4.market Structure and Price Determination

Economics
Course Code:CSER-1209
Md. Rabiul Karim

Assistant Professor
Department of Economics
Jagannath University, Dhaka
Email: [email protected]
Definition of Market
 Place where there are many buyers and sellers .
 Actively engaged in buying and selling acts.
 Thus, It does not mean a particular place but the entire area
where buyers and sellers of a commodity are in close contact
and they have one price of same commodity.
 A market does not mean a particular place but the whole region
where sellers and buyers of a product are spread.
Market structure
 Market structure consists of four main market characteristics:

1. The number of sellers and buyers,
2. The nature of the product,
3. The ability of individual firms to influence the market price,
4. The ease of entry into or exit from the market.
Types of market structure
 Perfect Competition
 Monopoly Competition
 Monopolistic Competition
 Oligopoly Competition
Perfect competition
 It is such a market structure where there are large numbers of

sellers and buyers.
 Homogeneous product .
 The price of the product is determined by the industry .
 One price prevails in the market and all the firms sell the product
at the prevailing price .
Characteristics
 Large number of buyers and sellers

 Homogeneous product
 No barriers to entry
 Perfect knowledge of the market
 Perfect mobility of factors of production
Monopoly
 It is a market structure in which there is only a single seller of the

product .
 One firm has full control over the supply of the product .
 Example : WASA, Titas Gas Distribution etc.

Characteristics
 Sole supplier of the product
 Large number of buyers
 No close substitutes
 One firm industry
 Absence of entry
 Monopolist is price maker
Monopolistic Competition
 Refers to the market organization in which there are many firms

selling closely related but not identical commodities.
 Example: Soap (Lux, Lifebuoy, Sandolina)

Characteristics
 Many firms
 Closely related but not identical product
 Sellers have some degree of control over the prices
Oligopoly
 It is a market structure in which there are few sellers of a
product selling identical or differentiated products .
 If they are selling identical products, it’s a case of Pure
Oligopoly.
Such as: Mobile phone company

Characteristics
 Relatively small number of sellers

 Interdependence of the firms
 Price rigidity and price war
 Difficulty in entry and exit
Short-Run Equilibrium of the firm: Total
Approach
 Total Profit : Total Revenue (TR) - Total Cost (TC)
 Total Revenue (TR)= P . Q ; P= Price, Q= Quantity
 Price (P) will be remain same in perfect competition market
 Brake Event point: Total Revenue is equal to Total Cost (TR=TC)
Short-Run Equilibrium of the firm:
Marginal Approach
 Marginal Revenue (MR) = is the change in TR for one-unit change in
the quantity sold.
 Marginal Cost (MC) = is the change in TC for one-unit change in the
quantity sold.
 As price (P) will be remain same in perfect competition market, so MR
= P.
 Condition of Market Equilibrium

I. MR = MC
II. Slope of MC is greater than slope of MR
Short-Run Equilibrium of the firm
 A firm in Short Run Equilibrium may face one of these situations

I. Super Normal Profits
II. Normal Profits
III. Minimum Losses
Super-Normal Profits : AR>SAC
 A Firm in Equilibrium earns super normal profit, when average
revenue is more than its short-run average cost (SAC)
 Firm equilibrium point=E, where MR = MC
 Equilibrium output=EM
 Total Cost: OBAM
 Total Revenue: OPEM Super Normal Profit
 Super Normal Profit: SMC
Cost / Revenue
OPEM - OBAM SAC
P E
=BPEA
=Shaded area
 Since AR>SAC B A
AR=MR
Firm is earning EA super
normal profit per unit of
output.
O M
Outpu
Normal Profits : AR=SAC
 A Firm in Equilibrium earns normal profit, when average revenue
is equal to its short-run average cost (SAC)
 Firm equilibrium point=E, where MR = MC
 Equilibrium output=EM
 Total Cost= OPEM
 Total Profit= OPEM
SAC SMC
 Normal Profit= OPEM – OPEM
Cost / Revenue
 =0
P E
 At this output AR and SAC
both are equal to EM and AR=MR
Firm is earning normal
profit per unit of output
O
Outpu M
Minimum Loss : AR<SAC
 A Firm will be in equilibrium at that level of output where it gets the
minimum losses when SAC is more than AR.
 Total Revenue: OPEM

 Total Cost : OBAM
 Minimum Loss: OPEM - OBAM
= - PBAE
SAC
Loss
 At equilibrium AR=EM and SMC
Cost / Revenue
SAC=AM and also from B A
graph AR<SAC
 Even if Firm discontinues AR=MR

P E
the production, it will have
to bear the loss of fixed
cost which is minimum
possible loss of a Firm.
O
Outpu M
t
Problem 01
 A monopolist cement manufacturer has the demand function

p=110-4Q, and the marginal cost equal to a constant 10. Calculate
the profit maximizing output and price. Compared to competitive
pricing, how much income is redistributed from consumer to
monopolist?
Solution - 01
Problem 2
Problem 3
Solution 03
 Thanks

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Economics

Md. Rabiul Karim

 Actively engaged in buying and selling acts.

 Market structure consists of four main market characteristics:

 It is such a market structure where there are large numbers of

 Large number of buyers and sellers

 It is a market structure in which there is only a single seller of the

 Example : WASA, Titas Gas Distribution etc.

 Refers to the market organization in which there are many firms

 Example: Soap (Lux, Lifebuoy, Sandolina)

Such as: Mobile phone company

 Relatively small number of sellers

 Condition of Market Equilibrium

 A firm in Short Run Equilibrium may face one of these situations

 Total Revenue: OPEM

 Even if Firm discontinues AR=MR

 A monopolist cement manufacturer has the demand function

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