WHAT IS MARKET?

A market is defined as the sum total of all the buyers and sellers in
the area or region under consideration. The area may be the earth,
or countries, regions, states, or cities.
MARKET STRUCTURE
Market structure refers to the nature and degree of competition in
the market for goods and services. The structures of market both for
goods market and service (factor) market are determined by the
nature of competition prevailing in a particular market.
TYPES OF MARKET
MONOPOLISTIC COMPETITION
Monopolistic competition theory was developed in 1930s by the American
economist Edward Chamberlin.
Monopolistic competition is more realistic than either pure competition or
monopoly.
It is a blending of perfect competition and
monopoly.
MONOPOLISTIC COMPETITION
◦ A market situation in which a large number of firms produce similar but not
identical products
◦ Entry into the industry is relatively easy
Characteristics
◦ Large number of buyers and sellers

◦ Products Differentiation

◦ Sales promotion and advertising

◦ Easy entry and exit of firms

◦ Lack of perfect knowledge

LARGE NUMBER OF BUYERS AND
SELLERS
•There are large number of firms but not as large as under perfect competition.
•That means each firm can control its price-output policy to some extent. It is
assumed that any price-output policy of a firm will not get reaction from other
firms that means each firm follows the independent price policy.
•If a firm reduces its price, the gains in sales will be slightly spread over many of
its rivals so that the extent to which each of the rival firms suffers will be very
small. Thus these rival firms will have no reason to react.
PRODUCT DIFFERENTIATION
•Product differentiation refers to a situation when the buyers of the product
differentiate the product with other.
•Basically, the products of different firms are not altogether different; they are
slightly different from others.
•Although each firm producing differentiated product has the monopoly of its
own product, yet it has to face the competition.
•This product differentiation may be real or imaginary. Real differences are like
design, material used, skill etc. whereas imaginary differences are through
advertising, trade mark and so on.
SELLING COST
•Every firm tries to promote its product by different types of expenditures.

•Advertisement is the most important constituent of the selling cost which

affects demand as well as cost of the product.

•The main purpose of the monopolist is to earn maximum profits; therefore, he

adjusts this type of expenditure accordingly.
FREE ENTRY AND EXIT OF FIRMS
•Like perfect competition, under monopolistic competition also, the firms can
enter or exit freely.
•The firms will enter when the existing firms are making super-normal profits.
•With the entry of new firms, the supply would increase which would reduce the
price and hence the existing firms will be left only with normal profits.
•Similarly, if the existing firms are sustaining losses, some of the marginal firms
will exit.
•It will reduce the supply due to which price would rise and the existing firms will
be left only with normal profit.
LACK OF PERFECT KNOWLEDGE
•The buyers and sellers do not have perfect knowledge of the market.

•There are innumerable products each being a close substitute of the other. The
buyers do not know about all these products, their qualities and prices.
DEMAND CURVE UNDER MONOPOLISTIC
COMPETITION
•As firm produce a differentiated product, they will have a certain amount of
market power due to brand loyalty.
•Firms are therefore not price takers, as they can raise price without losing all of
their customer.
•The demand curve will be downward sloping, but relatively elastic due to the
number of close substitutes.
SHORT-RUN EQUILIBRIUM WITH MONOPOLISTIC
COMPETITION (with profits)

MC
ATC

pP1 d
price in rs.

ATC • Price (P1) > ATC

A • Economic profit
Profits
MR

q
Quantity

15
SHORT-RUN EQUILIBRIUM WITH MONOPOLISTIC
COMPETITION (with losses)
MC ATC

ATC
Rs per Unit

P1
d
Losses
A -Price (P1) < ATC
-Economic loss

MR

Quantity

16
SHORT-RUN AND LONG-RUN EQUILIBRIUM WITH MONOPOLISTIC COMPETITION (break
even point)
Firms make normal profit in the long run as there is free entry and exit and they have limited market power

MC ATC

T
P1 =
Rs. per Unit

ATC
d
A
-Price (P1) = ATC
-Normal rate of return
MR

Quantity

17
PRICE AND QUANTITY SOLD

Prices and quantity sold under monopolistic competition are in between the prices /quantity
sold under perfect competition and the prices/quantity sold under monopoly. Prices are more
than the prices under perfect competition and less than the prices under monopoly and the
quantity sold is more than the quantity sold in perfect competition and less than the quantity
sold in monopoly situation
 COMARING PERFECT COMPETITION
WITH MONOPOLISTIC COMPETITION
Perfect Competition Monopolistic Competition

One of many sellers , no barriers to One of many sellers, no barriers to

entry, and no long term profit entry, and no long term profit

Perfectly elastic demand (price Faces elastic market demand (price

taker) maker)

Must only produce more Must lower price

to sell more to sell more

All units sold for price equal to MR All units sold for price greater than
(P=MR) MR (P>MR)
Thank You!