Back to: ECONOMICS SS2
Welcome to class!
In today’s class, we will be talking about market strategy. Enjoy the class!
What is market structure?
Market structure can be defined as the organizational framework of a market. It can also entail the basic characteristics that make a particular market distinct and unique from the others. In this vein, therefore, the focus is on those characteristics that affect the nature of the competition and pricing within a certain market. By the way, the meaning is the organized system of trading peculiar to people in certain industries.
Some of the features of a market structure are highlighted below:
- Customer turnover rate
- The extent of product differentiation
- The nature of costs
- The number of firms within the market (level of competition)
- The market shares of each of the firms; specifically the largest firm among the bunch
- The structure of buyers in the market
- The degree by which the market is vertically integrated
Types of market structure
Perfect Market Structure:
A Perfect Market Structure, otherwise known as perfect competition, is a type of market structure where competition is rife and many producers can freely produce similar products while trying to sell the same to customers. There are low barriers to entry and the demand curve is very elastic.
Features of a perfect competition
- Many firms
- Freedom of entry
- Homogeneous product
- Normal profit.
- Cheap and efficient communication and transportation
- High consumers turnover rate
- Market shares of the largest firm are usually high
Market equilibrium position
A firm is said to be in equilibrium when it is most likely not going to change its level of output. At this point, it neither needs expansion nor contraction; therefore it remains the way it is. It just wants to earn maximum profits by equating its marginal cost with its marginal revenue,
i.e. MC = MR.
Diagrammatically, the conditions of equilibrium of the firm are:
(1) The MC curve must equal the MR curve. This is the first order and necessary condition. But this is not a sufficient condition which may be fulfilled yet the firm may not be in equilibrium.
(2) The MC curve must cut the MR curve from below and after the point of equilibrium, it must be above the MR. This is the second-order condition.’ Under conditions of perfect competition, the MR curve of a firm coincides with the AR curve. The MR curve is horizontal to the X- axis. Therefore, the firm is in equilibrium when MC=MR=AR (Price).
In our next class, we will be talking about Imperfect Market. We hope you enjoyed the class.
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