in economics, markets are divided into different

In this session, you were introduced to the various types of market environments in which a firm operates.

There are two extreme market conditions: a perfectly competitive market and a monopoly market structure.

In economics, markets are divided into different types based on the level of competition that exists in eachmarket environment. The more competitive a market environment is, the closer it is to perfect competition,and the less competitive a market environment is, the closer it is to a monopoly.

Each market type is characterised based on the following factors:1. Number of producers and sellers transacting in the market2. Type of products in terms of how similar or different they are within the market3. The ease or difficulty with which firms can enter or exit the market4. The extent to which a firm can determine the price of the product.

Markets can be classified into the following broad categories:

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The characteristics of a perfectly competitive market are mentioned in the image given below.

A perfectly competitive market results in the most efficient market outcome, as it provides an adequateamount of a product at a minimal cost to consumers who are willing and able to pay for it.


The characteristics of a monopoly model are mentioned in the image given below.

There are two major types of monopolies that exist due to different barriers to entry, which are as follows:

1. Natural Monopolies: In these monopolies, economies of scale are so large that having two or morefirms operating in it only adds cost to the economy and makes it inefficient. These are usually utilitycompanies, wherein the government recognises the benefits of a natural monopoly.

2. Limited Monopolies: These are monopolies that are limited by either scope or time, to recover thehigh costs involved.


The characteristics of a monopolistic model are as follows:

1. There are many buyers and sellers in the market.2. Products are differentiated; however, close substitutes do exist.3. Firms have some control over price.4. There are low entry or exit barriers.

The characteristics of an oligopoly market structure are given in the following image.

Some simple tests can be undertaken to check whether or not a market is an oligopoly. One such test ischecking for the concentration of the market shared by the top four to six firms in the market. Another suchtest is the Herfindahl-Hirschman Index or HHI, which is an index that helps to calculate thedegree of competition based on the number of firms in the market and the market share of each of thosefirms.


Since consumers are negatively affected owing to the presence of monopolists, a government limits thispower in many ways. The benefits of this are as follows:

One of the basic economic assumptions is that all individuals have perfect information about their decisions.Here, this assumption is relaxed to understand the implications of imperfect information on firms andmarkets.


In economics, an externality is the cost or benefit of an action that affects a third party other than the buyer orseller of a particular good or service. To understand externalities better, it is important to understand thetotal costs and benefits of a product.

The costs of running a business can be thought to consist of the following:

1. Private costs: These are all the costs that are directly borne by the producer.

2. Social costs: These are the costs that are borne by society.

In this scenario, total costs would take into account the full spectrum of costs and, hence, are equal to private

costs + social costs.


Similarly, total benefit = private benefit + social benefit.

Externalities can be either positive or negative and can be explained as follows:

● Positive externality: A situation in which social benefits are greater than private benefits● Negative externality: A situation in which private benefits are greater than social benefits

To prevent negative externalities, the following steps can be taken:

There are different modes of government intervention that act to change the price of a product in the market.

1. Price ceiling is a government-imposed maximum price that can be charged by suppliers for thecommodity. This is done to make commodities affordable to the general public.

2. Price floor refers to a minimum price that is decided for a product or service in the market to ensurethat the producers get their due compensation.

3. Taxation is the charge levied by a government on transactions in an economy. These charges arecollected to be used for public services and to improve the general public’s well-being.

Other than constraining the price of a product, governments can also impose regulations or restrictions onfirms, individuals or entities.


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in economics, markets are divided into different

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