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Forms of Market
and 
Price Determination Under 
Perfect Competition with 
Simple Applications
UNIT–4
This Unit Contains
10. Forms of Market
11. Determination of Market Equilibrium 
 and Effects of Shifts in Demand and 
 Supply Curves
12. Simple Applications of Demand and
 Supply
10.1 Market—the concept
‘Market’ is a term which is commonly used for a particular place or locality where goods 
are bought and sold. In economics, market is more than a geographical area or a ‘mandi’ 
where goods are bought and sold. Market is defined as a complex set of activities by 
which potential buyers and potential sellers are brought in close contact for the 
purchase and sale of a commodity. According to Prof. Samuelson, “A market is a 
mechanism by which buyers and sellers interact to determine the price and quantity of a 
good or service.” A market can be regional, national or an international market. A market 
must have the following features:
1. Commodity, i.e., there must be a commodity which is being demanded and sold.
2. Buyers and Sellers, i.e., there must be buyers and sellers of the commodity.
3. Communication, i.e., there must be communication between buyers and sellers.
4. Place or Area, i.e., there must be a place or area where buyers and sellers could interact 
with each other.
Chapter Scheme
10.1 Market—The Concept
10.2 Types of Different Market Structures
10.3 Perfect Competition
 10.3.1 Meaning of Perfect Competition
 10.3.2 Features of Perfect Competition 
and their Implications
 10.3.3 Comparison Between Pure 
Competition and Perfect 
Competition
10.4 Monopoly
 10.4.1 Meaning of Monopoly
 10.4.2 Features of Monopoly
10.5 Perfect Competition vs. Monopoly
10.6 Monopolistic Competition
 10.6.1 Meaning of Monopolistic 
Competition
 10.6.2 Features of Monopolistic 
Competition
10.7 Monopolistic Competition vs. Monopoly
10.8 Oligopoly
 10.8.1 Meaning and Types of Oligopoly 
 10.8.2 Features of Oligopoly
10.9 Comparison of the Four Market Forms
  Points to Remember
  Test Your Knowledge
  Answers to MCQs
 
10 Forms of Market
Saraswati Introductory Microeconomics10.2
10.2 types of Different Market structures
Four main types of market structures are as follows:
1. Perfect Competition 2. Monopoly
3. Monopolistic Competition 4. Oligopoly.
There are many criteria of classifying the market on behalf of the number of sellers, 
similarity of products, availability of information, mobility of firms, the inputs engaged in 
the firm, etc. Whatever the criteria the end result is reflected in one thing: how much 
influence an individual seller, on his own, is able to exercise on the market. Lower the 
influence more the competitive nature of the market it indicates.
10.3 perfect coMpetition
10.3.1 Meaning of Perfect Competition
Perfect competition is a market structure characterised by complete absence of rivalry 
among individual firms. Perfect competition is defined as a market structure in which 
an individual firm cannot influence the prevailing market price of the product on its 
own. A good example of perfect competition is the agriculture market. Otherwise, it is an 
ideal situation which rarely exists in the real world.
10.3.2 Features of Perfect Competition and their Implication
There are following features of perfect competition:
1. A Large Number of Buyers and Sellers. There are so many buyers and sellers that no 
individual buyer or seller can influence the price of the commodity in the market. Any 
change in the output supplied by a single firm will not affect the total output of the 
industry. To an individual producer the price of the commodity is given. He can sell 
whatever output he produces at the given price, i.e., an individual seller is a price-
taker. Similarly, no individual buyer can influence the price of the commodity by his 
decision to vary the amount that he would like to buy, i.e., price of the commodity is 
given to the buyer. He is a price-taker having no bargaining power in the market.
Fig. 10.1 Infinitely Elastic Demand Curve Under Perfect Competition
 In Fig. 10.1, the demand curve facing a firm is derived from the market equilibrium. 
In a perfectly competitive market, price of the commodity is determined by the 
Forms of Market 10.3
intersection of the market demand and supply curves of the commodity. This occurs at 
point E where DD = SS.
 Implication. The perfectly competitive firm is then a ‘price-taker’ and can sell any 
amount of the commodity at the established price. d is then the demand curve facing 
a firm. It is infinitely elastic and given by a horizontal line. d is also the price line or 
AR curve. Since AR is constant, MR curve coincides with AR curve. That is, d = P = AR = 
MR. Therefore, AR curve is also the MR curve of the firm.
