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Market Structure: Bhoopendra Kumar Nagar Prof. Akram Ahmad Khan

The document discusses market structure and perfect competition. It defines a perfect market as having many small buyers and sellers, homogeneous products, perfect information, and prices set by demand and supply. Under perfect competition, a firm is a price taker and can maximize profits by producing where price equals marginal cost. The profit maximizing point is found using revenue and cost curves, and profits exist in the short run but disappear in the long run under perfect competition.

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Bhoopendra Kumar Nagar
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120 views

Market Structure: Bhoopendra Kumar Nagar Prof. Akram Ahmad Khan

The document discusses market structure and perfect competition. It defines a perfect market as having many small buyers and sellers, homogeneous products, perfect information, and prices set by demand and supply. Under perfect competition, a firm is a price taker and can maximize profits by producing where price equals marginal cost. The profit maximizing point is found using revenue and cost curves, and profits exist in the short run but disappear in the long run under perfect competition.

Uploaded by

Bhoopendra Kumar Nagar
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MARKET STRUCTURE

Presented By:- BHOOPENDRA KUMAR NAGAR

Submitted To:- PROF. AKRAM AHMAD KHAN


TOPIC OUTLINE :

• Types of market

• Perfect market

• Pricing under perfect market

• Shutdown point
What is Market?
Market is a place where people can buy and sell commodities. It
may be vegetables market, fish market, financial markets or
foreign exchange markets.

In economic language market is a study about the demand for and


supply of a particular item and its consequent fixing of prices,
example bullion on market and foreign exchange market or a
commodity market like food grains market etc
Market In Economic Sense Implies:

1. Presence of buyers and sellers of the commodity

2. Establishment of contact between the buyer and seller

3. Similarity of the product

4. Exchange of commodity for a price


Classification Of Market Structure Based On
The Nature Of Competitor

1. Perfect market
2. Imperfect market
The Imperfect Market in turn can be classified as

a. Monopoly market
b. Duopoly market
c. Oligopoly market
d. Monopolistic market/ competition
Perfect Market

Perfect competition is a market structure characterized by a complete absence of


rivalry among the individual firms. A perfectly competitive firm is one whose
output is so small in relation to market volume that its output decisions have no
perceptible impact on price. No single producer or consumer can have control over
the price or quantity of the product.
Characteristic Features of Perfect Market:

1. Large number of buyers and sellers


2. Homogeneous product
3. Perfect knowledge about the market
4. Ruling prices
5. Absence of transport cost
6. Perfect mobility of factors
7. Profit maximization
8. Freedom in decision making
Graph - Price And Output Determination In The
Perfect Market
Pricing Under Perfect Competition
Demand and supply curves can be used to analyze the equilibrium market
price and the optimum output.
1. If quantity demanded is equal to quantity supplied at a particular price then
the market is in equilibrium
2. If quantity demanded is more than the quantity supplied then market price
may not be stable. i.e., it will rise.
3. If quantity demanded is less than quantity supplied then market price is
fixed not in a equilibrium position.
Graph – Price And Quantity Variability When
Increase In Demand
Graph – Price And Quantity Variability When
Increase In Price
Graph – Price And Variability When Change In
Demand Is Less Than Change In Supply
Graph – Price And Quantity Variability When Change
In Demand Is More Than The Change In Supply
Graph – Price And Quantity Variabilty When
Change In Demand And Supply Equally Profit
Profit Maximization Under Perfect Competition
The primary objective of any business is to maximize the profit. Profit can be
increased either by increasing total revenue (TR) or by reducing the total cost (TC). The
profit is nothing but the difference between the revenue and the cost.
The total profit = TR – TC

Let us assume that whatever produced is sold in the market.


TR = Quantity sold x price

To increase the revenue, it is better to either increase the quantity sold or increase
the price. Therefore while increasing the revenue or minimizing the total cost of
production over a period of time with attendant economies of scale will widen the
difference to gain more profit
Contd…

In perfect market, the firm’s Marginal cost, Average cost, Average

revenue, Marginal revenue are equal to the price of the commodity. The cost is

measured as average cost and marginal cost .When the firm is in equilibrium,

producing the maximum output i.e. cost of the last item produced is known as

marginal cost.The total cost divided by the number of goods produced will give

the average cost. When the firm is operating in perfect market MC = AC.
Contd..

In the same way the revenue available to the firm through selling goods

is called as total revenue.The last item sold is the marginal revenue. The

total revenue divided by the number of items sold is the average revenue

and when the firm is working in the perfect market the MR shall be equal to

AR. Therefore the MC = MR = AR = AC = P in the short run. The size of the

plant is fixed only with the variable factors and the price is fixed by the

demand and supply


Perfect Market Price Determination

Graph (a) Graph (b)


Graph - Short Run Profit Maximization Under
Perfect Competition
If the demand increases in the market then the new demand curve D1D1
intersects the SPSC at the new equilibrium point ‘E1’ and the price increases
from OP to OP1. Therefore the average revenue also increases from AR to
AR1. At this situation P1 = AR1 = MR1 but the SMC curve intersects at Q1 ie.,
new equilibrium point and the OM quantity has increased from OM to OM1 in
the ‘X’ axis. The average cost has increased as M1R.

The profit = Total Revenue (TR) – Total Cost (TC)


TR = quantity sold x price
TC = average cost x quantity produced
TR = OM1 x OP1 = OM1Q1P1
TC = M1R x OM1 = OM1RS
Profit = OM1Q1P1 - OM1RS = P1Q1RS
In the above graph, the shaded portion of P1Q1RS is the total profit
earned by the firm in the short run but in the long run the organization will increase
the production and will supply more of the commodity. Ultimately both the demand
and the supply gets equalized and the short run abnormal profit becomes normal.
Therefore we can conclude that even in the perfect market it is possible to earn
profit in the short period.
It indicates clearly that in the short run, in any perfect market, the increase
in demand will increase the profit to the businessmen. The normal profit will be
there until it gets equalized with the demand i.e. new D1D1 with the increased
supply of S1S1.
Shut Down Point:
If the market price for the product is below minimum average variable cost,
the firm will cease to produce, if this appears to be not just a temporary
phenomenon. When the price is less than average variable cost it will neither
cover fixed cost nor a part of the variable costs. Then the firm can minimize losses
up to total fixed costs only by not producing. It is therefore regarded as the shut
down point.
In the short run, a firm can be in equilibrium at various levels depending
upon different cost and market price conditions. But these are temporary
equilibrium points. Thus at this unstable equilibrium point the 94 firm gets
excess profits or normal profit and sometimes incur loss also.
Consequences Of Pure Competition

Perfect competition ensures maximum welfare of the people as a whole. Each

firm tends to attain the most efficient size to expand output and to reduce the

average cost of production.

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