Market Forms - Perfect competition, Monopoly, Monopsony, Oligopoly.pptx

Excellent exam materials.

1. Market Forms Perfect Competition - Features Monopolistic competition – Features Monopoly - Features Monopsony – Definition, Examples Oligopoly – Features Equilibrium of a firm in perfect competition under short run Shut down point

2. Perfect competition Perfect competition is a unique form of the marketplace that allows multiple companies to sell the same product or service. Many consumers are looking to purchase those products. None of these firms can set a price for the product or service they are selling without losing business to other competitors. There are no barriers to any firm that is looking to enter or exit the market. The final output from all sellers is so similar that consumers cannot differentiate the product or service of one company from its competitors. T T

3. Features of Perfect competition The main features of perfect competition are as follows: Many Buyers and Sellers – There will always be a huge number of buyers and sellers in this form of marketplace. The advantage of having a large number of small-sized producers is that they cannot combine to influence the market price. If the quantity offered by an individual seller is very small compared to the total market produce, they cannot influence the market price independently. Similarly, if there are many buyers, then an individual will not have the power to dictate conditions to the market or influence the price by altering demand for a product. The individual demand will not be large enough to change the price. Homogeneity – The product or service produced by the buyers in a perfectly competitive market should be homogenous in all respects. There should be no differentiation between them in terms of quantity, size, taste, etc., so that the products are perfect substitutes for each other. If a seller tries to charge a higher price for products that are so similar, they will lose their customers immediately. Free Entry and Exit – Another condition of a perfectly competitive market is that no artificial restrictions prevent a firm’s entry, or compel an existing firm to stay put when they want to leave. Their decision to enter, stay or leave the market depends purely on economic factors.

4. Perfect Knowledge – The buyers and sellers have perfect knowledge about the market conditions. The buyers are aware of the details of the product sold as well as its price. At the same time, the sellers know about the potential sales of their products at different price points. Since the buyers are already informed about the product, there is no need for advertising or sales promotion. So firms don’t have to invest a single penny in these activities. It also helps sellers save on advertising or other marketing activities, which keeps the price of their products low. Mobility of Factors of Production – The factors of production like labour , raw materials and capital should have total mobility under perfect competition. The labour should have the freedom to move from one place (industry, market or production unit) to another depending on their remuneration. Even the raw materials and capital should not have any restrictions in movement.

5. Transport Cost – In the perfectly competitive market, the costs for transporting goods, services or factors of production from one place to another is either zero or constant for all sellers. The assumption is that all sellers are equally near or farther away from the market. Thus, the transport cost is uniform for all of them. The result is that the overall costs for production and the selling price are the same across the board. Absence of Artificial Restrictions – There is no interference from the government or any other regulatory body to hinder the smooth functioning of the perfect competition. There are no controls or restrictions over the supply or pricing and the price can change solely based on the demand and supply conditions. Uniform Price – There is a single uniform price for all products and services in a perfectly competitive market. The forces of demand and supply determine it.

6. Monopoly A monopoly is a type of imperfect competition in which a company and its product dominate the sector or industry. This situation arises when there is no competitor in the market for the same product. Monopolies enjoy a significant market share due to the absence of any competitors. They can control the price of the product by knowing that the product will sell. Competitors are unable to enter the market due to the high barrier of entry. The organisation can change the prices at their will due to the resources at their disposal, and in this way, they impact the business of the sellers.

7. Monopolistic competition A monopolistic competition is a type of imperfect competition where there are many sellers in the market who are competing against each other in the same industry. They position their products, which are near substitutes of the original product. In a monopolistic competition, the barriers of entrance and exit are comparatively low. The companies try to differentiate their products by offering price cuts for their goods and services. The examples of such industries are hotels, e-commerce stores, retail stores, and salons.

8. Monopsony A monopsony occurs when a firm has market power in employing factors of production (e.g. labour ). A monopsony means there is one buyer and many sellers. It often refers to a monopsony employer – who has market power in hiring workers. This is a similar concept to monopoly where there is one seller and many buyers.

