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See all Premium member Presentation Transcript Module-5 : Module-5 Market Structure Analysis Characteristics of Perfect Competition : Characteristics of Perfect Competition Refers to the market structure where competition among the sellers and buyers prevails in its most perfect form The price is determined by the forces of market, i.e. aggregate market demand and aggregate market supply conditions Each firm produces such a small fraction of total industry output that an increase or decrease in its own output will have no perceptible influence up on total supply and hence price Individual sellers have no control over the price at which they sell Every participant whether a buyer or seller is a price taker Supply and Demand in Perfect Competition : Supply and Demand in Perfect Competition Under perfect competition there is a single ruling market price, the equilibrium price, determined by the interaction of forces of total demand and total supply in the market Thus both the market or equilibrium price and volume of production in a market under perfect competition are determined by the intersection of total demand and total supply Equilibrium of the firm under Perfect Competition : Equilibrium of the firm under Perfect Competition Accepting profit maximization as the fundamental business motive of a rational firm, it can be stated that the firm is in equilibrium, when it fulfills its motive It means the firm is in equilibrium when it produces that level of output which maximizes profit When total revenue is greater than total cost, a firm earns profit, in the accounting sense. But economists make a distinction between, normal profits and supernormal profits Equilibrium of the Firm in the Short Run : Equilibrium of the Firm in the Short Run When the firm attains a short run equilibrium position, it does not necessarily imply, that it makes excess or supernormal profits Its profitability depends up on the conditions of average revenue and average cost Equilibrium of the Firm in the Long Run : Equilibrium of the Firm in the Long Run In the long run, all firms have identical costs and because they are at liberty to leave the industry, they will all be earning normal profits In the long run, under conditions of perfect competition, every firm in the industry and the industry as a whole will be in full equilibrium and every firm will be producing the optimum output Monopoly : Monopoly Monopoly is a market structure where there is only one seller who controls the entire market supply, as there are no close substitutes for his product and there are barriers to the entry of rival producers The monopoly market model is the opposite extreme of perfect competition Features of Monopoly : Features of Monopoly The monopolist is the sole producer in the market. Thus, under monopoly, the firm and industry are identical There are no closely competitive substitutes for the product. So the buyers have no alternative or choice. They have either to buy the product or go without it Monopoly is a complete negation of competition A monopolist is a price maker. He can even vary the price from buyer to buyer. In a perfectly competitive market there is single price, as against under monopoly, there may be differentials A pure monopolist has no immediate rivals. There are legal, technological, economic or natural obstacles which may block the entry of new firms A monopolist has absolute control over the market supply, so he can control the price as well as quantity supplied Natural Monopolies : Natural Monopolies In many cases, natural factors create a monopolistic position which is described as “natural monopolies” For instance, in many professional services, the natural talent and skill allow some individuals to have monopoly E.g. a surgeon, a lawyer, an actor, a singer Price Discrimination : Price Discrimination Price discrimination is charging of different prices for the same product to different buyers or in different markets A monopoly firm which adopts the policy of price discrimination is referred to as a Discrimination Monopoly Types of Price Discrimination : Types of Price Discrimination Personal discrimination (based on economic status of the buyer) Age discrimination Gender discrimination Locational discrimination Size discrimination Variation in quality discrimination Special service or comfort Use discrimination Time discrimination Nature of commodity discrimination The Concept of Monopolistic Competition : The Concept of Monopolistic Competition Monopolistic competition refers to the market organization in which there is keen competition, but neither perfect nor pure, among a large number of producers or suppliers. They have some degree of monopoly because of their differential products Thus monopolistic competition is a mixture of competition and a certain degree of monopoly power. In other words, a market with a blending of monopoly and competition is described as monopolistic competition Major Sectors : Major Sectors Monopolistic competition is commonly found in many fields in retail, service and manufacturing industries Examples of retail:- cloth stores, chemists, electrical appliances, grocery etc Service Industry:- restaurants, beauty saloons, health clubs etc Manufacturing:- shoes, garments, cosmetics, furniture manufacturing etc Characteristics of Monopolistic Competition-1 : Characteristics of Monopolistic Competition-1 Large number of sellers No product homogeneity Product differentiation: it is the most distinguishing feature of monopolistic competition, that product of each seller is branded and identified A firm has a limited degree of control over the market as a relatively small percentage of total market is shared by individual firms Large number of buyers: unlike perfect competition, here buying is by choice and not by chance Characteristics of Monopolistic Competition-2 : Characteristics of Monopolistic Competition-2 There is free entry for firms Selling costs:- this too is an unique feature. Since products are differentiated, advertising and sales promotion becomes an integral part of goods marketing. Outlays incurred on this account are termed as selling costs. This distinguishes it sharply from perfect competition, where there is no need to advertise products, because goods are homogeneous Characteristics of Monopolistic Competition-3 : Characteristics of Monopolistic Competition-3 8. two-dimensional competition:- a)price competition, where firms compete with each other on the price issue and b) non-price competition, where competition is based on product variation and selling costs The group:- since there is no homogeneity of product we can’t think of industry. Here the concept of group was introduced, which is a cluster of firms, producing very related but differentiated goods Types of Product Differentiation : Types of Product Differentiation Product differentiation can be classified into two types Quality and characteristic of the product Conditions relating to the sale of product Quality and Characteristic of the Product : Quality and Characteristic of the Product Product differentiation relating to quality and characteristics of the product has wide-scale dimensions, implying real as well as imaginary differences Real differences could be related to the physical features as well as functional areas There could be differences in size, design and style, strength, durability, differences in the quality of materials, chemical compositions, workmanship, cost of inputs etc There may be imaginary differences relating to brand names, colour and packing. Advertising also sometimes emphasizes the imaginary differences Conditions Relating to Sale of Product : Conditions Relating to Sale of Product Product differentiation may be due to the conditions of sale and marketing This is apparent in many different forms like:- proximity and prestige of the location of business, attitude of the staff, business reputation of the firm, terms of trade like discounts offered, guarantee, repairs etc You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.