E-LESSON-6

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MBA 2 All right are reserved with CU-IDOL MANAGERIAL ECONOMICS Course Code: MBA601 Semester: First SLM UNITS : 7 E-Lesson : 6 www.cuidol.in Unit-7 (MBA601)

MARKET STRUCTURE INTRODUCTION 33 OBJECTIVES Student will be able to The market is a set of conditions in which Explain meaning and different types of market. buyers and sellers come in contact for the purpose of exchange. The market situations Analyse different features of market structures and vary in their structure. Different market to identify which type of market is a reality. structures affect the behaviour of buyers and sellers (firms). Answer how pricing and output decision are taken under different market conditions. A market is understood as a place where commodities are bought and sold at retail or Discuss the meaning of different concept like firm, wholesale prices. industry equilibrium etc. In economics, the term “market” does not Elaborate the approaches to equilibrium: MC & refer to a particular place as such but it refers MR approach. to a market for a commodity or commodities. www.cuidol.in Unit-7 (MBA601) INASllTITriUgThEt aOrFeDreISsTeArNveCdE AwNitDh OCNUL-IIDNOE LLEARNING

TOPICS TO BE COVERED 4 > Classification of Market Structures > Markets based on Time Element > Perfect Competition > Monopoly > Types of Monopoly > Imperfect Competition > ‘Firm’ and ‘Industry’ > Profit Maximisation www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

INTRODUCTION TO MARKET 5  DEFINITION OF MARKET: An arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods is described as market. It follows that for the existence of a market, buyers and sellers need not personally meet each other at a particular place. They may contact each other by any means such as telephone or telex.  Types of Market – Structures Formed by the Nature of Competition: Traditionally, the nature of competition was adopted as the fundamental criterion for distinguishing different types of market structures. The nature of competition among the sellers is viewed on the basis of two major aspects : (1) The number of firms in the market; and (2) The characteristics of products, such as whether the products are homogeneous or differentiated. On the selling side or supply side of the market, the following types of market structures are commonly distinguished: (1) Perfect competition; (2) Monopoly; (3) Oligopoly; and (4) Monopolistic competition. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

CLASSIFICATION OF MARKET 6 www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

CLASSIFICATION OF MARKET 7 STRUCTURES  Markets may be classified on the basis of different criteria, such as geographical space or area, time element and the nature of competition. This chart pinpoints the classification of different types of market structures. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

MARKETS BASED ON TIME ELEMENT 8  Time element is the functional or operational time period pertaining to production processes and market forces at work. The time element may be distinguished by the following functional time periods of varying durations, namely:  market period,  short period,  long period, and  very long period or secular time. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Markets Based on Time Element  Very Short Period/Market Period: The market period is regarded as a very short time period during which it 9 is physically impossible to change the stock of a commodity even by a single unit further. The basic characteristic of a very short period (or market period) market is that in this market it is not possible to make any adjustments in the supply to the changing demand conditions. In a very short period market, the equilibrium price of a commodity is referred to as the “market price” which is established by the intersection of market period demand and market period supply.  Short Period Market: The short period is a functional time period during which it is possible for a firm to expand output of a commodity to some extent by changing the variable inputs such as labour raw materials, etc., under its fixed plant size. Thus, the firm is in a position to make some adjustment in the supply in the changing demand conditions. In the short period market, the equilibrium price is established by the intersection of short period demand and short period supply. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Markets Based on Time Element 10  Long Period Market: The long period refers to a functional time period which is sufficient to permit changes in the scale of production to a firm by changing its plant size. In the long period market, the firm is in a position to make better and sufficiently well and even full adjustments in supply in the changing demand conditions. In the long period market, the equilibrium price of a commodity is established by the interaction of long period demand and long period supply.  Very Long Period/Secular Market: The very long period market is a secular time period which runs over a series of decades. During such a very long functional time period, dynamic changes take place in demand and supply situations. There can be perfect adjustment between demand and supply in the secular period. Thus, secular equilibrium is determined between demand and supply in the secular period. However, the secular period is of little theoretical significance on account of too long period involved in its operation. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Perfect Competition Perfect competition refers to the market structures where competition among the sellers and buyers prevails in its 1 1 most perfect form. In the perfectly competitive market, a single market price prevails for the commodity, which is determined by the forces of total demand and total supply in the market. Under perfect competition, every participant (whether a seller or a buyer) is a price-taker. Conditions or Characteristics of Perfect Competition:  Large Number of Sellers  Large number of Buyers  Perfect Knowledge of Market Conditions  Perfect Mobility of Factors of Production  Government Non-Intervention  Absence of Transport Costs Element.  Product Homogeneity  Free Entry & Exit of Firms www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

