Unit - 3

Market

Q1) What is Perfect Competition market?      

A1) Perfect competition is the most appropriate solution for improving the economy and the well-being of people. This is because such a market system has a good balance between supply and demand. Remember that it is also based on the strong internal relationship between producers and consumers.             

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.

Unlike a monopoly market, a perfectly competitive market is a trading system for goods that is not affected by price fluctuations. Therefore, those who trade here are generally based on the desire to help others. Although the products that producers offer are the ones most people really need.

While these methods and market structures are pretty perfect for creating a mutually beneficial trading environment, in fact not everyone understands what this system really means. Therefore, let's first understand the meaning and characteristics of a perfectly competitive market.

Definition of a perfect competition market

Perfect competition is a market in which transactions between sellers and buyers take the form of supply and product demand. The difference from the normal market is that in this system, the transactions executed are not affected by price fluctuations.

You need to know, the principle of perfect competition is the agreement between traders and buyers. This happens because they have intertwined internal connections because they already know the market price information. Generally, the products sold in this market structure are basic necessities such as rice, potatoes and sago.

Q2) What are the features of perfect competition market?   

A2) Characteristic 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.

Q3) Define Monopoly Market. What are its features?    

A3) A monopoly market is a form of market where the whole supply of a product is controlled by a single seller. The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly to control.

Thus, monopoly refers to a market situation in which there is only one seller of a commodity.

In monopoly market, single firm or one seller controls the entire market. The firm has all the market power, so he can set the prices to earn more profit as the consumers do not have any alternative.

Definition:

“Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.”- Bilas

“Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry”. –Koutsoyiannis

“A pure monopoly exists when there is only one producer in the market. There are no dire competitions.” – Ferguson

There are three essential conditions to be met to categorize a market as a monopoly market.

1. There is a Single Producer - The product must have a single producer or seller. That seller could be either an individual, a joint-stock company, or a firm of partners. This condition has to be met to eliminate any competition.
2. There are No Close Substitutes - There will be a competition if other firms are selling similar kinds of products. Hence in a monopoly market, there must be no close substitute for the product.
3. Restrictions on the Entry of Any New Firm - There needs to be a strict barrier for new firms to enter the market or produce similar products.

The above 3 conditions give a monopoly market the power to influence the price of certain products. This is the true essence of a monopoly market.

The features of monopoly market are:

1. One seller and large number of buyers - In a monopoly one seller produces all of the output for a good or service. The entire market is served by a single firm. For practical purposes the firm is the same as the industry. But the number of buyers is assumed to be large.
2. No Close Substitutes - There is no close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero. Monopolies usually sell products that do not have close alternatives. Therefore, the cross elasticity of demand for such products is either zero or very small. Also, the price elasticity of demand for monopoly products is less than one. Therefore, in the monopoly market, monopolies are facing a downward demand curve.

Currently, to some extent, all products are alternatives to each other. However, certain intrinsic characteristics of a product or product group can create gaps in this alternative chain.

A monopoly or a single seller is someone who identifies these gaps, eliminates competition, and controls the supply of a particular product. Such a monopoly can use his single selling power in any way to achieve maximum income. This includes price discrimination.

It is important to note that in real life, a complete monopoly is extremely rare. However, one company can control the supply of a good or group of goods. For example, utilities such as transportation, water, and electricity usually have monopoly markets to enjoy the benefits of large-scale production.

3.     Difficulty of Entry of New Firms - There are restrictions on the entry of firms into the industry, even when the firm is making abnormal profits. Other sellers are unable to enter the market of the monopoly

4.     Profit maximize- A monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue.

5.     Price Maker - Under monopoly, monopolist has full control over the supply of the commodity. The price is set by determining the quantity in order to demand the price desired by the firm. Therefore, buyers have to pay the price fixed by the monopolist.

Q4) How can you say that a particular market is a monopolistic market? What are its features?                                                                                                                             

A4) In Monopolistic competition there are large numbers of buyers and sellers which do not sell homogenous product unlike perfect competition. This is more realistic in the real world. Monopolistic competition occurs when an industry in which many firms selling products that are similar but not identical.