2. Homogeneous Product. Firms in the market produce a homogeneous product. 
Homogeneity of a product implies that one unit of the product is a perfect substitute 
for another.
 Implication. Since the products are identical, buyers are indifferent between suppliers. 
For example, if A’s bread is identical to B’s bread, then it is immaterial for the consumer 
whether he buys the bread from A or from B. Homogeneous product ensures uniform 
price for the product of all the firms in the industry.
3. Free Entry or Exit of Firms. The industry is characterised by freedom of entry and 
exit of firms. In a perfectly competitive market, there are no barriers to entry or exit of 
firms. Entry or exit may take time, but firms have freedom of movement in and out 
of an industry. Since resources are assumed to be mobile, entry or exit is relatively 
costless.
 Implication. The implication of this assumption is that given sufficient time, all firms 
in the industry will be earning just normal profit. In microeconomics, normal profit is 
treated as opportunity cost, and therefore, counted in calculation of total cost. Since 
profit equals total revenue minus total cost, normal profit means zero economic 
profit. Why? Let us explain.
 Suppose the existing firms are earning above normal profits, i.e., positive economic 
profits. Attracted by the positive profits, the new firms enter the industry. The industry’s 
output, i.e., market supply goes up. The price comes down. New firms continue to 
enter till economic profits are reduced to zero.
 Now suppose the existing firms are incurring losses. The firms start leaving the 
industry. The industry’s output starts falling and price starts going up. All this continues 
till losses are wiped out. The remaining firms in the industry once again earn just the 
normal profits.
 Only zero economic profit in the long-run is the basic outcome of a perfectly 
competitive market.
4. Perfect Knowledge. Firms have all the knowledge about the product market and the 
factor market. Buyers also have perfect knowledge about the product market.
 Implication. The implication of perfect knowledge about the product market is that 
any attempt by any firm to charge a price higher than the prevailing uniform price will 
fail. The buyers will not pay higher price because they have perfect knowledge. There 
is no ignorance about factors operating in the market. The sellers will not charge a 
Saraswati Introductory Microeconomics10.4
higher price. The buyers will not pay a higher price. Thus, uniform price will prevail 
in the market.
 As regards the knowledge about the input markets, the implicit assumption is that 
each firm has an equal access to the technology and the inputs used in the technology. 
No firm has any cost advantage. Cost structure of each firm is the same. All firms have 
a uniform cost structure.
 Since there is uniform price and uniform cost in case of all firms, and since profit 
equals cost minus price, all the firms earn uniform profits.
5. Perfect Mobility of Factors of Production. The factors of production can move easily 
from one firm to another. Workers can move between jobs and between places.
 Implication. It’s implication is that skillscan be learnt easily.
6. Absence of Transportation Cost. All goods are produced locally. Transportation costs 
are zero.
10.3.3 Comparison Between Pure Competition and Perfect Competition 
Pure competition is a market situation in which there are a very large number of buyers 
and sellers, products are homogeneous and there is free entry and exit of firms in the 
market. Perfect competition is a market situation in which: 
(i) There are a very large number of buyers and sellers (ii) Products are homogeneous 
(iii) Free entry and exit of firms in the market (iv) Perfect knowledge (v) Perfect mobility 
(vi) Absence of transportation cost. It is a broader concept than pure competition. Pure 
competition is a part of perfect competition.
10.4 Monopoly
10.4.1 Meaning of Monopoly
‘Mono’ means ‘one’ and ‘poly’ means ‘seller’. Monopoly is a market structure in which 
there is a single firm producing all the output. Example: Government has the monopoly 
in providing water supply, railways, etc.
10.4.2 Features of Monopoly
The major characteristics of monopoly market structure are:
(a) A Single Firm. The monopolist is the only producer of the good. It is because of some 
natural conditions or legal restrictions like copyrights, patent law, sole dealership, state 
monopoly etc. As a result, monopolist has full control over supply of the commodity. 
That is why a monopolist is called price maker.
