Market refers to a mechanism or an arrangement that facilitates contact between buyers and sellers for the sale and purchase of goods and services.
Various Forms of Market Structure
A market structure refers to the number of firms operating in the industry, the nature of competition between them and the nature of the product.
Factors determining structure :
- Number of buyers and sellers: Its significance lies in the fact whether a buyer or a seller by her/his own independent action influences the price of the commodity in the market.
- Nature of commodity: The prices of homogeneous and standardised commodities will be the same, whereas the prices of differentiated commodities of different sellers of the same commodity will be different.
- Mobility of goods and services: The freedom of movement of goods and factors of production enable sellers to charge the same prices.
- Perfect knowledge: Uniform price of the commodity will emerge because buyers and sellers of a commodity have perfect knowledge about prices and costs in different parts of the market.
On the basis of the given factors, there are two main forms of market.
- Perfect Competition
- Imperfect Competition
Perfect competition is a market situation that consists of a very large number of buyers and sellers offering a homogeneous product. Under such conditions, no firm can affect the market price. Price is determined through the market demand and supply of the particular product since no single buyer or seller has control over the price.
In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.
- Monopolistic Competition
A monopoly is a form of market where there is a single seller of a good with no close substitutes.
Negatively Sloped Demand Curve
Full control over the price under monopoly does not mean that the monopolist can sell any amount of goods at any price. Once the price is fixed by monopolists, consumers decide the quantum of the good to buy. The demand curve of the monopoly firm shows that the consumer is willing to buy more at lower prices. On the other hand, when the prices are more, the consumer buys a lesser quantity. There is an inverse relationship between the price and the quantity sold by a monopoly firm. Thus, the demand curve of a monopoly firm is a downward sloping curve.
Monopolistic competition is a form of market in which there are many sellers of the product, but the product of each seller is different from the other.
A monopolistic firm has partial control over price only through product differentiation. Products are differentiated through designs and the color of the packing of the product. It attracts consumers to buy the product at a higher price. As there are many rivals and close substitutes of products in the market, a monopolistic firm cannot have full control over the price.
In an oligopoly market, each firm is huge enough to control a significant portion of the market. Output quotas and the price have a direct bearing on the output and the price of rival firms in the market. So, there is no unique demand curve for an oligopoly firm. They form a collusive agreement among the firms to fix the price and output in the market. It is to avoid price competition and earn monopoly profits.
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