MARKET STRUCTURECONTENTS1.Intro to market structure2.Factors to be considered in classifying market struture3.Types of market structure and their characteristicsi.Perfect competitionii.Monopoly marketiii.Monopolistic competition marketiv.Oligopoly market4.Comparison among the markets

IntroductionMarket structure is the institutional

arrangment which shows the behaviour relationship between buyers and sellers.

It is a conduct and structure at the market.

FACTORS TO BE CONSIDERED IN CLASSIFYING MARKET STRUCTURE

1.Number of buyers and sellers, How many buyers and sellers are on the market?.for example monopoy has one seller2.Degree of product differentiation. Determine if the products are similar to each other or if a product is unique.3.Nature of entry and exit.Are there any barriers to entry? an entry barrier can be high startup costs, For example the startup cost of settting an aircraft factory that requires high investement funds is one of teh barrier that there are few aircraft producersOn exit it refers to how easy it is to get out of the investment.For example if the firm has many machine that cannot be converted to use in production of other products,then geting out of the market wont be easy, some companies may opt not to enter because of the risk.4.Goverment intervationDoes the goverment interfere in the market? Has the goverment set any barrier in form of regulation?. For example a goverment might choose to restrict number of firms to produce a particular product or service.5.Degree of competition.

TYPES OF MARKET STRUCTURES AND THEIR CHARACTERISTICS There are four main types of market

structure i.Perfect market competition ii.Monopoly market iii.Monopolistic market iv.Oligopoly market.

Perfect competitive market It is the market where there is a large

number of buyers and sellers selling homogenous product (i.e same nature of product are sold!!).

For example maize, flour

FEATURES/CHARACTERISTICS OF PERFECT COMPETITIVE MARKET The market is characterized by the following six main features.1.Large number of buyers and sellers.There are many large companies offering the product, hence forcing companies to offer the products at market price, if the company sells products at high price, it wont sell the products it manufactures.Also many buyers are available to buy the product due to its needs. For example Flour and sugar2.Product sold is homogenousThe product offered is not unique, it is identical to other products offered by sellers. consumers can susbtistute from one seller to another.3.Both buyers and sellers are price takersThe sellers are price takers since they have to go along with the market price, if they increase their price, they will loose their customers as customers can shift to other substitute sellers. The customers also have to accept the price as there will be no product at a price below market price4.There is free entry and exitThere is easy of entry and exit due to a way that resources used can be used in multiple activties in a market, because of this firms can enter and go out easly.5.The consumers/buyers have the perfect information about the productThe consumers know everything about the product resulting to low or no advertisement needed. For example in most countries, buyers have perfect information about sugar or milk.6.There is no goverment intervention

Monopoly market It is a market structure which has a single

supplier or firm with no substitute. There is only one firm producing a prooduct

or service, there are no substitutes.hence consumers have no choice but only to buy a product or service at one place.

The firm has the power to set price and entry by other firms is not possible.

For example, In most contries there is only one electrical company which is regulated by the goverment.

FEATURES OF MONOPOLY MARKET

1.There is a single supplierDue to the presence of single supplier, consumers have no choice but only to buy the product or service at one place2.Products have no close substitutesDue to single producer, there is no close substitutes. Hence the consumers have to buy the product from single supplier.There are no other companies/producers that offer the same products.3.The monopolistic has the power to set the priceSince the products have no substitutes, the firm has the power to set price that it sees fit for it to gain profit. The firm is the price maker4.There are entry barriers.Barriers for other firms to enter can be many such as startup cost barriers and goverment intervention in the market etc5.There is goverment intervention

Examples of Monopoly Electricity utilities, Gas Water Public Tramsport Telecommunications

10

Monopoly graph

Monopolistic competition market It is the market where by there are many

buyers and sellers selling different products that are differentiated interms of colour, size, quality and packaging.