Forms of Market 10.5
(b) No Close Substitutes. There are no close substitutes for the commodity. The product sold 
by monopolist has no close substitute. It may be possible that some substitutes are available 
but these substitutes are too costly and inconvenient to use. Such substitutes which are 
easily and quickly used in place of given product are not available in the market. Since a 
monopolist has no close substitute product, it does not face any competition.
(c) Price Maker with Constraint. The monopolist 
produces all the output in a particular market. The 
monopolist is a ‘price-maker’. It does not mean 
that monopolist can fix both price and the quantity 
demanded. If he fixes a high price, less commodity 
will be demanded.
 Implication. The result is a downward sloping 
demand curve as shown in Fig. 10.2. The demand 
curve is a constraint facing a monopoly firm. 
Demand curve is also the price line and the AR 
curve. Since AR is downward sloping, MR lies 
below AR curve and is twice as steep as the AR 
curve.
(d) Barriers to Entry. There are significant barriers to entry. That is, entry is blockaded. 
This barrier may be economic, institutional or artificial in nature. As a result, a 
monopoly firm earns abnormal profit in the long run. 
(e) Price Discrimination. It is one of the most important feature of monopoly. When a 
monopoly firm charges different prices from different customers for the same product 
it is called price discrimination. It’s aim is profit maximisation.
10.5 perfect coMpetition vs. Monopoly
Perfect competition and monopoly are extreme situations. Some important points of 
comparison between the two market forms are:
(a) Comparison of Assumptions. A glance at the assumptions of the two forms of market 
organisation reveals that monopoly is a direct opposite of perfect competition.
Perfect Competition Monopoly
1. Large number of buyers and sellers
2. Products are homogeneous
3. Free entry and exit
1. One seller
2. No close substitutes
3. Barriers to entry
(b) Profit Comparison. In perfect competition, there are no supernormal profits in the 
long-run but in monopoly supernormal profits are generally earned in the long-run. 
Thus, profits are higher under monopoly than in perfect competition.
(c) Allocation of Resources. Under perfect competition, there is optimal allocation of 
resources as P = MC. But since P > MC under monopoly, allocation of the available 
Fig. 10.2 Inelastic Demand Curve Under 
Monopoly
Saraswati Introductory Microeconomics10.6
resources in the economy is inoptimal, i.e., the monopoly element does not allow 
production to expand to the socially desired level. Thus, there is loss of social welfare 
under monopoly.
10.6 Monopolistic coMpetition
10.6.1 Meaning of Monopolistic Competition
Monopolistic Competition is defined as a market structure in which there are many 
firms selling closely related but unidentical commodities. Examples: detergents, 
automobiles, textiles, soft drinks, T.V. sets, etc.
10.6.2 Features of Monopolistic Competition
The major features of monopolistic competition are:
(a) Large Number of Buyers and Sellers. There are a large number of buyers and sellers of 
the commodity but not so large as in perfect competition. Each firm is supplying a small 
percentage of total market supply of the product. As a result, a firm is in a position to 
influence price of the product marginally on its own due to its brand value but not 
because of big influence. Similarly no individual buyer can influence the price of the 
product.
(b) Product Differentiation. The products of the sellers 
are differentiated but are close substitutes of one 
another. Product differentiation can be real or 
artificial. Its effect is that sellers can differentiate their 
products. This gives the seller some degree of price-
making power, which he can exploit. But there are 
many close substitutes for each product and thus, a 
monopolistic firm faces an elastic demand curve as 
shown in Fig. 10.3. The demand curve is the price 
line or the AR curve. The MR curve lies below the 
AR curve.
(c) Free Entry or Exit of Firms. Firms can freely move 
in and out of a ‘group’. In monopolistic competition, the concept of industry is 
undefined as products are differentiated. Instead of industry, the word ‘group’ should 
be used. 
(d) Imperfect Knowledge. Buyers and sellers do not have perfect or complete knowledge 
of market conditions. Buyer’s preferences are guided by advertising and other selling 
activities undertaken by the sellers.
( e) Selling Cost. A firm under monopolistic competition incurs selling cost which is the 
cost of promoting the demand for its product. Examples of selling costs are 
advertisements, window displays, salesmen’s salaries, etc. It plays a major role to 
Fig. 10.3 Elastic Demand Curve under 
Monopolistic Competition
	Unit-4
	Ch-10