Monopolistic competitions try to differentiate its product. Thus, it is closely related to business strategy of brand differentiation. In monopolistic competition heavy advertising and marketing is common among firms.

Monopolistic competition combines element of both monopoly and perfect competition. All firms in monopolistic competition relatively have low market power and they are all market makers.

Monopolistic competitive market -

1. The firm offer highly differentiated product.
2. Free entry and exit in the market i.e.- no barriers.
3. Firm can make decision independently.
4. Customers have the preference of choosing products.
5. Seller becomes price setter.
6. Seller can charge marginally high price to enjoy some degree of market power

Features: 

1. Product differentiation – monopolistic competition includes firms that offer similar product but are not identical. The products are differentiated not on the basis of price but the difference includes physical aspects of the product, location from where it sells and intangible aspects of the product. The product and services perform the basic function but have difference ion quality such as type, colour, appearance, reputation, location that distinguish the product from each other. For ex, motor vehicles are same to move people from one point to another. But there are many types of motor vehicles such as car, bike, scooter.

2.     Many firms – there are many firms in each product group. A product group is a "collection of similar products". Under monopolistic market, each firms have a small market share.  This gives each firm a freedom to set price and each firm action have negligible impact on the market. A firm can cut the price to increase sale without any fear. As its action will not prompt retaliatory responses from competitors.

3.     Freedom of entry and exit - Like perfect competition, under monopolistic competition the firms can freely enter or exit. When the existing firms makes super-normal profits, then new firms will enter. The entry of new firms leads to increase the supply of goods and services and this would reduce the price and thus the existing firms will be left only with normal profits. Similarly, if the existing firms are incurring losses, some of the firms will exit. This will reduce the supply which result decrease in price and the existing firms will be left only with normal profit.

4.     Independent decision making – under monopolistic market, each firm can independently set the terms and conditions of exchange for its product. The firm does not consider how their decision will have impact on competitors. In other words, each firm feels free to set prices and prompting heightened competition.

5.     Market power – under monopolistic competition, the firms have low degree of market power. Market power means that the firm has control over the terms and conditions of exchange for its product. All firms under monopolistic competition are price makers. A firm can raise the prices of products and services without losing all its customer’s base. The firm can also lower prices without any effect on the competitors. Since the firm have relatively low market power, there is no barrier to entry.

Q5) What is Oligopoly market? State its features.                                             

A5) Oligopoly origin

The word oligopoly comes from two Greek words, "Origi" which means "minority" and "Poleyn" which means "sell".

Definition and meaning of oligopoly

Oligopoly is defined as a market structure with a small number of companies, none of which can prevent other companies from having a great influence.

Meaning of oligopolistic market

The oligopolistic market situation is also called "minority competition". In this article, we will look at the definition of oligopoly and some important features of this market structure.

Oligopoly is an industry dominated by several companies. There are several companies in this market that sell homogeneous or differentiated products.

Also, because there are few sellers in the market, all sellers influence the behavior of other companies, and others influence it.

Oligopoly is complete or incomplete / differentiated. In India, examples of oligopolistic markets include automobiles, cement, steel and aluminium.

Oligopoly characteristics

Now that the definition of oligopoly has been clarified, let's take a look at the characteristics of oligopoly.

1. A few companies

Under oligopoly, the exact number of companies is undecided, but there are several large companies. There is also fierce competition as each company produces a significant portion of its total production.

b.    Barriers to entry

Under oligopoly, there are barriers to entry such as patents, licenses, and management of critical raw materials, allowing businesses to make extraordinary profits in the long run. These barriers prevent new companies from entering the industry.

c.     Non-price competition

Companies rely on non-price methods such as advertising, after-sales service, and guarantees because they are afraid of oligopolistic price competition and are trying to avoid it. This allows businesses to influence demand and build brand awareness.

d.    Interdependence

Under oligopoly, few companies occupy a large share of the industry's overall production, so each company is influenced by the price and production decisions of its rivals. Therefore, there are many interdependencies between oligopolistic companies. Therefore, companies take into account the behavior and reaction of their competitors when determining price and production levels.

e.     Product properties

Under oligopoly, a company's products are homogeneous or differentiated.

f.       Selling costs

Sales costs are critical to competing with rivals for greater market share, as companies seek to avoid price competition and there is a great deal of interdependence between them.

g.    No unique pattern of pricing behaviour

Under oligopoly, companies want to act independently, on the one hand to make the most profits and on the other hand to work with their rivals to eliminate uncertainty.

