Revenue (TR)
-It is the total amount of money a firm receives from a given quantity ofits product sold. It is
obtained by multiplying the unit price of the commodity and the quantity of that product sold.
TR=P X Q, where P = price of the product
Q = quantity of the product sold.
 Average revenue (AR)
2
-It is the revenue per unit of item sold.
-It is calculated by dividing thetotal revenue by the amount of the product sold.
AR = TR P.Q =>AR = P
=
Q
Q
Therefore, the firm‘s demand curve is also the average revenue curve.
 Marginal Revenue(MR)
- It is the additional amount of money/ revenue the firm receives by selling one more unit of the
product. In other words, it is the change in total revenue resulting from the sale of an extra unit
of the product. It is calculated as the ratio of the change in total revenue to the change in the
sale of the product.
TR  = PxQ  Q
MR=  Q



= PQ Q (because P is constant) =>

MR =P
Thus, in a perfectly competitive market, a firm‘s average revenue, marginal revenue and price
of the product are equal, i.e. AR = MR = P =Df

3
There are two ways to determine the level of output at which a competitive firm will realize
maximum profit or minimum loss. One method is to compare total revenue and total cost; the
other is to compare marginal revenue and marginal cost.
a) Total Approach (TR-TC approach)
In this approach, a firm maximizes total profits in the short run when the (positive) difference
between total revenue (TR) and total costs (TC) is greatest.
b) Marginal Approach (MR-MC)
The firm will maximize profit or minimize loss by producing the output at which marginal
revenue equals marginal cost. More specifically, the perfectly competitive firm maximizes its
short-run total profits at the output when the following two conditions are met:
 MR = MC
 The slope of MC is greater than slope of MR; or MC is rising).
(that is, slope of MC is greater than zero).

4
Mathematically, ∏ =TR- TC

∏ is maximized when d
0
dQ

d dTR dTC
  0
That is,
dQ dQ dQ

 MR – MC = 0
 MR = MC ......................... First order condition (FOC)

d 2
0
dQ 2
d 2  d TR  d TC
2 2
The second order condition of profit maximization is

dQ2 dQ2 0
dQ2
That is,
dMR dMC
  0
dQ dQ

 dMR dMC

dQ dQ
dMC dMR
 dMR dMC
dQ > where =slope of MR and =slope of MC
dQ
dQ dQ

Therefore, Slope of MC > slope of MR -------- Second order condition (SOC)

 Slope of MC > 0 (because the slope of MR is zero)
Graphically, the marginal approach can be shown as follows.

5
MC, MR MC

MR

Q* Qe Q

The profit maximizing output is Qe, where MC=MR and MC curve is increasing. At Q*,
MC=MR, but since MC is falling at this output level, it is not equilibrium output.

6
 Whether the firm in the short- run gets positive or zero or negative profit depends on the level of
ATC at equilibrium. Thus, depending on the relationship between price and ATC, the firm in
the short-run may earn economic profit, normal profit or incur loss and decide to shut-down
business.
 Economic/positive profit
- If the AC is below the market price at equilibrium, the firm earns a positive profit equal to the area
between the ATC curve and the price line up to the profit maximizing output.
MC
AC

P MR
Profit
AC

Qe Q

 Loss
- If the AC is above the market price at equilibrium, the firm earns a negative profit
(incurs a loss) equal to the area between the AC curve and the price line.

AC

MC

Loss
MR

AC
P
Q
Qe

 Normal Profit (zero profit) or break- even point

- If the AC is equal to the market price atequilibrium, the firm gets zero profit or normal
profit.

7
 MC AC

P=AC MR
(P=AC)

Qe Q
[

 Shutdown point
- The firm will not stop production simply because AC exceeds price in theshort-run. The firm
will continue to produce irrespective of the existing loss as far as the price is sufficient to cover
the average variable costs. This means, if P is larger than AVC but smaller than AC, the firm
minimizes total losses. But if P is smaller than AVC, the firm minimizes total losses by shutting
down. Thus, P = AVC is the shutdown point for the firm.

AC

MC AVC

P Shut down point (P=min. AVC)

Qe Q

8
 Short run equilibrium of the industry
-The industry/market supply curve is a horizontal summation of the supply curves of the
individual firms.
- Industry supply curve can be obtained by multiplying the individual supply at various prices
by the number of firms, if firms have identical supply curve.

- An industry is in equilibrium in the short-run when market is cleared at a given price i.e.
- when the total supply of the industry equals the total demand for its product, the prices at
which market is cleared is equilibrium price.
- When an industry reaches at its equilibrium, there is no tendency to expand or to contract the
output.
Monopoly market
 Definition and characteristics
Pure monopoly exists when a single firm is the only producer of a product for which there are
no close substitutes.
 The main characteristics of this market structure include:
-Single seller:
-No close substitutes:
-Price maker
-Blocked entry
 Sources of monopoly
The emergence and survival of monopoly is attributed to the factors which prevent the entry of
other firms in to the industry. The barriers to entry are therefore the sources of monopoly power.
The major sources of barriers to entry are:
i) Legal restriction
ii) Controloverkeyrewmaterial

9
 iii) Efficiency
iv) Patent right
 Monopolistically competitive market
A seller of a differentiated product has limited monopoly power over customers who prefer his
product to others. His monopoly is limited because the difference between his product and
others are small enough that they are close substitutes for one another.
This market is characterized by:
a) Differentiated product:
-The product produced and supplied by many sellers in the market is similar but not
identical in the eyes of the buyers.
-There is a variety of the same product. The difference could be in style, brand name, in
quality, or others.
b) Many sellers and buyers:
-There are many sellers and buyers of the product, but their number is not as large as that of
the perfectly competitive market.
c) Easy entry and exit:
- Like the PCM, there is no barrier on new firms that are willing and able to produce and
supply the product in the market. On the other hand, if any firm believes that it is not worth to stay in
the business, it may exit.
d) Existence of non-price competition:
- Economic rivals take the form of non-price competition in terms of product
quality, advertisement, brand name, service to customers, etc. A firm spends
money in advertisement to reach the consumers about the relatively unique
character of its product and thereby get new buyers and develop brand
loyalty. Many retail trade activities such as clothing, shoes, soap, etc are in this
type of market structure.

10
  Oligopoly market
This is a market structure characterized by:
 Few dominant firms: there are few firms although the exact number of firms is
undefined.Each firm produces a significant portion of the total output.
 Interdependence: since few firms hold a significant share in the total output of
the industry,each firm is affected by the price and output decisions of rival
firms. Therefore, the distinguishing characteristic of oligopoly is the
interdependence among firms in the industry.
 Entry barrier: there are considerable obstacles that hinder a new firm from
producing and supplying the product. The barriers may include economies of
scale, legal, control of strategic inputs, etc.
 Products may be homogenous or differentiated. If the product is
homogeneous, we have a pure oligopoly. If the product is differentiated, it will
be a differentiated oligopoly.
 Lack of uniformity in the size of firms: Firms differ considerably in size.
Some may be small, others very large. Such a situation is asymmetrical.
 Non-price competition: firms try to avoid price competition due to the fear of
price wars and hence depend on non-price methods like advertising, after sales
services, warranties, etc. This ensures that firms can influence demand and
build brand recognition.
A special type of oligopoly in which there are only two firms in the market is known as
duopoly.

11