Market Structures – Economics

The term “market” is used in two senses in economics. In one sense, it refers to a place where goods and services, are bought and sold. In this sense, a market is physically located in a specific geographical area, for example, the Kenyatta market in Enugu, the capital of Enugu State in Nigeria.
In the second and wider sense, a market means all those buyers and sellers of goods who do business with one another. In this case, a transaction could be conducted through the telephone, telegraph or telex, the post office, a newspaper advertisement or some other communication channels. It could be done without the buyer and seller meeting. Therefore, a market is not only a geographical area, but also a medium or organization through which buyers and sellers can communicate with one another, to exchange goods and services at prices determined by the market forces of demand and supply.

In some markets, there is strong competition among sellers and buyers when the prices of commodities traded in the market are about the same. Economist call such a situation of strong competition, in which the price differences of commodities are small, a perfect market.
   The perfect market is a theoretical economic model. When market structures display varying degrees of imperfection, we call them imperfect markets. Examples of imperfect markets are:
(1) monopoly (single producer- an individual or a firm – supplies the goods or services)
(2) monopolistic competition (several producers providing similar products)
(3) duopoly (two producers of the same commodity)
(4) oligopoly (few producers)
  We shall now discuss these two major types of market structures.

Perfect Competition
The following are the assumptions of perfect competitions or a perfect market.
(1) There is a large number of sellers and buyers, none of whom dominates the market. This means that variations in output by any producer, or in purchases by any buyer, will not affect the market price of the commodity. All the producers are ‘price-takers’, that is, once the price has been determined by the forces of demand and supply, the producers will sell as much as they can at that price.
(2) The products are homogeneous, or rather, the buyers regard the products as the same and they are, therefore, indifferent as to whom they buy their goods from.
(3) There is no preferential treatment in the selling or buying of the commodity. The commodity bears the same price tag throughout the market.
(4) There is perfect knowledge of the quality and the price of the commodity. The commodity being offered for sale. In other words, consumers have a perfect knowledge of the market.
(5) There is free entry into the market for new firms and free exit for the existing ones.
(6) There is perfect mobility of factors of production. Factors are transferred easily to where they are needed.
(7) No transport costs are involved in moving factors of production and finished goods from one location to another.
(8) Goods are easily moved from one part of the market to another.

Imperfect Competition
A market is described as imperfect when a commodity or service is sold in such a way that free competition does not exit. There are different degrees of imperfection. The imperfect markets commonly dealt with are:
(1) Monopoly: A single seller of a commodity or service.
(2) Monopolistic Competition: The producing firm has a certain degree of monopoly, but it is aware that it’s rivals produce similar or substitute goods and this fact affects its price policy.
(3) Duopoly: Two firms sells the same goods or services.
(4) Oligopoly: A few large firms controls the industry.
 Difference Between Perfect and Imperfect Competition

Perfect Competition Imperfect Competition
There is a large number of relatively small sellers so that variations in output will not affect prices of goods and services. There is one seller, or only a few sellers, whose variations in output affect prices of goods and services.
Products are homogeneous. One product must be a perfect substitute of another, so that when a producer raises his price above equilibrium price, buyers will buy from other sellers. Products are not homogeneous. They are differentiated by, for example, brand name, special packaging, quality differences and advertising. When the producer raises his price, some buyers will still patronize him.
Consumers have perfect knowledge of the ruling price in the marke; producers are aware of the extent of profits in the industry. Consumers do not have complete knowledge of the ruling price in the market.
Firms cam freely enter or leave the market. There is no free movement of firms into or out of the market.
There is perfect mobility of factors of production. They are easily transferred to where they are needed. Prohibition may make free movement of factors of production difficult
No transport costs are involved, as they mean locational disadvantage. Transport cost are involved and these impose an added value on the products, thus causing an increase in the price of the goods.
Goods are movable from one section of the market to another. Immobility is an essential element of imperfect market. Therefore, goods are not movable from one section of the market to another.
The perfect competitor is a price-taker. The graph showing the demand of the firm’s products is a horizontal price line The imperfect competitor is a price-maker. The graph showing the firm’s demand of goods is a downward sloping line, which is similar to the average revenue curve.

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I'm simply known as Sosa. A well known programmer and founder of the defunct Lectures Portal, Simplicity is my nature.

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