MARKET

STRUCTURE

Dr. Raghuveer Katragadda

08/19/2023
 MARKET STRUCTURE
• Market structure refers to the nature
and degree of competition in the
market for goods and services. 
• The structures of market both for goods
market and service (factor) market are
determined by the nature of
competition prevailing in a particular
market.
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 MARKET STRUCTURE
• Ordinarily, the term “market” refers to a particular place
where goods are purchased and sold. 
• But, in economics, market is used in a wide perspective.
In economics, the term “market” does not mean a
particular place but the whole area where the buyers
and sellers of a product are spread.
• Because, the sellers and buyers of a particular
commodity are spread over a large area.
• Transactions for commodities may be also through
letters, telegrams, telephones, internet, etc.
• Thus, market in economics does not refer to a particular
market place but the entire region in which goods are
bought and sold. In these transactions, the price of a
commodity is the same in the whole market.
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 MARKET STRUCTURE 2
• Number and Nature of Sellers: The market structures are
influenced by the number and nature of sellers in the
market. They range from large number of sellers in perfect
competition to a single seller in pure monopoly, to two
sellers in duopoly, to a few sellers in oligopoly, and to many
sellers of differentiated products.
• Number and Nature of Buyers: The market structures are
also influenced by the number and nature of buyers in the
market. If there is a single buyer in the market, this is
buyer’s monopoly and is called monopoly market. Such
markets exist for local labour employed by one large
employer. There may be two buyers who act jointly in the
market. This is called duopoly market. They may also be a
few organised buyers of a product.
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 MARKET STRUCTURE 3
• Nature of Product: It is the nature of product that
determines the market structure. If there is product
differentiation, products are close substitutes and the market
is characterised by monopolistic competition. On the other
hand, in case of no product differentiation, the market is
characterised by perfect competition. And if a product is
completely different from other products, it has no close
substitutes and there is pure monopoly in the market.
• Entry and Exit Conditions: The conditions for entry and exit
of firms in a market depend upon profitability or loss in a
particular market. Profits in a market will attract the entry of
new firms and losses lead to the exit of weak firms from the
market. In a perfect competition market, there is freedom of
entry or exit of firms.
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 MARKET STRUCTURE 4
• Economies of Scale: Firms that achieve large
economies of scale in production grow large in
comparison to others in an industry. They tend to
weed out the other firms with the result that a
few firms are left to compete with each other. This
leads to the emergency of oligopoly. If only one
firm attains economies of scale to such a large
extent that it is able to meet the entire market
demand, there is monopoly.

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 Understanding Market Structures
In economics, market structures can be understood well by
closely examining an array of factors or features exhibited by
different players. It is common to differentiate these markets
across the following seven distinct features.
• The industry’s buyer structure
• The turnover of customers
• The extent of product differentiation
• The nature of costs of inputs
• The number of players in the market
• Vertical integration extent in the same industry
• The largest player’s market share
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 Forms of Market Structure

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 REVENUE
 Revenue means income. By revenue we mean sales figure
that a firm earns by selling its output.

 Types of Revenues:

Revenue

Total Average Marginal

Revenue
Revenue Revenue
08/19/2023 AR = TR/Q OR
TR = P X Q AR = P X Q/Q MRn = TRn – TRn-1
 REVENUE…2
 Total Revenue refers to the amount of money which a
firm realize by selling certain units of commodity.

 Average Revenue is the revenue earned per unit of

output.

 Marginal Revenue is the change in the Total revenue

resulting from the sake of an additional unit of a
commodity.

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 P r o fi t
 Profit is the difference between income and expenditure.

 Types of Profit:

Profit

Super Sub
Normal Normal Normal
Profit Profit Profit
AR > AC AR = AC AR < AC
TR > TC TR = TC TR < TC
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 P r o fi t

 Super Normal Profit is an excess profit which is earned over and

above the minimum profit.

 Normal Profit is minimum profit which is earned by the firm. In

this case revenue is equal to the cost.
 As per accounting definition normal profit should be zero but economically
the cost includes rent for land, wages to labor, interest on capital, some
minimum profit to entrepreneur ; which is required to run the business.

 Subnormal profit is called when the revenue is less than its cost.

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 Characteristics of Perfect Competition
• Large Number of Buyers and Sellers
• Freedom of Entry or Exit of Firms
• Homogeneous Product
• Absence of Artificial Restrictions
• Profit Maximisation Goal
• Perfect Mobility of Goods and Factors
• Perfect Knowledge of Market Conditions
• Absence of Transport Costs
• Absence of Selling Costs
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 Perfect Competition Market

• A perfectly competitive market is one in which the

number of buyers and sellers is very large, all engaged
in buying and selling a homogeneous product without
any artificial restrictions and possessing perfect
knowledge of market at a time.
• In the words of A. Koutsoyiannis, “Perfect competition
is a market structure characterised by a complete
absence of rivalry among the individual firms.”
• According to R.G. Lipsey, “Perfect competition is a
market structure in which all firms in an industry are
price- takers and in which there is freedom of entry
into, and exit from, industry.”
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 Price determinati on under Perfect
Competi ti on
 While discussing price determination under Perfect
Competition it should be clear between the Industry and
Firm.

