CHAPTER FIVE

CHAPTER FIVE
MARKET STRUCTURE
5.1. The Concept of Market in Physical and Digital Space
• The market may be a physical place or may be virtual/digital space.
Market refers to a physical place where commodities are bought and

sold.
Digital market/virtual space is the marketing of products or services

using digital technologies, mainly on the internet, through mobile phone
Apps, and any other digital media.
Marketing is the process of planning & executing the production, pricing,

promotion, and distribution of goods and services to create exchanges
that satisfy individual and organizational goals.
5.2 Types of market structure
• On the basis of the following criteria: the types of market structure
 Degree of competition among firms in are:
a market,  Perfectly competitive

 The number of buyers and sellers, market
 The nature of the commodity,  Pure monopoly market
 The mobility of goods and factors of  Monopolistically

production, and competitive market
 The knowledge of buyers and sellers  Oligopoly market
about prices in the market,
5.2.1 Perfectly Competitive Market
• A perfectly competitive market or perfect competition is a market structure in

which there are a large number of producers (firms) producing a homogeneous
product so that no individual firm can influence the price of the commodity.
• Assumptions of perfectly competitive market

1. Large number of sellers & buyers (price is determined by market ss & dd
interaction)
2. Homogeneous product i.e. perfect substitutes
3. Free entry and exit
4. Perfect mobility of factors of production
5. Perfect knowledge about market conditions
6. No government interference
• The demand curve of the firm who operates under perfect competition is
perfectly horizontal.
Short Run Equilibrium of the Firm
The main objective of a firm is profit maximization.
If the firm has to incur a loss, it aims to minimize the loss.
Profit is the difference between total revenue and total cost

• TR=P X Q, where P = price of the product
• Q = quantity of the product sold.
• Average revenue (AR):- it is the revenue per unit of item sold.
• Therefore, the firm‘s demand curve is also the average revenue curve.
Marginal Revenue: it is the additional amount of money/ revenue the
firm receives by selling one more unit of the product.
In other words, it is the change in total revenue resulting from the sale of
an extra unit of the product.
It is calculated as the ratio of the change in total revenue to the change in

the sale of the product.
 Thus, in a perfectly competitive market, a firm‘s average revenue, marginal

revenue and price of the product are equal, i.e. AR = MR = P =Df
• We know that in the short the firm can adjust variable inputs in order to
adjust the level of output that can maximize the profit.
• To find the level of output that can maximize the firm’s profit in short run,
we can use two methods.
A)Total Approach
B)Marginal Approach
• A) Total Approach
 In this approach, a firm maximizes total profits in the short run when the
(positive) difference between total revenue (TR) and total costs (TC) is
greatest.
• Note: The profit maximizing output level is Qe because it is at this output
level that the vertical distance between the TR and TC curves (or profit) is
maximized.
B) Marginal Approach
 In the short run, the firm will maximize profit or minimize loss by producing
the output at which marginal revenue equals marginal cost.
 More specifically, the perfectly competitive firm maximizes its short-run total
profits at the output when the following two conditions are met:
• MR = MC
• The slope of MC is greater than slope of MR; or MC is rising).
• (That is, slope of MC is greater than zero).

• Therefore, Slope of MC > slope of MR ------- Second order condition (SOC)
• Slope of MC > 0 (because the slope of MR is zero)
• Graphically, the marginal approach can be shown as follows.

• The profit maximizing output is Qe, where MC=MR and MC curve
is increasing. At Q*, MC=MR, but since MC is falling at this output
level, it is not equilibrium output.
• Whether the firm in the short- run gets positive or zero or negative profit
depends on the level of ATC at equilibrium.
• Thus, depending on the relationship between price and ATC, the firm in
the short-run may earn economic profit, normal profit or incur loss
and decide to shut-down business.
• iii) Normal Profit (zero profit) or break- even point - If the AC is
equal to the market price at equilibrium, the firm gets zero profit or
normal profit.
IV) Shutdown point - The firm will not stop production simply because
AC exceeds price in the short-run.
o The firm will continue to produce irrespective of the existing loss as

far as the price is sufficient to cover the average variable costs.
o This means, if P is larger than AVC but smaller than AC, the firm
minimizes total losses.
o But if P is smaller than AVC, the firm minimizes total losses by

shutting down.
o Thus, P = AVC is the shutdown point for the firm.