9. Example of a monopsony An example of a monopsony occurs when there is one major employer and many workers seeking to gain employment. If there is only one main employer of labour , then they have market power in setting wages and choosing how many workers to employ. Examples of monopsony in labour markets Coal mine owner in town where coal mining is the primary source of employment. The government in the employment of civil servants, nurses, police and army officers.

10. Oligopoly Oligopoly is defined as a market structure with a small number of firms, none of which can keep the others from having significant influence. Meaning of Oligopoly Market An Oligopoly market situation is also called ‘competition among the few’. An oligopoly is an industry which is dominated by a few firms. In this market, there are a few firms which sell homogeneous or differentiated products. Also, as there are few sellers in the market, every seller influences the behavior of the other firms and other firms influence it. Oligopoly is either perfect or imperfect/differentiated. In India, some examples of an oligopolistic market are automobiles, cement, steel, aluminum, etc.

11. Characteristics of Oligopoly Now that the Oligopoly definition is clear, it’s time to look at the characteristics of Oligopoly: Few firms Under Oligopoly, there are a few large firms although the exact number of firms is undefined. Also, there is severe competition since each firm produces a significant portion of the total output. Barriers to Entry Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry like patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into the industry. Non-Price Competition Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence depend on non-price methods like advertising, after-sales services, warranties, etc. This ensures that firms can influence demand and build brand

12. Features of Oligopoly Interdependence Under Oligopoly, since a 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, there is a lot of interdependence among firms in an oligopoly. Hence, a firm takes into account the action and reactions of its competing firms while determining its price and output levels. Nature of the Product Under an oligopoly, the products of the firms are either homogeneous or differentiated. Selling Costs Since firms try to avoid price competition and there is a huge interdependence among firms, selling costs are highly important for competing against rival firms for a larger market share.

13. Equilibrium of a firm in perfect competition under short run

14. Equilibrium of a firm in perfect competition under short run In the above figure, you can see that the costs and revenue are on the Y-axis and the Quantity is on the X-axis. Further, marginal costs cut the marginal revenue curve from below at point A. At point ‘A’, P is the equilibrium price and ‘Q’ is the equilibrium quantity. Note that corresponding to the equilibrium quantity, the average cost is equal to the average revenue. It also means that the firm is earning a normal profit. Short-run Equilibrium of a Competitive Firm In the short-run, there the following assumptions: The price of the product is given and the firm can sell any quantity at that price The size of the plant of the firm is constant The firm faces given short-run cost curves

15. We know that the necessary and sufficient conditions for the equilibrium of a firm are: MC = MR MC curve cuts the MR curve from below In other words, the MC curve must intersect the MR curve from below and after the intersection lie above the MR curve. In simpler terms, the firm must keep adding to its output as long as MR>MC. This is because additional output adds more revenue than costs and increases its profits. Further, if MC=MR, but the firm finds that by adding to its output, MC becomes smaller than MR, then it must keep increasing its outpu

16. Since it is a perfectly competitive market, the demand for the product of the firm is perfectly elastic. Further, it can sell all its output at the market price. Therefore, its demand curve runs parallel to the X-axis throughout its length and its MR curve coincides with the AR curve. On the supply side, recall the four cost curves – AFC, AVC, MC, and ATC. Of these, the supply curve is that portion of the MC curve which lies above the AVC curve and is upward-sloping. In the short run, the firm cannot avoid fixed costs. Even if the production is zero, the firm must incur these costs. Therefore, the firm cannot avoid losses by not producing and continues producing as long as its losses do not exceed its fixed costs. In other words, a firm produces as long as its average price equals or exceeds its AVC.

17. Shutdown point A shutdown refers to a short-run decision It is not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market. The short-run and long-run decisions differ because most firms cannot avoid their fixed costs in the short run but can do so in the long run. That is, a firm that shuts down temporarily still has to pay its fixed costs, whereas a firm that exits the market saves both its fixed and its variable costs.