 According to one of the features of Perfect Competition

firm is the price taker; which means firms are not free to
determine their own prices.
 Prices are determined on the basis of market demand
and market supply.
 Economically under Perfect Competition price is
determined by the intersection of market demand and
market supply curve.
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Price determinati on under Perfect
Competi ti on for
SHORT RUN

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 P r i c e d e te r m i n ati o n u n d e r Pe r fe c t
C o m p eti ti o n fo r
S H O RT R U N
Under perfect competition Price determined by the
market
In short run one can make any changes in variable
factors but it does not allow any change in fixed
factors.
Every firm under perfect competition produces same
cost curve.
Under perfect competition for short run always the
demand curve and average revenue curve will be one
and a same.
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P r i c e d e t e r m i n a ti o n u n d e r P e r f e c t C o m p e ti ti o n f o r
SHORT RUN

 Firm sales additional units at the same price so that average

revenue curve and marginal revenue curve will be one and a same.
 Avg. cost curve and Marginal cost curve as usual found
• normally as “U” shaped.
 In short run there are three possibilities as below to earn profit:
i. Super Normal Profit
ii. Normal Profit
iii. Sub Normal Profit
 After attaining the equilibrium the firm will not increase or
decrease its output.
Equilibrium = MR = MC

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P r i c e d e t e r m i n a ti o n u n d e r P e r f e c t C o m p e ti ti o n f o r
LONG RUN

Long run is that period which allows change in each

and every factor.
Firm can adjust supply according to the
changein demand.
The firm may change the size or scale of
operation to reduce the cost.
It can be possible that some firms may leave the
market.
As a result supply becomes perfectly elastic and
therefore supply will change with the change in price.
In long run firm will earn only NORMAL PROFIT.
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Price will be fixed by the industry by intersection
point of market demand and supply.
As thefirm earns Normal profit sowe
can seein the diagram that AR = AC.

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 MONOPOLY

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 MONOPOLY
• A market structure characterized by a single seller,
selling a unique product in the market. In a
monopoly market, the seller faces no competition,
as he is the sole seller of goods with no close
substitute.
• In a monopoly market, factors like government
license, ownership of resources, copyright and
patent and high starting cost make an entity a
single seller of goods. All these factors restrict the
entry of other sellers in the market. Monopolies
also possess some information that is not known to
other sellers.
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 Characteristics of a Monopoly

• Profit maximizer: a monopoly maximizes profits. Due to the lack of

competition a firm can charge a set price above what would be charged
in a competitive market, thereby maximizing its revenue.
• Price maker: the monopoly decides the price of the good or product
being sold. The price is set by determining the quantity in order to
demand the price desired by the firm (maximizes revenue).
• High barriers to entry: other sellers are unable to enter the market of the
monopoly.
• Single seller: in a monopoly one seller produces all of the output for a
good or service. The entire market is served by a single firm. For practical
purposes the firm is the same as the industry.
• Price discrimination: in a monopoly the firm can change the price and
quantity of the good or service. In an elastic market the firm will sell a
high quantity of the good if the price is less. If the price is high, the firm
will sell a reduced quantity in an elastic market.
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 Characteristics of a Monopoly

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 Sources of Monopoly Power

• Economies of scale
• Capital requirements
• Technological superiority
• No substitute goods
• Control of natural resources
• Network externalities
• Legal barriers
• Deliberate actions

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 Price-Output Determination under Monopoly
• A firm under monopoly faces a downward sloping
demand curve or average revenue cum.
• Further, in monopoly, since average revenue falls as
more units of output are sold,
• the marginal revenue is less than the average
revenue.
• Equilibrium level in monopoly is that level of output in
which marginal revenue equals marginal cost.
• Producer will continue to produce as long as marginal
revenue exceeds the marginal cost. At the point where
MR is equal to MC the profit will be maximum and
beyond this point the producer will stop producing.
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Price-Output Determination under Monopoly (Short Run)

•OM output, marginal revenue is greater

than marginal cost, but beyond OM the
marginal revenue is less than marginal
cost. 
•Therefore, the monopolist will be in
equilibrium at output OM where
marginal revenue is equal to marginal
cost and the profits are the greatest.
•Price in the diagram is MP or OP.
•At output OM, while MP’ is the average
revenue, ML is the average cost,
therefore, PP’TL is the profit per unit.
•Now the total profit is equal to PP’TL
(profit per unit) multiply by OM (total
output). In the short run, the monopolist
has to keep an eye on the variable cost,
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otherwise he will stop producing.
 MONOPOLY: Long Run Equilibrium
• The supernormal profit in the long run is
disappeared as new firms are entered into the
industry.
• As the new firms are entered into the industry,
the demand curve or AR curve will shift to the
left, and therefore, the supernormal profit will be
competed away and the firms will be earning
normal profits.
• The AR curve in the long run will be more elastic,
since a large number of substitutes will be
available in the long run. 
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 •Therefore, in the long run,
equilibrium is established when firms
are earning only normal profits. Now
profits are normal only when AR = AC.

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