WHAT IS MARKET STRUCTURES ? – Concept of Revenue
In everyday speech, the market refers to a fixed place where people meet to buy and sell. But in relation to Economics, market does not necessarily refer to a fixed place. It is defined as any arrangement, system or organization whereby buyers and sellers of goods and services are brought into contact and can transact business with one another. The means of contact could be through internet, phone, letter or telegraphic system or a fixed place like the regular marketplace.
WHAT IS MARKET STRUCTURES?
In economics, market structures can be understood well by closely examining an array of factors or features exhibited by different players. It is common to differentiate these markets across the following seven distinct features.
- The industry’s buyer structure
- The turnover of customers
- The extent of product differentiation
- The nature of costs of inputs
- The number of players in the market
- Vertical integration extent in the same industry
- The largest player’s market share
Types of Market
The market could be classified based on the types of commodities bought and sold (i.e. consumer goods market, labour market and capital and money market), or on the basis of channel of distribution (resale and wholesale market), or the bases of prices.
Under this discussion, we shall look at the type of market on the basis of prices.
Types of Market (On the Basis of Prices)
- Perfect Competition/Market
- Imperfect Competition/Market
A perfect market is a market structure in which prices are determined by the forces of demand and supply. It is a market without government intervention. It should be noted that in the real world a perfect market does not exist in its pure form.
When a large number of small businesses compete against each other, perfect competition occurs. They sell similar products (homogeneous), have no price effect over commodities, and can enter and depart the market at any time.
The things being sold are fully understood by the consumers in this form of market. They are aware of the charges made against them as well as the product branding.
Features of a Perfect Market
- Free entry and free exit of buyers and sellers
- Homogenous commodity so there will be no room for consumer to prefer one to another
- Uniformity of prices. Each single competitor cannot influence price.
- Large number of buyers and sellers
- There are a large number of buyers and sellers such that no single person can influence price.
- Perfect knowledge of the market transactions available to everyone.
Advantages of Perfect Competition
- Since there are large numbers of buyers and sellers, it becomes impossible for a single buyer or seller to influence price. This helps to prevent consumer exploitation
- The freedom of entry and exit of producers/sellers enhances competition and results in production of high quality products
- Normal profits are earned by firms in the long run. Since there is no room to make abnormal profits, this brings about efficient allocation of resources.
- Consumers benefit maximally since there is no room to make abnormal profit
Disadvantages of Perfect Market
- It leads to waste of resources. There is capacity underutilization under perfect competition since each firm produces an insignificant proportion of the total output and therefore may not enjoy economies of scale.
- Capacity under-utilization may lead to lying off workers and unemployment of
An imperfect market is a market in which the forces of demand and supply are not allowed to operate freely. There are different degrees of regulations of the market forces. In practical terms, it is imperfect competition that operates in most markets.
Types of Imperfect Markets
- Monopolistic competition
This is a market situation in which there are many producers or sellers producing or selling identical but non-homogenous commodity. Goods are non-homogenous because of the branding of the commodity. Examples include daily newspapers from different publishing houses, producers of several bottled non-alcoholic drinks, etc.
Monopolistic competition is a type of imperfectly competitive market that has both monopolistic and competitive characteristics. Sellers compete with one another and can differentiate their products in terms of quality and branding to appear unique. In this sort of competition, sellers examine their competitors’ pricing while ignoring the effect of their own prices on their competitors.
An Oligolistic market is one in which there are few producers or sellers but many buyers. Large capital requirement may limit the buyers. Examples are network owners like MTN, Glo Network, etc. Oligopoly is more competitive than monopoly but it is less competitive than monopolistic competition
A small number of large enterprises sell differentiated or identical items in an oligopoly market. Because there are just a few companies in the market, their competing strategies are intertwined.
If one of the actors, for example, decides to drop the price of its items, this will cause other actors to follow suit. A price increase, on the other hand, may persuade others to take no action in the hopes that consumers will choose their items. As a result, strategic planning by these players is essential.
This is a market in which there are only two sellers or producers of a commodity but there are many buyers. A duopoly is a type of oligopoly where two firms have dominant or exclusive control over a market. It is the most commonly studied form of oligopoly due to its simplicity. Duopolies sell to consumers in a competitive market where the choice of an individual consumer can not affect the firm.
A monopsony is market situation in which there is a single buyer but there are many buyers, a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers.
This is a market situation is which there are few buyers and many sellers of a commodity. An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers.
Monopoly is a market situation in which a producer is the only seller of a particular good that has no close substitute. By implication, a monopolist can charge whatever price it wants and consumers are left with no choice than to purchase the product even at high prices.
Features of Imperfect Market
- Heterogeneous commodity
- There is only one or very few buyers and/or sellers
- There is an imperfect knowledge of market
- There is no free entry into or exit from the market
- Preferential treatment exists since there is no uniform prices
Costs are expenses incurred during production. We shall examine the following types of cost incurred during process of production.
This is made up of total fixed cost and total variable cost, i.e. TC = TFC + TVC, where TFC is total fixed cost and TVC is total variable cost
Total Fixed Cost
These are the costs that do not change with the level of production. They remain constant whether the firm is working at full capacity or not. Examples are rent, purchase of equipment and machinery, top management salary. These expenses are usually fixed in the short run.
Mathematically, TFC = TC – TVC
Total Variable Cost:
These are expenses that vary as output increases or decreases. Example of variable costs include money spent on raw materials, wages, fuel, maintenance of machinery and vehicle, etc
Average Cost or Average Total Costs
This is total cost divided by output. It is referred to as unit cost of output. Average cost can be divided into Average Fixed Cost (AFC) and Average Variable Cost (AVC).
Mathematically, AC = T where Q is the level of output
Or AC = AFC + AVC
Marginal Cost (MC)
This is the change in total cost as a result of a unit change in output. Marginal cost is influenced by variable cost but not fixed cost. Mathematically,
MC = Change in total cost Or: TCn – TCn-1
Change in quantity
Concept of Revenue
Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in the market.
Revenue is a very important concept in economic analysis. It is directly influenced by sales level, i.e., as sales increases, revenue also increases.
We shall consider three revenue concepts
This is the total amount of income a firm or producer receives from the sale of its product. Total revenue can be derived by multiplying output by unit price
Total Revenue = Quantity × Price
TR = QP, where Q is level of output and P is price
This is the total revenue divided by the number of units sold. It is the price per unit.
Average revenue: This refers to the amount of money earned per individual unit or user. The average revenue is the total revenue amount divided by the quantity. It is derived thus:
Average Revenue = Total Revenue/Quantity
AR = where TR is total revenue and Q is level of output.
Marginal revenue (MR) is the increase in revenue that results from the sale of one additional unit of output. While marginal revenue can remain constant over a certain level of output, it follows from the law of diminishing returns and will eventually slow down as the output level increases.
MRn = TRn-TRn-1
MRn = Marginal revenue of nth unit;
TRn = Total revenue from n units;