MARKET

STRUCTURES
• Market refers to an arrangement that allows
people to transact, or to perform an exchange of
goods and services.
• A market plays a center role in ensuring that sellers
and buyers have a platform to meet, and therefore
giving sellers/producers an opportunity to show case
their good while at the same time giving an
opportunity to buyers/customers to find goods/services
subject to their needs
• In the current world it will be wrong to
suggest that a market is only a physical
place since there are other non-physical
arrangement that still permits people to
transact.
Conditions for Market Existence
• Area
• Goods / Services
• Buyers
• Sellers
• Information/Contact between S & B.
• Price
Categorizing Market Structures
• In analyzing the behaviors of firms, economists have
created categories to explain the relationship firms
have with prices, competition, products, and
entrepreneurship.
• It is important to realize that not every industry fits
perfectly into a particular category.
• The groupings only represent an effort to
consolidate firms to help us understand the
market structure.
• The market structure in which a firm
produces and sells its product is defined by
five characteristics:
• Number of firms
• Type of product
• Price control
• Conditions of entry
• Non-price competition
• Basing on the characteristics that help us to
determine where a certain firm belongs to we get
the four main categories of Market Structures:
- Pure competition (Perfect),
- Monopoly,
- Oligopoly,
- Monopolistic competition.
Pure Competition/Perfect Competition
• This a market structure characterized with many sellers and
buyers who have perfect knowledge/information of the market
situation. Perfect competition is characterized with the
following:
• Many perfectly competitive firms.
There are many perfectly competitive firms. A large number of
these firms act independently of one another. These organizations
offer their products domestically as well as internationally.
• Production of Identical/homogeneous product.
As long as prices are the same as their competitors,
consumers will have no preferences for a product or a
firm. Consumers view perfectly competitive firms as
perfect substitutes for one another because they all make
the same product. Perfectly competitive firms make no
attempt to differentiate their products or compete in any
fashion because of the existence of a market price.
• Firms have no control over price/Price Takers
A price-taking firm enters the market accepting the market price
rather than setting its own price. If a perfectly competitive firm
attempts to set its own price, it will soon fail as a business.
Asking a higher-than-market price would not be in the best
interest of the firm because consumers would quickly substitute.
There would be no reason for the firm to ask for lower than the
market price because the firm is already selling all its quantities
at the market price. Asking for a lower price would deprive the
firm of revenue.
• Free Entry and Exit
The conditions of entry for a perfectly competitive
firm are free and easy. A new firm can join the market
without barriers or obstacles. New firms can freely
enter the market, while old firms can leave without
much difficulty in liquidating their assets. No
significant monetary, legal, or technological hurdles
stand in the way of a perfectly competitive firm.
• Non – Price competition does not exist
In a perfectly competitive market, non-price
competition does not exist. Firms are content
with the market price and quantities offered.
The Demand Curve for PCM
• The Demand Curve for PCM are as follows:

Price Market Price

Quantity Quantity
Market Demand Curve for Perfect The Individual Demand Curve for
Competition Perfect Competition
• The demand for a perfectly competitive firm has little to do with
prices. Because a company accepts the market price, the demand
for its products varies in quantities at one price (the market
price). The perfectly competitive firm has what is called a
perfectly elastic demand. The firm cannot obtain a higher profit
by raising its price or restricting its output.
• It is important to note that the market demand curve for a
perfectly competitive firm is downward sloping and that the
individual firm’s demand curve is perfectly elastic.
Revenue for a Perfectly Competitive firm

• For a perfectly competitive firm, its revenue schedule is exactly the same as its
demand schedule (the demand curve is the same as the revenue curve).
PRICE QD TR MR
200 0 0 -
200 1 200 200
200 2 400 200
200 3 600 200
• In our illustration, total revenue increases by the
same amount each time: 200. Each unit sold adds
exactly its constant price to total revenue.
• When a perfectly competitive firm decides to change
its output, it must consider how this change will
affect its total revenue. Marginal revenue (the change
in revenue when selling one additional unit of
output) will be equal to price for a perfectly
competitive firm.
Illustration of PCM ATC, AVC & MC
• PCM ATC, AVC & MC
MC ATC

Price/Costs
AVC
P3

P2

P1

Q2 Q2 Q3 Quantity
• Remember that the price lines in a perfectly
competitive firm are horizontal.
• This previous figure demonstrates a market price.
The average revenue for a perfectly competitive firm
is calculated by dividing total revenue by quantity,
and the marginal revenue is the change in total
revenue as one more product is sold. If only one price
is represented, average and marginal revenue have to
be the same.
• This is a graph commonly associated with perfectly competitive
firms because of the horizontal price lines that illustrate a
perfectly elastic demand for the firm. The three possible prices
do not mean the firm has a choice of prices.
• Note that the firm is a price taker, and these are just three
possible scenarios of market prices. Firms determine their profit
maximizing points at the quantity where MR = MC. The long-
run condition for a perfectly competitive firm is when you have
the minimum point of the average total cost (ATC) curve
(productive efficiency) combined with the point where the MC
curve intersects with marginal revenue (allocative efficiency).
Moodle Assignment:
•Using Illustration show how does a firm in PCM make
profit in the short run?
•Using Illustration show why do Economist argue that there
is no profit in the long run for a firm operating in PCM?
•Examine a scenario with a diagram of how a firm can
continue operating in the PCM even if it is making losses.?
NB: Submission should be done on 25th November, 2019 (23:59 Hrs.).
• All sources used should be hardcopies of Literatures from the IAA Library (A
minimum of 5 books is a must), excluding Ambilikile, Saleemi, and Tanzania
Institute of Bankers/NBAA Text.
• The work should be typed and justified with Times New Roman size 12, line
spacing of 1.5, and submitted online in a PDF format.
• Failure to adhere to the Instruction will amount to zero marks.
• Failure to submit the assignment online as specified will amount to zero marks.
• Failure to properly illustrate with one’s own drawing (not copied) will amount to
zero marks.
• Plagiarism will amount to zero marks.
• There will be no negotiate for non-submission.
 END
END is never really an END but rather it is Effort’s Never Dies