Depending on their motives, the actual situation can change, making it impossible to predict patterns of pricing behavior between companies. Companies can compete with or collude with other companies, which can lead to different pricing situations.

h.    Uncertainty of demand curve

Unlike other market structures, oligopoly cannot determine a company's demand curve. This is because, on the other hand, there is a great deal of interdependence between rivals. And on the other hand, there is uncertainty about the reaction of rivals. When a company changes prices, rivals can react in different ways, which makes the demand curve uncertain.

Q6) Explain equilibrium price under perfect competition market?  

A6) Under perfect competition, many factors influence the pricing of goods. In this article, we will look at industry equilibrium and corporate equilibrium as key factors behind perfect competition pricing.

Industrial equilibrium under perfect competition

Economically, the industry is made up of many independent companies. Each company has several factories, farms, or mines as needed. Each such company in the industry produces homogeneous products. Industrial equilibrium occurs when the total production of an industry is equal to the aggregate demand. In such a scenario, the prevailing price of the item is its equilibrium price.

We know that in a highly competitive situation, the interaction between supply and demand determines the equilibrium price as shown below.

In Figure above, OP is the equilibrium price. In addition, OQ is the equilibrium quantity sold at that price. Now, the equilibrium price is the price at which both supply and demand are equal. In other words, the buyer who wants to buy at that price will not be dissatisfied, and the seller who wants to sell the item at that price will not be dissatisfied.

Note that the market is not in equilibrium if the demand remains the same and the price is higher or lower than the OP. Also, if the goods are less or more than the demand, the equilibrium will not be achieved.

Equilibrium of companies under perfect competition

Enterprises are in equilibrium when maximizing profits. Therefore, the output that gives the company the greatest profit is the equilibrium output. When a company is in equilibrium, there is no reason to increase or decrease production.

In a highly competitive market, companies are price takers. The reason is that there are many companies that manufacture homogeneous products. Therefore, companies cannot influence prices with their individual capabilities. They must follow prices determined by the industry.

The following figure shows the demand curve of a company under perfect competition.

From Figure above, we can see that the industry price OP is fixed through the interaction of industry supply and demand. Companies must accept this price. Therefore, they are price takers, not price makers. Therefore, the price OP cannot be increased or decreased.

Therefore, the line P serves as the demand curve for such an enterprise. Therefore, in perfect competition, the demand curve of an individual company is a horizon at the level of market prices set by the industry. Companies need to choose the level of production that produces the most profit.

Q7) What is break even analysis?      

A7) Break-even analysis is additionally referred to as cost-volume profit analysis. Break-even point analysis is a relationship between asking price, sales volume, fixed costs, variable costs, and profits at various level activity. Break-even analysis may be a widely used technique for studying the cost-volume-profit relationship narrow

Here, the entire cost is adequate to the entire asking price. The broader interpretation refers to the analytical system. Determines expected profits for all levels of activity. It describes the connection between production costs, Production volume and sales value.

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit sell price to determine the point at which you will break even. In other words, it reveals the point at which you will have sold enough units to cover all of your costs. At that point, you will have neither lost money nor made a profit.

Here, CVP analysis is additionally commonly performed, but it's not accurate, but it's called "break-even point analysis". The difference between the 2 terms is extremely narrow. CVP analysis includes full range Break-even analysis is one among the techniques utilized in this process. But as mentioned the above break-even point analysis techniques are so popular in CVP analysis research that the 2 terms are used as a synonym. For the needs of this investigation, we also these two terms to know the concept of break-even analysis, it's helpful to understand the following specific basic terms listed below application

• You’ll use break-even analysis to work out your company's break-even point (BEP).
• The break-even point is that the level of activity where total revenue is adequate to total cost. At this level, the corporate doesn't make a profit

1. Contribution

This is a more than the asking price that exceeds the variable cost also called "gross profit". The amount of profit (loss) is often confirmed by deducting fixed costs from contributions. In other words, it had been fixed Costs and benefits correspond to contributions. It is often expressed by the subsequent formula.

