Unit 3
Objectives and equilibrium of the
firm
contents
Kamolika- Market structure, perfect
competion
 Lochani- Monopoly n monopolistic
structure
 Manish-Oligopoly
 Leena-Types of oligopoly
 Kritika-Output determination under
various market structure

Market Structure:- Perfect
competition
Market structure
Perfect competition
 Monopoly
 Oligopoly
 Monopolistic compitition

Perfect competition
There are many buyers and sellers of
product.
 The product is homogeneous.
 Perfect mobility of resources.
 Economic agents have perfect knowledge
of market condition.

Characteristics of P. C.
Large no. of buyers and sellers.
 Free entry and exit of firms.
 Government non intervention.
 Product homogeneity.
 Perfect knowledge of market condition.
 Absence of transport costs element.

MONOPOLY
AND
MONOPOLISTIC
COMPETITON

MONOPOLY :- Monopoly is that market
from in which a single producer control the
entire supply of a single commodity which has
no close substitute.
 There must be only one seller or producer.
The commodity produced by producer must
have no close substitutes.
 Monopoly can exist only when there are strong
barriers to entry.

•FEATURES:



There is a single producer or seller of the
product.
There are no close substitutes for the
product. If there is a substitute, then the
monopoly power is lost.
No freedom to enter as there exist strong
barriers to entry.
The monopolist may use his monopolistic
power in any manner to get maximum
revenue.
MONOPOLISTIC COMPETITION

Monopolistic competition refers to competition
among a large number of seller producing close
but not perfect substitutes.

Perfect competition & monopoly are rarely found
in the real world.
DEFINATION:
Edward. H. Chamberlin…
Monopolistic competition is more
realistic than either pure competition or
monopoly. It is a blending of competition &
monopoly.

“There is competition which is keen though not
perfect , between many firms making very
similar product”.
FEATURES
1.
Large number of seller
2.
Product differentiation
3.
Free entry & exit of firms
4.
Selling cost
5.
Group equilibrium
6.
Nature of demand curve
OLIGOPOLY
DEFINATION
This term is derived from two Greek words , ’ oligi ’ ,
which means a few and ‘polien’, which means ‘to sell’ .
Oligopoly is defined as the market structure in which
there are a few sellers of the homogeneous or
differentiated products , who intensively compete against
each other and recognize interdependence in their
decision making .Actual number of sellers under
oligopoly depends on the size of the market . If there are
only two sellers , it is called dupoly .
Fellned calls oligopoly as competition among few
sellers .
J .M . Clark terms it as ‘workable competition’.
Oligopoly is also often referred to as incomplete
competition,limited competition,multiple monopoly,
incomplete
Features of Oligopoly
1. Few Dominant Firms
Under oligopoly , few large sellers dominate the
dominate the market for a product .Each seller
has sizeable influence on the market .Every firm
possesses a large degree of monopoly
power(when products are differentiated ) and
accounts for a large part of market’s total demand
. It uses all resources at its disposal to counter the
actions of rival firms to ensure its survival and
growth in the market . Thus , each firm acts as a
strategic competitor.
2.MUTUAL
INTERDEPENDENCE
As the number of firms is small size each(sizeable)
firms has to consider the possible reaction of the
rivals, while taking business decisions as to its price ,
outputs or promotion. This will enable the firm to
know how the buyers of its product will react to any
such change . When on one hand ,every firm is in a
position to influence the price , output and profit s of
other firms in the market . On the other hand , it
cannot fail to take into account the reaction of other
firms to its price and output policy. Therefore there is
a good deal of interdependence of the firms under
oligopoly .
Indeterminate demand curve

The element of interdependence of firms has
made the systematic analysis of oligopoly very
difficult . The mutual interdependence also
make predictions and hence optimal decision
very difficult due to the atmosphere of
uncertainty no firms under oligopoly is in a
position to visualize consequences of its price
outputs with any degree of accuracy.
Emergence
of Oligopoly
Now, let us examine why does oligopolistic
tendency arise in the market . There are various
reasons for the emergence of oligopoly
1.Huge Capital Investment
Industries like cement ,steel , chemical etc require
huge capital investments well as recurring expenses.
The cost and time that new firm will have to face make
the entry unviable and unattractive . Consequently ,
only a few big firms continue to operate in the market
.Consequently , only a few big firms continue to
operate in the market . Few small firms produce
enough to meet the entire demand at lower cost than a
large number of firms dividing the total output.
2.Absolute Cost Advantage
A small number of firms may secure absolute
advantage in cost over all others , which permits them
to operate profitably even at a low price at which the
others cannot survive .
3.Product Differentiation
A few firms in some cases obtain an advantage of
product differentiation. Buyers develop brand
loyalties and then prefer these products to other
varieties of the same product .
4. Mergers
Modern business firms are now learning to
eliminate competition through mergers . As the
number of firms decline ,profits rise and
oligopolies are established.
TYPES OF OLIGOPOLY
1.
Product Differentiation:- On the basis of
product differentiation or nature of the product
and marketed, oligopoly may be classified
pure oligopoly and differentiated oligopoly.
2.
Entry of Firms:- on the basis of ease of entry
of competitors in the market, oligopoly
clasified as open or closed.
Leadership :- on the basis of presence of price
leadership ,the oligopoly situation may be
classified as partial or full.
4. Agreement :- oligopoly may be classified into
collusive and non-collusive oligopoly on the
basis of agreement and understanding among the
firms.
5. Coordination :- an oligopoly situation may be
classified organised and syndicated oligopoly.
3.
Price n output decisions under
different Market structure
Market structure
Market means any organisation whereby buyers
and sellers of a good r kept in close touch with
each other
-Stonier n Hague
 It means a general field within which d force
determining d price of particular product operate
-Ely

Classification of Market
On the basis of Area (local,national n
international)
 On the basis of Time (very short, short,very
long,long)
 On the basis of nature of transaction (spot
market n future market)
 On d basis of volume of buisness(wholesale n
retail market)

price determination under perfect
competition
Marshal laid emphasis on d role of time element
in d determination of price he distinguish 3
periods in which equilibrium between demand n
supply was brought about
 1) Market period
 2) short run equilibrium
 3) long run equilibrium

Price output determination under
Monopoly
Marginal cost should be equal to marginal
revenue
 The marginal cost curve should cut marginal
revenue curve 4m below

Degrees of price descrimination
1) Price descrimination of the first degree
 2) Price descrimination of the second degree
 3) Price descrimination of the third degree