MONOPOLY 12  Monopoly is the other extreme form of market situation.  Pure monopoly is a market structure in which there is only one seller. He controls the entire market supply of a product. Because, there is no rival producing a close substitute, the monopoly firm itself is an industry, so its output constitutes the total market supply.  In a monopoly market, the seller (the monopolist) is faced with a large number of competing buyers. But, being the sole supplier, the monopolist has a strong hold over price determination. He usually tries to set the price and output of his product entirely in his own interests of profit maximisation. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

MONOPOLY Features of Monopoly: 13  There exists only one seller but there are many buyers.  The monopoly firm is the industry.  There are many entry barriers such as natural, economic, technological or legal, which do not allow competitors to enter the market. The monopolist has, therefore, complete hold over the market supply and price determination.  A monopoly firm is a “price-maker.” In a monopoly market, the price is solely determined at the discretion of the monopolist, since he has control over the market supply.  There are no closely competitive substitutes for the product of the monopolist. So the buyers have no alternative or choice. They have to either buy the product from the monopolist or go without it.  Monopoly is a complete negation of competition.  Since a monopolist has a complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

TYPES OF MONOPOLY 14 1. Pure Monopoly and Imperfect Monopoly:  Pure monopoly means a single firm which controls the supply of a commodity which has no substitutes, not even a remote one. It possesses absolute monopoly power. Such a monopoly is very rare.  Imperfect monopoly means a limited degree of monopoly. It refers to a single firm which produces a commodity having no close substitutes. The degree of monopoly is less than perfect in this case and it relates to the availability of a close substitute. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

2. Legal, Natural, Technological and Joint Monopolies: 15  Legal monopolies emerge on account of legal provisions like patents, trade marks, copyrights etc.  Natural advantages like good location, old-age establishment, involvement of huge investment, business reputation etc. confer natural monopolies on many firms.  Technological expertise, economies of large scale and efficiency of superior capital use and the process of mechanisation etc., confer technological monopolies to big firms.  Through business combinations like trusts, cartels, syndicates, etc., some firms may unite in a group and acquire joint monopolies in the market. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

3. Simple Monopoly and Discriminating Monopoly: 16 All right are reserved with CU-IDOL  A simple monopoly firm charges a uniform price for its product to all the buyers. A simple monopoly operates in a single market.  A discriminating monopoly firm charges different prices for the same product to different buyers. A discriminating monopoly operates in more than one market. 4. Private Monopoly and Public or Social Monopoly:  When an individual or a private body controls a monopoly firm, it is regarded as a private monopoly.  When production is solely owned, controlled and operated by the state, it is regarded as a social or public monopoly. Public monopolies are confined to nationalised industries. www.cuidol.in Unit-7 (MBA601)

IMPERFECT COMPETITION  In reality competition is never perfect. So, there is imperfect competition when perfect form of competitio1n7 among the sellers and the buyers does not exist. This happens as the number of firms may be small or products may be differentiated by different sellers in actual practice. Similarly, there is no pure monopoly in reality. Imperfect competition covers all other forms of market structures ranging from highly competitive to less competitive in nature. Traditionally, oligopoly and monopolistic competition are categorized as the most realistic forms of market structures under imperfect competition. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

OLIGOPOLY 18 All right are reserved with CU-IDOL  Oligopoly refers to the market structure where there are a few sellers (more than two but not too many) in a given line of production.  Fellner defines oligopoly as “competition among the few.” In an oligopolistic market, firms may be producing either a homogeneous product or may have product differentiation in a given line of production. www.cuidol.in Unit-7 (MBA601)

Oligopoly Features of Oligopoly: 19 All right are reserved with CU-IDOL  There are a few sellers supplying either homogeneous products or differentiated products.  Firms have a high degree of interdependence in their business policies in fixing price and determining output.  Firms under oligopoly have always the fear of retaliation by rivals.  Competition is of a unique type in an oligopolistic market. Here, each oligopolist faces competition, and has to make a constant struggle against his rivals.  Advertising and selling costs have strategic importance to oligopolist firms. www.cuidol.in Unit-7 (MBA601)

