MARKET FORMS - magadhuniversity.ac.in
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MARKET FORMS Sourav Kumar Asst. Prof. University Deptt. Of Economics Magadh University, Bodh-Gaya
Transcript of MARKET FORMS - magadhuniversity.ac.in
MARKET FORMS
Sourav KumarAsst. Prof.
University Deptt. Of Economics
Magadh University, Bodh-Gaya
Market Forms
The degree to which a firm is able to alter
the price of their product in the market by
its own action depend upon market forms.
To understand how market behaves as a
whole, there is need to understand, what
are the different kinds of markets forms?
The answer begins with the two major
sides to every market- supply and demand.
These two components need to be
combined to understand how the whole
market behaves.
Competition The more is the power an individual firm to
influence the market, the more competitive is
the market.
Market form is based on the market structure.
The term market structure is the concept that
rests upon the type of market in which firms
operate.
The firms that produce a product, or a closely
related set of products, constitute an industry.
The market demand curve for any particular
product is collective curve gathered from the
industry.
Own Demand
When firms take their production and sales
decision, they need to know about what
quantity they can sell at various prices.
Their concern is, therefore, not with the market
demand curve of whole industry, but rather
with the demand curve of their own product.
If a firm’s managers know the demand curve
of their own firm faces, they know the sales
that their firm can make and the revenue it will
earn at each possible price.
Market Structure
The term market structure is the concept that
rests upon the type of market in which firms
operate.
Market can be distinguished by the number of
firms in the market and the type of product that
they are selling.
The firms that produce a product, or a closely
related set of products, constitute an industry.
The market demand curve for any particular
product is collective curve gathered from the
industry.
Types of Market
Structure
Broadly, there are three types of market form:-
Perfect competition
Imperfect competition: - Monopolistic
competition and oligopoly
Monopoly
Market Conditions
Basic features of
different market
forms
Assumptions of
perfect competitio
n
Large number of sellers and buyers: The industry includes a large number of firms so that each individual firm however large supplies only a small part of the total quantity offered in the market.
Product homogeneity: The industry is defined as a group of firms producing a homogenous product. This assumption imply that the individual firm in pure competition is a price taker: its demand curve is infinitely elastic.
Free entry and exit of firms: There is no barrier to entry or exit from the industry. Entry or exit may take time, but firms have freedom of movement in and out the industry.
No government regulation: there is any government regulation in the market. Tariffs, subsidies and rationing of product are ruled out
Perfect knowledge: It is assumed all the sellers and buyers have complete knowledge of the market. Information is free and costless.
Under perfect
competition
Here are the major points to remember:
Under perfect competition, there are many
firms, each producing an identical product and
each one is too small to affect the market price.
The prefect competitors faces a completely
horizontal demand curve.
The extra revenue gained from each extra unit
sold(MR) is therefore the market price (AR).
Market Demand
Although no one can influence the market price
significantly, the collective actions of all the firms
in the industry and collective action of consumers,
together determines the equilibrium price.
This occurs at the point where the market demand
curve and the industry supply curve intersect.
At the equilibrium price each firm is producing and
selling a quantity for which its marginal cost (MC)
equals marginal revenue (MR). But because price
equals AR and MR also equals AR, under perfect
competition, then under equilibrim.
AR= MR= MC= Price
Equilibrium While MR= MC is the equilibrium under any
market form, under perfect competition, in
addition they are both equal to price as well.
Given their fixed inputs, all the firms are
maximising their profits and so have no
incentives to alter output in the short run.
Because total quantity demanded equals total
quantity supplied, there is no reason for market
price to change. Thus, the market and all the
firms in the industry are in the short-run
equilibrium.
short-run equilibrium
Given their fixed inputs, all the firms are
maximising their profits and so have no
incentives to alter output in the short run.
Because total quantity demanded equals total
quantity supplied, there is no reason for market
price to change.
Thus, the market and all the firms in the
industry are in the short-run equilibrium.
Market Price &
Equilibrium
Short-run profitabilit
y of the firms
We know that when an industry is in the short run equilibrium, each firm is maximising its profit.
However, we do not know how large these profits are. It is one thing that a firm is doing as well as it can, given its particular circumstances; it is another thing to know how well it is doing.
Figure shows three possible positions for a firm in the short-run equilibrium.
In all the cases the firm is maximizing its profit by producing where price equals marginal cost, but the size of the profits is different in each case.
In part (i) it is just covering all of its costs- it is just at break even point.
In part (ii)the firm is suffering losses.
In part (iii) it is making pure profits because average revenue exceeds average total cost.
Short Run Supply Curve
Break EVEN and Shut down
When price is P5 – Super normal profit over
and above P4.
At P4 Break-Even point. Here – Normal Profit.
At P3 the fixed cost is partly covered but AVC
is fully covered.
At P2 variable cost is covered but fixed cost is
not covered. Since AVC is covered the
production can continue.
At P1 even variable cost is not covered so
production is ‘shunt down’ immediately.
Supply Curve – for p2, p3, p4 & p5 output is
q2, q3, q4 & q5.