Contribution = Selling Price – Variable Cost or Contribution = Fixed Cost + Profit = Contribution – Fixed Cost

Profit / Volume ratio (P / V ratio)

This term is important for studying the profitability and profit ratio of operating a business.

Establish a relationship between contribution and sales. The ratio can be displayed in the following format Percentage too. The expression can be expressed as:

This ratio can also be found by comparing changes Contribution to changes in sales or changes in profits due to changes in sales. Increased contribution. Fixed costs are assumed to be constant at all production levels, which mean increased profits.

Therefore,

P/V Ratio (or, C/S ratio) = Contribution S𝑎𝑙𝑒𝑠 = C S or, P/V Ratio = Sales−Variable Cost S𝑎𝑙𝑒𝑠 = S−V S or, 1- Variable Cost S𝑎𝑙𝑒

This ratio is also known as the "contribution / sales" ratio. This ratio can also be found by comparing changes Contribution to changes in sales or changes in profits due to changes in sales increased contribution. Fixed costs are assumed to be constant at all production levels, which mean increased profits.

Therefore, thus, P/V Ratio = Change in Contribution by Change in S𝑎𝑙𝑒𝑠 or, P/V Ratio = Change in Profit (or Loss) Change in S𝑎𝑙𝑒

Q8) How can you say that the market is monopoly market? Write its features

A8) A monopoly market is a form of market where the whole supply of a product is controlled by a single seller. The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly to control.

Thus, monopoly refers to a market situation in which there is only one seller of a commodity.

In monopoly market, single firm or one seller controls the entire market. The firm has all the market power, so he can set the prices to earn more profit as the consumers do not have any alternative.

Definition:

“Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.”- Bilas

“Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry”. –Koutsoyiannis

“A pure monopoly exists when there is only one producer in the market. There are no dire competitions.” – Ferguson

There are three essential conditions to be met to categorize a market as a monopoly market.

1. There is a Single Producer - The product must have a single producer or seller. That seller could be either an individual, a joint-stock company, or a firm of partners. This condition has to be met to eliminate any competition.
2. There are No Close Substitutes - There will be a competition if other firms are selling similar kinds of products. Hence in a monopoly market, there must be no close substitute for the product.
3. Restrictions on the Entry of Any New Firm - There needs to be a strict barrier for new firms to enter the market or produce similar products.

The above 3 conditions give a monopoly market the power to influence the price of certain products. This is the true essence of a monopoly market.

The features of monopoly market are:

1. One seller and large number of buyers - In a monopoly one seller produces all of the output for a good or service. The entire market is served by a single firm. For practical purposes the firm is the same as the industry. But the number of buyers is assumed to be large.

2.     No Close Substitutes - There is no close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero. Monopolies usually sell products that do not have close alternatives. Therefore, the cross elasticity of demand for such products is either zero or very small. Also, the price elasticity of demand for monopoly products is less than one. Therefore, in the monopoly market, monopolies are facing a downward demand curve. Currently, to some extent, all products are alternatives to each other. However, certain intrinsic characteristics of a product or product group can create gaps in this alternative chain.

A monopoly or a single seller is someone who identifies these gaps, eliminates competition, and controls the supply of a particular product. Such a monopoly can use his single selling power in any way to achieve maximum income. This includes price discrimination.

It is important to note that in real life, a complete monopoly is extremely rare. However, one company can control the supply of a good or group of goods. For example, utilities such as transportation, water, and electricity usually have monopoly markets to enjoy the benefits of large-scale production.

3.     Difficulty of Entry of New Firms - There are restrictions on the entry of firms into the industry, even when the firm is making abnormal profits. Other sellers are unable to enter the market of the monopoly

4.     Profit maximize- A monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue.

5.     Price Maker - Under monopoly, monopolist has full control over the supply of the commodity. The price is set by determining the quantity in order to demand the price desired by the firm. Therefore, buyers have to pay the price fixed by the monopolist.