Business Economics · Ch 4 — Market Structures and Price Determination
Meaning of Market and Its Forms
Meaning of Market and Its Forms
In everyday language a market means a particular place where goods are bought and sold. In economics, however, a market does not refer to a place at all. It refers to the whole set of buyers and sellers who are in close contact with one another for the purchase and sale of a commodity, so that the price of that commodity tends to be the same throughout. Contact today need not be face-to-face — telephone, correspondence and online platforms all keep buyers and sellers in touch. Thus the market for a share, or for gold, can extend across the entire country or the world.
The behaviour of price and output in an industry depends on its market structure — chiefly on the number of sellers, the nature of the product, and how easily new firms can enter. On this basis, markets are classified into the following broad forms.
| Basis | Perfect Competition | Monopoly | Monopolistic Competition | Oligopoly |
|---|---|---|---|---|
| Number of sellers | Very large | One | Many | A few |
| Nature of product | Homogeneous (identical) | A single product with no close substitute | Differentiated (close substitutes) | Homogeneous or differentiated |
| Entry & exit of firms | Free | Blocked / restricted | Free | Difficult |
| Control over price | None (price taker) | Considerable (price maker) | Some (limited) | Interdependent — mutual reaction |
| Shape of firm's demand (AR) curve | Perfectly elastic (horizontal) | Downward sloping, less elastic | Downward sloping, highly elastic | Kinked / indeterminate |
| Example (illustrative) | Agricultural produce like wheat | Public utility such as railways | Toothpaste, soap brands | Automobiles, telecom |
Perfect competition and monopoly are the two extreme, largely theoretical forms. Monopolistic competition and oligopoly lie in between and describe most real-world markets; they are together called imperfect competition. This chapter focuses on price and output determination under perfect competition, monopoly and monopolistic competition, and on how shifts in demand and supply move the market equilibrium.
Two revenue concepts are used throughout. Average Revenue (AR) is revenue per unit sold, , which is simply the price. Marginal Revenue (MR) is the addition to total revenue from selling one more unit, . A firm maximises profit where and is rising.
The whole body of buyers and sellers of a commodity in close contact, such that a single price tends to prevail — not a physical place.
The characteristics of a market — number of firms, nature of product and conditions of entry — that determine how price and output are decided.
A price taker (perfectly competitive firm) accepts the ruling market price and cannot influence it; a price maker (monopolist) can set its own price by choosing output.