Market Classifications Lecture PDF

Market Classifications  Demand Curve Faced By The Farm Every economic establishment tries to obtain the largest net profit Determining net profit requires knowledge of production costs & its total revenue Knowledge of the total revenue requires knowledge of the...

Market Classifications  Demand Curve Faced By The Farm Every economic establishment tries to obtain the largest net profit Determining net profit requires knowledge of production costs & its total revenue Knowledge of the total revenue requires knowledge of the prices & production size Knowledge of the price & production size requires knowledge of the demand curve facing it The demand curve facing the firm varies depending on the type of market  Market Classifications Definition of Market The place or area where buyers and sellers meet to buy and sell a particular commodity Forms of Market 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly  Perfect competition A market is considered a perfectly competitive market when it has the following characteristics : (⑴)Large number of buyers and sellers: that no individual buyer or seller can influence (4) Free entry and exit the market price and output by his independent the market action (2) Homogeneous products (5) No government regulation. Producers produce a homogeneous or There is no government interference in identical goods that consumers this market form such as subsidies, cannot distinguish between them. rationing of essential goods (3) Perfect knowledge of market conditions: (6) Uniform price: Buyers and sellers have full knowledge of the at each time price of transactions take place in the market  Demand curve faced by the producer in a perfectly competitive market One of the basic characteristics of a perfectly competitive market is the presence of a very large number of producers This leads to decrease in the share of each of them of the total production in market. therefore, decrease the ability to influence the market price for the commodity Means that the producer under perfect competition can't change the market price Means that the demand elasticity facing a producer for his commodity nearly infinity Demand curve in faced by the producer in a perfectly competitive market perfectly competitive market  Equilibrium of an individual producer in a perfectly competitive market The price in a perfectly competitive market is the same for all establishments But the establishments vary among themselves in the extent of their economic efficiency of production Low production High production efficiency efficiency represented by represented by the high average the low average of its production of its production costs costs The equilibrium is determined by the situation in which the marginal costs of the unit are equal to its marginal revenue which represents (under perfect competition) the market price An economic establishment that achieves abnormal profit An economic establishment that achieves normal profit An economic establishment that achieves a loss An economic establishment that achieves a loss  Monopoly Monopoly form is a market where there is single seller of a product, and he has full control over the supply of that unparalleled commodity. The monopoly market has The following Characteristics : (1) There is a single seller or (5) A monopoly firm earns producer of the product. abnormal profits (2) There is no distinction (4) There are no close substitutes between a producer and an of the commodity produced by industry under monopoly monopoly seller (6) There is restriction on (3) Seller is a price maker. entry or exit of other firms.  Causes of monopoly market (1) Exclusive ownership of important raw materials (2) Exclusive knowledge of production techniques. (3) Patent rights (4) Foreign trade barriers imposed by the government  Demand curve faced by the producer in a monopoly market Production Price Total Average Marginal revenue revenue revenue 1 10 10 10 10 2 9 18 9 8 3 8 24 8 6 D 4 7 28 7 4 5 6 30 6 2 6 5 30 5 0 7 4 28 4 -2 8 3 24 3 -4 9 2 18 2 -6 10 1 10 1 -8  Equilibrium of the monopolist producer The monopolist producer tries to obtain the maximum possible profit from his output. This is achieved by the situation in which marginal revenue equals marginal costs. However, what distinguishes the monopolist is that his marginal revenue doesn't equal the price of the commodity The price in monopoly is greater than marginal revenue at any level of sales When the monopolist achieves his goal, he is able to sell his commodity at a price that exceeds its marginal revenue  Monopolistic Competition In a monopolistic competitive market, the number of sellers is large, but each seller has a product not completely like from those of his rivals, so Each firm has a kind of limited monopoly of its own product The monopolistic competitive market has The following Characteristics : (1) The number of firms is fairly Large (3) Individual pricing by a firm. (4) Selling Costs (2) Differentiation of Product Every firm tries to promote its sales through expenditure on (5) Free entry and exit the market advertisement  Oligopoly Oligopoly is market form where there are only a few producers/sellers of a commodity, which number of firms that can keep watch on the actions of rivals and behave accordingly So The firm cannot take independent action without thinking of in what way its opponent firms will react Kinds of Oligopoly (2) Differentiated Oligopoly (1) Pure Oligopoly products are Differentiated but close The market where the products substitutes for each other. are homogenous, Price change by one firm has less So any change in price by one effect upon rival firms firm has a substantial effect on such industries as automobiles, the price & sales of other motorbikes, refrigerators, such industries as cement, steel,. televisions Thank you