MONOPOLISTIC COMPETITION 20  Monopolistic competition refers to the market structure in which there are a large number of firms producing similar but not identical products.  Monopolistic competition is a blend of monopoly and competition.  Monopolistic competition is similar to perfect competition in that it has a large number of sellers, but its dissimilarities lie in its product differentiation. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Monopolistic Competition 21 Following are the major characteristics of monopolistic competition:  There are a large number of sellers.  There are a large number of buyers.  There is product differentiation. Each seller tries to distinguish his product from the rest.  Each seller resorts to advertising and sales promotion efforts. Thus, selling costs are a unique feature of monopolistic competition.  Monopolistic competition has two aspects: (i) price competition, i.e., sellers compete in price determination, and (ii) non-price competition, i.e., sellers compete through product improvements and advertising sales promotion efforts. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

FIRM AND INDUSTRY 22 Firm  Firm refers to a business unit — an enterprise undertaking the production of a commodity.  In economic theory the term firm connotes a particular production unit. It symbolises a unit of control over a group of factors of production co-ordinated for the purpose of producing a commodity.  A firm may be a small one or a very large one.  The term ‘small firm’ refers to a single plant, factory, business or retailing unit, which has small capital investment, producing small quantities of a product per unit of time.  On the other hand, a large firm is one which has a number of plants under a complex managerial organisation, with a diversity of financial capital investments, which may produce a wide variety of products and in large quantities per unit of time. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Firm and Industry Industry 23  The term industry refers to a group of firms engaged in the production of a specific commodity, including its close substitutes. Thus, an industry is a set of firms producing homogeneous goods.  Here, the term ‘homogeneity’ implies similarity of productive activity, results, and satisfaction of similar wants by similar kinds of goods. Thus, there are firms, which are engaged in the same type of production. All these firms together constitute the industry. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

PROFIT MAXIMISATION 24  In determining the equilibrium of a firm, it is assumed that the firm aims at maximisation of its profits.  Profit in the ordinary sense is understood as the excess of the firm’s total revenue of sales proceeds of a given output over its cost of production. Symbolically, P = R – C where, P = profit, R = total revenue, and C = total cost when R > C, then R – C is a positive value; it is called profit. If, however, R < C, then R – C is negative, it is called loss www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Profit Maximisation 25 Economists have, therefore, two distinct notions of profit: (i) Normal Profit and (ii) Super-normal Profit.  Normal Profit: It refers to that amount of earnings which is just sufficient to induce the firm to stay in the industry. Normal profit is, thus, the minimum reasonable level of profit which the entrepreneur must get in the long run, so that he is induced to continue the employment of his resources in its present form. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

Profit Maximisation 26  Normal profit is the opportunity cost of entrepreneurship. It is equivalent to the transfer earnings of the entrepreneur. That means, if the entrepreneur fails to earn the normal rate of profit in the long run, he will close down the operation of his firm and quit the industry in order to shift his resources elsewhere.  It must be remembered that the entrepreneur desires a fixed amount as normal profit, which is independent of the output. So, normal profit as a factor cost is a fixed implicit cost element. Evidently, when output expands, total normal profit like TFC gets spread over the range of output. This has a bearing on the shape of the average cost curve (AC). www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

NORMAL PROFIT 27 In this figure, we have drawn two AC curves, one excluding normal profit- cost element (AC) and another by including it (AC + NP). It may be observed that as we move from left to right, the vertical distance between AC and AC + NP curves tend to become narrow in a steady manner. This implies that as output increases, normal profit per unit of output, diminishes. However, the total normal profit at all levels of output remains the same. Geometrically, thus, when output is OA, the average normal profit is QR. When output rises to OB, the average normal profit diminishes to VW. Total normal profit is PQRS in the former case and TVWZ in the latter case. However, PQRS = TVWZ. Normal profit is measured by the difference between AC + NP and AC curves. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

