Question

Define the different types of markets and their behavior in the economy.

Answer 1

Perfect Competition is a form of market structure in which there is free entry and exit of firms and firms are selling homogeneous and identical products in the market. Firms are price takers rather than price makers. Industry determines the equilibrium price from the demand and supply curve intersection. Sellers can sell any unit of commodity at that price and firms does not have any price control over the commodity. If one seller try to charge higher price then it will lose all his customers because all firms are selling similar products in every respect like color, shape, brand, etc.

Monopoly is a form of market structure in which there is a single seller who sold goods which does not have close substitutes. There are barrier in the entry of new firms. The firm is a price maker because it determines the price for its product. Firm has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes. Railways is an example of monopoly industry in India.

Monopolistic competition refers to a market situation with large number of buyers and sellers selling closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under this form of competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic than curves under monopoly. Example: Firms producing different brands of soaps like Dove, lux, lifebuoy, etc. Monopolistic competition possesses features of monopoly and perfect competition.

Oligopoly is a market structure with few large firms who produces homogeneous or differentiated products intensely competing against each other. There is interdependence of firms in decision-making. Under this form of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war. The demand curve facing an oligopoly firm is indeterminate because of high degree of interdependence among oligopolistic firms. Example: Auto-producers in the Indian market; Hyundai, Honda, Tata, Ford are some well-known brand names.