1. Md. Hasan Tarik Chief Instructor, NAPD
Market Structure
Md. Hasan Tarik
Chief Instructor, NAPD

2. Concept of Market
Generally Market is known to be a specific place where products are bought and sold.
But in Economics market does not refer to a specific place
Market is meant by where there is an existence of the buyer and seller of a product and transaction of the product by a price which is fixed by joint bargaining of the seller and the buyer
Transaction can occur in any place of through correspondence

3. Market Structure
Setting the price of the firm’s product is one of the important decisions made by the managers
If price is set too high, the firm will be unable to compete with other suppliers
If the price is too low, the firm may not be able to earn a normal rate of profit

4. Market Structure
A firm in a competitive market may have little or no control over price
In that case managerial attention must be focused on the rate of output to be produced
A firm that is the only seller of a product may have considerable freedom in setting price

5. Market Structure
Market Structures can be characterized on the basis of four characteristics:
Number and size distribution of sellers
Number and size distribution of buyers
Product differentiation
Conditions of entry and Exit

6. Number and size distribution of sellers
If there are numerous sellers of nearly equal size, the influence of any one firm is likely to be small over price and total supply. Conversely it is also true
A dominant firm or few large firms that provide a substantial proportion of total business, exert considerable impact over price and product attribute. Such as Microsoft

7. Number and size distribution of buyers
Where there are many small purchaser of a product, all buyers are likely to pay about the same price
If there is only one purchaser, that buyer in a position to demand lower prices from sellers
If a market consists of many small buyers and one or a few firms making volume purchases, the larger firms may be able to buy at lower prices. For example IBM and AT&T buy at lower prices

8. Product Differentiation
Product differentiation refers to the degree that the output of one firm differs from that of other firms in a market
When products are undifferentiated, decisions to buy are made strictly on the basis of price
Product differentiation indicates a firm’s ability to affect price

9. Conditions of Entry and Exit
When it is extremely difficult for new firms to enter, existing firms will have much greater freedom in making pricing and output decisions
In case of exit if the resources used to produce the product can easily be transferred from one use to another they can earn a higher rate of return

10. Classification of Market
The classification of market can be presented in the following diagram:

11. Classification of Imperfect Market
Imperfect market can be classified as follows:

12. Characteristics of Perfect Market
Large number of small buyers and sellers
Homogeneous product which is standardized and can be easily graded
Perfect information (Price, quality of product, mode of payment)
Easy entry and exit
Perfect mobility of factors of production (land, labour, capital, organization)
Product undifferentiated. Decisions to buy are made on the basis of price

13. Price is fixed is perfect market through the interaction between buyers and sellers

15. AR and MR under Perfect Market
In perfect market there are many buyers and sellers. So it is not possible for a buyer to shift the market demand curve.
Again a seller or firm produce a little amount of total supply. So it is not possible for him to influence the market supply curve of the product
Price of the product is fixed by the market supply and demand curve

16. AR and MR under Perfect Market
As the product is homogeneous in Perfect Market, the price which is fixed in the market has to taken by buyer and seller both
This price can not be changed by buyer and seller
A seller under Perfect Market is a price taker
For this reason in Perfect Market P=AR=MR

17. AR and MR under Perfect MarketQ P TR MR 1 10 2 20 3 30 4 40 5 50

18. AR and MR under Perfect Market
From Table we see that fixed market price of product Q is P=10 Taka
The value of total income TR increases with the same rate as the value of Q
So it is obvious to be P=AR=MR=10
The firm will charge the same price for each Q amount

19. TR TR P 30
AR=MR=10 Pe 20 10 Q1 Q2 Q 2 Q 1 3

20. Limitations of Perfect Market
Unrealistic
External Effects
Economies of large scale
Non-Homogeneous product
Ignorance of buyer and seller
Non-perfect Mobility of factors
Transport Cost
Freedom of Consumers and producers limited

21. Imperfect market
In imperfect market individual sellers have some measure of control over the price of output in that industry. Economies of scale or decreasing average costs, are the major sources of imperfect competition.

23. Difference between perfect and imperfect competition
Figure shows that a perfect competitor faces a horizontal demand curve, indicating that it can sell all it wants at the going market price. A seller under perfect competition is a price taker
An imperfect competitor faces a downward sloping demand curve showing that if it increases its sales, it definitely depress the market price of its output.

24. Monopoly
The word monopoly originates from two Greek words: ‘monos’ means single and ‘polis’ means dealer or seller/producer
Monopoly is that type of market in which a single seller has control over the market and monopoly product has no close substitute
Monopoly is a price maker basically due to three reasons: single producer, single seller, no close substitute, restriction or prohibition on entry

25. Causes of the Rise of Monopoly
Demand for product is low
Personal goodwill
No mobility of items
Control over supply
Ignorance of the probable competitors
Unhealthy competition

26. Characteristics of Monopoly
Single seller/producer
Absence of competition
No close substitute of monopoly product
Control over supply
Restriction/prohibition on entry into market
No distinction between firm and industry
Monopoly is a price maker

28. Marginal Revenue and Monopoly
Marginal revenue (MR) is the increment in total revenue that comes when output increases by 1 unit. MR can be either positive or negative
Marginal revenue is positive when demand is elastic and negative when demand is inelastic

29. Total, average and marginal revenue under MonopolyQ
AR=P
TR=PQ MR
Cum. MR 1 10 2 9 18 8 3 24 6 4 7 28 5 30 -2

30. TR, AR and MR under monopoly
Monopoly market can control the price or the supply of the product
But can not control both
If it wants to sell more product it has to take less price for every extra unit
Because it has to compete with the others products of the which is included in the consumer’s budget
In monopoly market total income increases in the descending order
MR decreases more than AR

31. Some important comments about Monopoly
Does Monopolist make profit always?
Does Monopolist always earns excess profit?

32. Duopoly The word ‘Duo’ means two and ‘Poly’ means seller.
A market system where there are only two sellers
Duopoly is a special type of Oligopoly market system
Fierce competition is prevalent

33. Oligopoly
Greek word ‘Oligos’ means a few and Latin word ‘Polis’ means seller
Industry is dominated by few firms
Action on the part of any one firm may bring on a reaction by other firm or firms having significant effects on the original firm
OPEC is an example
Products may be homogeneous or different

34. Characteristics of Oligopoly market
Interdependence
Nature of the product: homogeneous or different
Homogeneous product: Pure Oligopoly
Different products: Differentiated Oligopoly
Demand curve is undefined
Importance of advertisement and selling cost
Group nature

35. Collusive Oligopoly
When firms cooperate completely, they engage in collusion.
This term denotes a situation in which two or more firms jointly set their prices or outputs
Divide the market among them or make their business decision jointly
Firms are tempted to collude when they recognize that their profits depend on their joint actions

36. Monopolistic Competition
Large number of firms
Produce slightly differentiated product
Entry and exit easy
Firms take other firms price as give
Product differentiation leads to a downward slope in each seller’s demand curve
Change in price of one firm can create little effect on other firms product

37. Characteristics of Monopolistic Competition
Many sellers
Product differentiation
Easy entry and exit
Advertisement and selling expense
Nature of Demand
Group equilibrium
Similar cost and demand
Alternate activities of firm
Similarity and resemblance