FEATURES/CHARACTERISTICS OF MONOPOLISTIC COMPETITION MARKET

1.Large number of buyers and sellers2.Easy of entry because of relative low costs and easy of exit3.Products are differentiated interms of colour, quality, size and packaging For example restaurants offer the same product which is food, but they differ in taste as each restaurant has its own way of cooking , which results to food that is completely different from others.4.The firm is a price makerThe company or seller has the power to set its own price, if the product is of high quality and more better than other competitors, a firm can set price higher than its competitors

Q

Short-run Monopoly EquilibriumMonopolistically competitive firms take full advantage of short-run monopoly.

Competition, market structures and business decisions

Market structures Мonopolistic competition

PriceCosts

Quantity

MR Demand

MC AC

Qmc

Pmc

OLIGOPOLY MARKETIt is a market structure where there are

few sellers selling differentiated products, it is dominated by few giant companies.

For example; automobile manufacture or cellphone manaufacture: they offer different cellphones with different shapes,specification and design. Example HTC and SAMSUNG

FEATURES OF OLIGOPOLY MARKET

1.There are few sellers2.The market is dominated by giant company3.There is high level of competition4.There is a barrier to entry.i.e the cost of starting is high5.The firms are interdependent. Each firm is affected what others do6.There is higher level of collusion

COLLUSION: It is the formal agreement among oligopolist on price setting and market share. In simple collusion means agreement between people to act together secretely or legally in order to achieve a certain goal

BASIS OF DIFFERENCE

Perfect competition

Monopoly market

Monopolistic competition

Oligopoly

1.NUMBER OF SELLERS

Very large number of sellers

Single seller Large number of sellers

Few big sellers

2.NATURE OF PRODUCT

Homogenous products

No substitute products( product is unique)

Closely related but differentiated products

Products are homogenous under pure oligopoly and differentiated under differentiated oligopoly

3.DEGREE OF PRICE CONTROL

A firm is a price taker, no control over the price

A firm is a price maker. Has control over price

A firm has partial control over the price. An individual firm is able to influence the price by creating a unique product

It follow the policy of price rigidity to avoid price wars

BASIS OF DIFFERENCE

Perfect competition

Monopoly market

Monopolistic competition

Oligopoly

4.BARRIERS TO ENTRY AND EXIT

Freedom of entry and exit

Entry of new firm is restricted and exit of old firm is restricted

Freedom of entry and exit

Restriction on entry of new firms

5.LEVEL OF KNOWLEDGE OF MARKET

Perfect knowledge about market conditions

Imperfect knowledge about market conditions

Imperfect knowledge about market conditions

Imperfect knowledge about market conditions

6.COMPETITION

Highly intensive

No competition

High competition

High competition

7.GOVERMENT INTERVENTION

No goverment intervention

Goverment intervention is present

No goverment intervention

There is less goverment intervention

Marketsslide 19

PRICE DETERMINATION IN MARKETS

The market demand curve shows the amount demanded at every price.

The market supply curve shows the amount supplied at every price.

The question now is whether there is some price at which the quantities supplied and demanded are the same.

Marketsslide 20

EQUILIBRIUM PRICE DEFINED

The equilibrium price of a good is: a price at which quantity supplied equals

quantity demanded. a price at which excess demand equals

zero.

At the equilibrium price there is no net tendency for price to change.

Marketsslide 21

Excess demand exists when, at the current price, the quantity demanded is greater than quantity supplied.

Excess supply exists when, at the current price, the quantity supplied is greater than the quantity demanded.

Marketsslide 22

Excess supply = Qs - QD

Market for tacos

supply

demand

price

quantity

p = $3

QD QS

EXCESS SUPPLY

Marketsslide 23

Excess demand = QD - QS

Market for tacos

supply

demand

price

quantity

p = $1

QDQS

EXCESS DEMAND

Marketsslide 24

When there is EXCESS DEMAND for a good, price will tend to rise.

When there is EXCESS SUPPLY of a good, price will tend to fall.

Marketsslide 25

When excess demand equals zero, price must be the equilibrium price, and we say the market is in equilibrium.

If you want to find out the price at which a market is in equilibrium, then look for the price where the excess demand is zero.

Marketsslide 26

Economists are interested in the explaining equilibrium prices.

In particular, they are anxious to explain why equilibrium prices change.