SS2 ECONOMICS LESSON
3
MARKET STRUCTURE
MARKET: Any arrangement where buyers come in contact
with sellers for exchange of goods and services.
FORMS OF MARKET
1.
Factor
Market: Market for buying and
selling productive resources. Ex. Machines, capital
2.
Capital
Market: Market where medium and long
term loans are sold.
3. Money Market: For selling and buying
short term securities.
4. Forex Market: For buying and selling
foreign currencies.
Market
Structure is an organizational characteristic of a market that which affect
the firm’s pricing and nature of competition.
Market
Share is a portion of a whole market controlled by a particular firm’s
product.
TYPES
OF MARKET STRUCTURE
There are 2 major divisions of the types.
a.
Perfect market
b.
Imperfect market.
1.
Monopoly
2.
Oligopoly
3.
Monopolistic Competition
4.
Perfect Market
1.
MONOPOLY
This exists when a single firm is the only supplier of a unique product.
The firm is the monopolist and has control over price or output, being the only
supplier but cannot control both at the same time. Ex. PHCN.
Features of Monopoly Market
1.
Single supplier
2.
Product has no substitute
3.
There is restriction on entry into the market
4.
Profit is the main motive of the monopolist
5.
A monopolist can control either price or output
Causes of Monopoly
1.
Granting of patent right and trademark for
inventing a product
2.
Merging firms into one to ensure economies of
large scale
3.
Act of parliament
4.
State monopoly, mainly to prevent exploitation
5.
Having control over source of raw materials.
EQUILIBRIUM OF A MONOPOLIST
A monopolist can determine either output or price but not both at the
same time. Being the only firm in the industry, it is faced with a downward
sloping demand curve and maximizes profit when its MC=MR or when MC curve cuts MR curve from below and the slope of MC
is greater than the slope of MR at the point of intersection.
A monopolist can make abnormal or super-profit both in the short and long
run, since entry and exit is restricted, normal profit or loss.
Abnormal Profit:
Under equilibrium conditions, a monopolist will make abnormal profit if
he is able to minimize his average cost and maximize his average revenue. That is, if his AR is greater than AC.
(PLOT GRAPH M1)
Normal Profit:
Normal profit is the exact cost of the services provided by an entrepreneur.
A monopolist making normal profit has his AR equal to AC.
(PLOT GRAPH M2)
Loss:
Although it is rare for a monopolist to make loss both in the short and
long run being the only firm in the industry, if a monopolist’s AC exceeds AR,
then he is making a loss.
(PLOT GRAPH M3)
Advantages of monopoly:
1.
High profit.
2.
Stability of price, since one firm makes price.
3.
No unhealthy rivalry
4.
Wastage is reduced.
5.
Effective and efficient management of resources.
Disadvantages of monopoly
1.
Resources are ineffectively allocated.
2.
Consumers are exploited.
3.
Consumer’s choices are restricted.
4.
Can result in artificial scarcity.
5.
Creates income inequality.
Control of monopoly
1.
Discouraging merger.
2.
Price should controlled by the government.
3.
Monopolist profit should be taxed.
4.
Privatization of monopoly firms.
PRICE
DISCRIMINATION
This is a situation where a seller charges different prizes to different
buyers for the same product. A
discriminating monopolist charges different prices to different buyers for
the same product.
Conditions
for price discrimination:
1.
Demand elasticity of the product must be
different among different buyers.
2.
Market should be segregated (separated)
3.
Transfer of product from low priced to high
priced buyers must be avoided.
2. OLIGOPOLY
This market structure exists when there are few firms in an industry controlling
more than half the entire market share.
It can easily be found in the smart-phone industry, where firms like Samsung,
Apple and Huawei controls about 59% of the entire market.
Features of Oligopoly Market
1.
Few firms dominate the entire market.
2.
There is no fixed pattern of pricing since each
firm has its own pricing policy.
3.
There is some level of inter-dependence as the
action of firm might affect the other.
4.
The firms in the industry spend a lot in
advertisement so as to control a large portion of the market.
5.
Each firm keeps close watch on the activities of
another so as to counter any of their moves.
3. MONOPOLISTIC COMPETITION
This is a market where there are many sellers dealing on differentiated
but close substitute products. Ex. Soft-drink industry
FEATURES
OF MONOPOLISTIC MARKET
1.
Large number of sellers.
2.
There is freedom of entry and exit unlike monopoly
3.
Product is different, but perfect substitute of
another.
4.
The market is faced with downward sloping demand
curve.
5.
Profit maximization is the main motive.
(Price and output determination is the
same as in monopoly market above. Draw the graphs)
4. PERFECT COMPETITION
This is a market where there are many sellers of an identical product
with perfect knowledge of the market situation and perfect mobility of
resources.
Features
of Pure Competition
1.
Many buyers and sellers
2.
Goods are identical
3.
Perfect knowledge of the market
4.
All firms are price takers
5.
Faced with perfectly elastic demand curve
Advantages of Perfectly
Competitive Market
1.
There is consumer sovereignty
2.
Free movement of factors of production
3.
Resources are effectively allocated to consumer
satisfaction.
4.
Healthy competition makes for efficiency
5. There
is full employment of resources.
Disadvantages of
Perfect Market
1.
Risk of overproduction
2.
Unhealthy rivalry
3.
Can result in wastage
4.
Little or no progress due to duplication and no
innovation as in monopoly.
PRICE
AND OUTPUT DETERMINATION IN PURE MARKET
Faced with perfectly elastic demand curve, firms are price takers and can
only control output to make abnormal profit in the short run and normal profit
in the long run. Any firm producing at a higher AC to AR will make loss and may
eventually exit from the market.
The most profitable output occur when MR=MC=AR=P=D
Abnormal Profit:
A perfect competitor can make abnormal profit if his AR exceeds AC under
equilibrium.
(PLOT GRAPH M4)
Normal Profit:
In the long run, a perfect competitor is likely to make only normal
profit since there are now many firms in the market. Under equilibrium, normal
profit occurs when AR equals AC.
(PLOT GRAPH M5)
Loss:
Both in the short and long run, a perfect competitor an incur losses if
his AC exceeds AR.
(PLOT GRAPH M6)
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