SUPERNORMAL PROFIT 28  Profits in excess of normal profit are considered as supernormal. Since normal profit is included in the cost of production, supernormal profit is obtained when total revenue exceeds total costs (i.e., TR > TC). It is also called pure business profit or “excess profit.”  Supernormal profit depends on the demand conditions in the business, which are uncertain and unpredictable. Thus, supernormal profit is the reward for bearing uncertainties and unpredictable risks of business. Sometimes, in a competitive market, supernormal profit is also earned due to extraordinary efficiency on the part of the entrepreneur.  Incidentally, when TR > TC, such that only a part of normal profit is earned by the firm, it is called subnormal profit. Subnormal profit is the profit below the normal profit earned when total revenue covers up explicit costs fully and a part of implicit cost of entrepreneurial services. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

PROFIT MAXIMISATION 29  From the above analysis, it follows that an entrepreneur’s income consists of two elements: normal profits and surplus of total revenue over total cost, which is termed as residual income. Normal profits are the minimum income which the entrepreneur must receive if he is to continue to remain in his line of production. They are a part of the costs, and in pursuing the objective of profit maximisation, the entrepreneur does not aim at maximising normal profits. What he aims at maximising is the residual income, i.e., the difference between the total revenue and the total cost, which is known as ‘supernormal profit.’  A firm is said to be in equilibrium when it has no inclination to expand or to contract its output. The firm will reach such a state when it maximises its residual profits. Residual profits are the difference between total revenue and total cost. The firm will, therefore, reach equilibrium when it maximises the difference between its total revenue and total cost.  The behavioural rule of profit maximisation or the equilibrium output of the firm is explained by the Marginal Revenue-Marginal Cost equality approach (MR: MC Approach) www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

SUMMARY 30  Market refers to a situation where the buyers and sellers contact either directly or indirectly and conduct exchange transactions. Market need not be a particular area, or a place.  Market can be classified on the basis of an area, the nature of business transactions, the volume of business and time.  Market can also be classified on the basis of competition as perfectly competitive market, monopoly market and imperfectly competitive market.  Firm refers to a business unit — an enterprise undertaking the production of a commodity. In economic theory the term firm connotes a particular production unit.  The term industry refers to a group of firms engaged in the production of a specific commodity, including its close substitutes.  Normal profit is the opportunity cost of entrepreneurship. It is equivalent to the transfer earnings of the entrepreneur.  Supernormal profit depends on the demand conditions in the business, which are uncertain and unpredictable.  The marginal cost-marginal revenue (MR : MC) approach clearly shows the behavioural role of profit maximisation by using price as an explicit variable. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

MULTIPLE CHOICE QUESTIONS 1. A market refers to contact arrangements between 31 (a) Buyer and seller (b) Merchants and traders (c) Wholesaler and retailers (d) Business people 2. In international trade, buying from abroad is termed as (a) Export (b) Imports (c) duty paid (d) Custom approval 3. Selling goods abroad is termed as (a) Imposts (b) exports (c) custom duty paid (d) Governments action 4. Monopoly implies (b) A few sellers (a) A simple seller (d) Blocked entry (c) Free entry 5. Oligopoly implies (a) A few sellers (b) Two sellers (c) only three sellers (d) No control Answers 1. (a), 2. (b), 3. (b), 4. (a) 5 (a) www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

FREQUENTLY ASKED QUESTIONS Q1. What is Monopoly? 32 Ans. Monopoly is a market structure in which there is only one seller. He controls the entire market supply of a product. Because, there is no rival producing a close substitute, the monopoly firm itself is an industry, so its output constitutes the total market supply. For further detail please Refer to SLM. Q2. Explain characteristics of Perfect Competition. Ans. 1.Large Number of Sellers 2. Large number of Buyers 3. Product Homogeneity 4. Free Entry & Exit of Firms For further detail please Refer to SLM. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

REFERENCES 33 1. Salvatore,D.(2012).Managerial Economics: Principles and Worldwide Applications. Oxford: Oxford Press. 2. Ahuja, H. L.(2017).Managerial Economics, New Delhi: S. Chand. 3. Dwivedi, D.N.(2018).Managerial Economics, New Delhi: Vikas Publications. 4. Peterson, L., Jain.(2005). Managerial Economic. New Delhi: Prentice Hall of India. 5. Mote, V.L., Gupta G..S.(2017).Managerial Economics. New Delhi: McGraw Hill Education. www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL

34 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-7 (MBA601) All right are reserved with CU-IDOL