UNIT 2

MARKET:

In the ordinary sense, the market refers to a place where buyers and sellers meet for the purpose of exchange of goods. However, in economics the term market does not refer to a particular place such. In economics, the term market refers to, ‘An arrangement in which buyers and sellers come in close contact with each other directly or indirectly, to buy or sell goods.’

Following are the features of market:-

1) It does not refer to a particular place. It refers to an arrangement which facilitate transaction between buyers and sellers of goods.

2) The supply from sellers and demand from buyers are the two important forces in market.

3) The exchange of a commodity takes place at a particular price in the market.

4) The price is determined by the forces of demand and supply in the market.

5) The market can be small or large. It can be local, national or international.

6) There may be different markets for a specific commodity. Therefore, there may be different prices in different markets for the same commodity.

7) A market brings together potential buyers and potential sellers of a particular commodity.

1.1 TYPES OF MARKET:

The market structure is generally classified on the basis of competition among the sellers. Thus, we have the following types of markets:

1) Perfect competition 2) Monopoly  3) Monopolistic competition

4) Oligopoly  5) Duopoly  6) Pure competition

In this chapter we have to learn about perfect competition, monopoly & monopolistic competition.

-         Perfect competition:

Perfect competition refers to ‘A market structure in which there are large number of buyers and sellers with a single uniforms price for the product which is determined by the forces of demand & supply.’ The price prevailing in perfect competition market is equilibrium price.

Features of perfect competition:-

1) Large number of seller / seller are price takers: There are many potential sellers selling their commodity in the market. Their number is so large that a single seller cannot influence the market price because each seller sells a small fraction of total market supply. The price of the product is determined on the basis of market demand and market supply of the commodity which is accepted by the firms, thus seller is a price taker and not a price maker.

2)  Large number of buyers: There are many buyers in the market. A single buyer cannot influence the price of the commodity because individual demand is a small fraction of total market demand.

3) Homogeneous product: The product sold in the market is homogeneous, i.e. identical in quality and size. There is no difference between the products. The products are perfect substitutes for each other.

4) Free entry and exit: There is freedom for new firms or sellers to enter into the market or industry. There is no legal, economic or any type of restrictions. Similarly, the seller is free to leave the market on industry.

5) Perfect knowledge: The seller and buyers have perfect knowledge about the market such as price, demand and supply. This will prevent the buyer from paying higher price than the market price. Similarly, sellers cannot change a different price than the prevailing market price.

6) Perfect mobility of factors of production: Factors of production are freely mobile from one firm to another or from one place to another. This ensures freedom of entry and exit firms. This also ensure that the factors cost are the same for all firms.

7) No transport cost: It is assumed that there are no transport costs. As a result, there is no possibility of changing a higher price on the behalf of transport costs.

8) Non intervention by the government: It is assumed that government does not interfere in the working of the market economy. Price is determined freely according to demand and supply conditions of the market.

9) Single Price: In Perfect Competition all units of a commodity have uniforms or a single price. It is determined by the forces of demand and supply.

- PURE COMPETITION:

According to Prof. Chamberlin, there is said t be ‘Pure competition’ when the first three condition of perfect competition i.e. large number of buyers and sellers, homogenous product & free entry and exit of firm are fulfilled. When monopoly is absent because the first three conditions are fulfilled but the other conditions like perfect knowledge, perfect mobility, absence of transport cost or no Govt. Interference are not fulfilled, then the competition would be ‘PURE’ and not ‘PERFECT’.

1.2 Price determination under Perfect competition:

The equilibrium price refers to that price at which the demand and supply of a commodity are in equilibrium (equal). In other words Quantity demanded is equal to Quantity supplied. Once equilibrium price is reached there is no tendency for the price to move upward or downwards.

According to Marshall both Demand and Supply are essential in determination equilibrium price. Like the two blades of a scissor that cut piece of paper, demand and supply are important part in determining equilibrium price. Both the blades are useless when they are applied individually. Thus demand and supply are equally important in determining equilibrium price.

This can be explained with the help of following table:

In the above table there is Price, Quantity demanded, Quantity supplied, Market condition and change in price. When the price is Rs. 5 Quantity demanded 120 units and quantity supplied 40 units, there is a shortage and pressure on the price is upward (rises). This conditions same at price of Rs. 10. When price is Rs.20 Quantity demanded is 60 units and Quantity supplied is 100 units, there is surplus in the market and pressure on price is downward (decrease). This condition same at price of Rs.25. When the price is Rs. 15 the quantity demanded is equal to the quantity supplied. It is equilibrium price. At this price the market is cleaned, that is neither surplus nor shortage in the market. At the equilibrium price demanded is equal to supply.

-         Monopoly:

The term Monopoly is derived from Greek words, Mono which means Single & Poly which means Selling.

Monopoly refers to a market situation in which there is only a single seller. The firm does not face any competition from any rival. Seller as there is no close substitute for the product. It is opposite of perfect competition. In monopoly the sellers try to control both the price and output. Therefore, In monopoly the seller is price maker. Following are the features of monopoly:

. Single seller: There are no competitions. Production and supply are controlled by monopolist. He is the Price maker. There is no close substitute for the product of monopolist.

.  No close substitute: There are no close substitutes for the product, so the buyers have no alternative or choice. They have to either buy the product or go without it.

. No entry: In monopoly there are many restrictions for entry. Thus, other products or firm are not allowed to enter the market. Thus, the monopolist has complete hold over the supply.

. Price maker: The entire market supply can be controlled by monopolist. He can determine the price of his product. Hence he is a price maker in the market.

. No distinction between firm & Industry: Since there is only one seller in monopoly, the firm itself is the industry. There is no distinction between the firm and Industry.

. Super normal Profit: The monopolist always wants to earn supernormal profit. His decision regarding the price and the level of output are guided by the profit maximization motive. Thus, sometimes at price, he supplies the product as per the demand and sometimes he controls the supply of the product and sells the product at high prices.

. Price discrimination: This implies charging p different prices for the same product to different buyers. The monopolist succeeds in increasing his profit by adopting the technique of price.

. Control over the market supply: The monopolist has complete hold over the market supply. He is a sole producer of the commodity. Therefore entry barriers such as natural, economic, technological or legal do not allow competitors to enter the market.

Types of Monopoly:

- Natural Monopoly: A natural monopoly arises when a particular natural resources is located or available only in particular locality or region. Hence the producers in that region who control the supply of that resources would enjoy a monopoly in the product which requires that natural resources.

- Legal Monopoly: It arises due to legal protection given to the producer in the form of patents, trademarks, copy rights, etc. The law prevents the potential competitors for producing identical products.

- Voluntary Monopoly: When number of big business companies acquire monopoly through voluntary agreement, business firms join together through cartels, syndicates etc.. They are called joint monopolies. Merger and amalgamation may also lead to monopoly. E.g. OPEC (Oil Producing and Exporting countries). This is also known as Joint Monopoly.

- Simple Monopoly: In simple monopoly the firm has monopoly power over a product or service, but it changes a uniform price to all the buyers.

-  Discriminating Monopoly: In discrimination monopoly, the firm change different prices to different buyers or in different markets for the same product. There is no fixed policy for sale of goods. Policies are changes as per the Market conditions, consumers, etc.

- State or social Monopoly: When the government owns and controls the production of a goods or services it is called state or social monopoly.

- Private Monopoly: Private monopoly refers to sole ownership of the supply of goods or services by the private firm or individual. The main objective of private monopoly is profit maximization, for e.g. Tata group and Reliance group