• Numerical Example:
• Suppose that the firm operates in a perfectly competitive market. The

market price of its product is $10. The firm estimates its cost of production
with the following cost function:
• TC=2+10q-4q2+q3
A) What level of output should the firm produce to maximize its profit?
B) Determine the level of profit at equilibrium.
C) What minimum price is required by the firm to stay in the market?

5.2.2 Monopoly market
Definition and characteristics
• Monopoly exists when a single firm is the only producer of a product

for which there are no close substitutes.
• X-tics:
1.Single seller
2.No close substitutes: no alternative
3.Price maker: downward sloping demand curve
4.Blocked entry: no competitor due to: economic, legal,
Sources of monopoly
1. Legal restriction
2. Control over key raw materials
3. Efficiency/economies of scale
4. Patent rights
5.2.3 Monopolistically competitive market
It is the market organization in which there are relatively many firms
selling differentiated products.
It is the blend of competition and monopoly.
The competitive element arises from the existence of relatively many

firms and no barrier to entry or exit. … easy entry
The monopoly element results from differentiated products, i.e. similar

but not identical products.
• X-tics:
Differentiated product: the product produced and supplied by many

sellers in the market is similar but not identical in the eyes of the buyers.
• The difference could be in style, brand name, in quality, or others.
• Hence, the differentiation of the product could be real (eg. quality) or

fancied (e.g. difference in packing).
Relatively Many sellers and buyers
Easy entry and exit
Existence of non-price competition

5.2.4 Oligopoly market
X-tics:
1.Few dominant firms
2.Entry barrier
3.Products may be homogenous or differentiated
• A special type of oligopoly in which there are only two firms in the
market is known as duopoly

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CHAPTER FIVE

• The market may be a physical place or may be virtual/digital space.

Market refers to a physical place where commodities are bought and

Digital market/virtual space is the marketing of products or services

Marketing is the process of planning & executing the production, pricing,

• On the basis of the following criteria: the types of market structure

 Degree of competition among firms in are:

a market,  Perfectly competitive

 The nature of the commodity,  Pure monopoly market

 The mobility of goods and factors of  Monopolistically

• A perfectly competitive market or perfect competition is a market structure in

• Assumptions of perfectly competitive market

2. Homogeneous product i.e. perfect substitutes

3. Free entry and exit

4. Perfect mobility of factors of production

5. Perfect knowledge about market conditions

If the firm has to incur a loss, it aims to minimize the loss.

Profit is the difference between total revenue and total cost

• Q = quantity of the product sold.

• Average revenue (AR):- it is the revenue per unit of item sold.

It is calculated as the ratio of the change in total revenue to the change in

 Thus, in a perfectly competitive market, a firm‘s average revenue, marginal

• The slope of MC is greater than slope of MR; or MC is rising).

• (That is, slope of MC is greater than zero).

• Slope of MC > 0 (because the slope of MR is zero)

• Graphically, the marginal approach can be shown as follows.

o The firm will continue to produce irrespective of the existing loss as

o But if P is smaller than AVC, the firm minimizes total losses by

o Thus, P = AVC is the shutdown point for the firm.

• Suppose that the firm operates in a perfectly competitive market. The

B) Determine the level of profit at equilibrium.

C) What minimum price is required by the firm to stay in the market?

• Monopoly exists when a single firm is the only producer of a product

2. Control over key raw materials

It is the blend of competition and monopoly.

The competitive element arises from the existence of relatively many

The monopoly element results from differentiated products, i.e. similar

Differentiated product: the product produced and supplied by many

• The difference could be in style, brand name, in quality, or others.

• Hence, the differentiation of the product could be real (eg. quality) or

Relatively Many sellers and buyers

Easy entry and exit

Existence of non-price competition

1.Few dominant firms

3.Products may be homogenous or differentiated

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