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Book No. – 3 (Economics)
Book Name – Principles of Microeconomics (HL Ahuja)
What’s Inside the Chapter? (After Subscription)
1. Meaning of Market
2. CLASSIFICATION OF MARKET STRUCTURES
2.1. Perfect Competition
2.2. Imperfect Competition
3. CONCEPTS OF AVERAGE REVENUE AND MARGINAL REVENUE
3.1. Average Revenue
3.2. Marginal Revenue
3.3. Average and Marginal Revenue under Imperfect Competition
3.4. Average and Marginal Revenue Under Perfect Competition
4. RELATIONSHIP BETWEEN AR AND MR CURVES
5. AVERAGE REVENUE, MARGINAL REVENUE AND PRICE ELASTICITY OF DEMAND
6. THREE TYPES OF REVENUE (AR, MR, TR) AND PRICE ELASTICITY(e)
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LANGUAGE
Market Structures and Concepts of Revenue
Chapter – 21
Table of Contents
Meaning of Market
- Prices and outputs of products are determined by the market structure in which they are produced, sold, and purchased.
- Economists classify markets in a capitalist economy into four types:
- Perfect competition or pure competition
- Monopolistic competition
- Oligopoly
- Monopoly
- Monopolistic competition, oligopoly, and monopoly are grouped under the term imperfect competition because these markets differ in the degree of imperfection.
- Monopolistic competition is highly imperfect, while monopoly is the most imperfect market structure.
- In economics, the market doesn’t refer to a specific geographical place but to the contact between buyers and sellers for transactions.
- The concept of a market exists when buyers and sellers are in communication to agree on a price and conduct transactions. They may be spread across towns, regions, or countries, but communication (through letters, telegrams, telephones, etc.) enables transactions.
- Because of close and free communication in a market, the price of a homogeneous commodity tends to be the same among different buyers and sellers.
- Cournot, a French economist, defines a market as the whole region where buyers and sellers are in free intercourse, causing the price of the same good to tend toward equality quickly.
- Essential characteristics of a market:
- Commodity being bought and sold.
- The presence of buyers and sellers.
- A place (could be a region, country, or the world).
- Communication between buyers and sellers that ensures one price for the same commodity at the same time.
CLASSIFICATION OF MARKET STRUCTURES
Perfect Competition
- Market structure refers to factors determining the intensity of competition in an industry.
- The three key elements for classifying market structures are:
- Number of firms producing a product.
- The nature of the product (homogeneous or differentiated).
- The ease of entry for new firms into the industry.
- Price elasticity of demand for a firm’s product depends on:
- The number of competitive firms producing similar products.
- The degree of substitution between the firm’s product and its rivals’ products.
- The degree of price elasticity of demand is a distinguishing feature across market structures.
- In perfect competition:
- There is a large number of firms producing a homogeneous product.
- The firm’s output is very small relative to total industry demand, so it cannot influence the price.
- The demand curve facing a firm in perfect competition is perfectly elastic (horizontal) at the market price.
- The price is determined by the market demand and supply (Figure 21.1(a)).
- The firm’s demand curve is horizontal at the price OP (Figure 21.1(b)).
- The price elasticity of demand for a firm is infinite in perfect competition.
- The features of perfect competition are:
- A large number of firms and buyers.
- Products are homogeneous.
- Free entry and exit of firms.
- Perfect information about market prices.
- In monopoly:
- There is a single firm producing or selling a product with no close substitutes.
- The monopolist has full control over the product’s supply, affecting its price.
- The monopolist’s demand curve is downward sloping and steep, indicating that changes in output significantly affect the price (Figure 21.2).
- The monopolist can raise prices by reducing output and lower prices by expanding output.
- Barriers to entry prevent new firms from entering the market.
- According to Prof. F. Machlup, monopolistic competition involves closer substitutes with more elastic demand curves, whereas monopoly involves remote substitutes with steeper demand curves.
- Formula for price elasticity of demand: