Unit-4

The term market refers to a particular place where goods are purchased and sold.
According to Prof. r. chapman, “ The term market refers to necessarily to a place but always to a commodity and the buyers and sellers who are in direct competition with one another”.

 An Area
 One Commodity
 Buyers and Sellers
 Free Competition
 One Price

 Classification of Market is done on the following basis:
1.
2.
3.
4.
5.
On the basis of Place or Area.
On the basis of Time.
On the basis of Competition
On the basis of function
On the other basis.

 On the Basis of Place or Area-
(i) Local Market- Here, competition between purchaser and seller is localized and limited at a specific market.
eg- Sale of vegetable, milk etc.
(ii) Regional Market- In this market sale and purchase of articles is localized to state only and not outside the state.
(iii) National Market- It is that market in which the demand of the goods is in the nation as a whole where you are living.

(iv) International Market- If the competition of goods is world-wide, the market will be
International.

(i)
On the Basis of Time-
Daily or very short period market- In daily or short period market supply of goods is stable, therefore price of goods is determined according to the demand of the goods.
(ii) Short period Market- Slight variations can be made regarding the demand for the goods.

(iii) Long Period Market- When demand for goods increases, supply also increases. Here, the price is influenced more by supply of the goods.
(iv) Secular Period- It is a period of more than ten years in which changes in demand fully adjust themselves to supply.
 On the Basis of Competition-
(i) Perfect Market- A market is said to be perfect when all sellers and buyers are aware of the prices at which transactions take place and all the offers made by other sellers and buyers and when any buyer can purchase from any seller.

(ii) Imperfect Market- A market is said to be imperfect when some buyers or sellers or both are not aware of the offers being made by others. Therefore different prices come to prevail for the same commodity at the same time in an imperfect market.
(iii) Monopoly- There is a single producer or seller who controls the market. There are no substitutes for his products. Eg- Indian
Railways
(iv) Duopoly- In Duopoly, there are two sellers , selling either a homogeneous or differentiated product. eg- Visa and Mastercard.

(v ) Oligopoly- There are only a few sellers. Eg-
The manufacturer of Motor cars by Hindustan
Motors (Ambassador Car); Premier
Automobiles (Fiat Cars).
(vi) Monopsony- It refers to a situation where there is single buyer of the commodity.
Eg- A single payer universal health care system, in which the government is the only "buyer" of health care services.
 Defense industry in the USA, with only one buyer (the US Department of Defense) and several sellers (such as Lockheed Martin,
Boeing, Northrop Grumman, and Raytheon.

 Example of a situation where both a monopoly and a monopsony exist involves the market for nuclearpowered aircraft carriers: the monopsony being with only one purchaser (the United States Navy) and the monopoly being with only one producer
(Huntington Ingalls Industries).
 On the Basis of Function-
(i) Mixed Market- It is that market where several types of goods are purchased or sold simultaneously. It is also called General Market.

(ii) Specialized Market- Here only one kind of goods are sold and purchased. Eg- Cloth
Market, Jewellery Market etc.
(iii) Sample Market- Where goods are purchased and sold as specimen of any variety of goods.
(iv) Marketing by Grades- Goods are purchased and sold according to grades.

 On the Other Basis-
(i) Fair Market- Goods are purchased and sold on the price fixed by the govt. and no other price can be charged by the other seller.
(ii) Black Market or Illegal Market- In this market the seller charges higher price than the price fixed by the government. This price is taken by seller secretly.

• A market is an arrangement through which buyers and sellers exchange their goods and services, anything of value.
• Market structure is a set of characteristics that determine business environment under which firms operate.

– Level of Freedom of entry and exit
– Nature of the product – homogenous
(identical)/ differentiated?
– Control over supply/output
– Control over price

Market Situations
Perfect
Competition
ImPerfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly
Duopoly

A market is said to be perfect when all the potential buyers and sellers are promptly aware of the prices at which the transaction takes place. Under such conditions the price of the commodity will tend to be equal everywhere.
Eg-A stock exchange approximates a perfect competition, as do street food markets in developing countries, fish markets and vegetable vendors operating in the same area.

 Large number of buyers and sellers.
 Homogeneity of products.
 Perfect knowledge of Market.
 Absence of price control or any artificial restrictions.
 Free entry and exit of firms.
 Independent relationship between buyers.

In Imperfect competition market, the price of any commodity cannot be one. There will always be difference because buyers and sellers are not aware of the offers made by others.

 Small number of Buyers and Sellers.
 Difference in quality and shape of the goods.
 More expenses on Advertisement.
 Difference in Price.
 Product Differentiation.
 Lack of Knowledge on part of Consumers.

 It is a market situation in which there are few firms selling homogeneous or differentiated product.
 Eg- Telecom companies.

 Few Sellers
 Mutual Interdependence
 Entry and Exit of Firms is difficult.
 Heavy Expenditure on Advertisement.

 Duopoly means such type of Business in which there are two sellers, selling either a homogeneous product or a differentiated product.
 Eg: Visa and Mastercard

 It refers to a market situation in which there are many producers producing goods which are close substitutes of one another.

 Existence of Many Firms
 Large number of Sellers
 Product Differentiation
 Free entry and exit of Firms.
 Independent Price Policy.

 The word monopoly has been derived from Greek word Mono+Poly. Mono means Single and Poly means
Producer. Therefore, Monopoly means Single
Producer.
 Monopoly is that form in which a single producer controls the whole supply of a single commodity which has no substitutes.

 Single Seller
 Absence of Substitutes
 Barriers to the Entry of New Firm
 Full Control over Supply of Commodity.

 Natural Monopoly- When monopoly is established due to natural reasons.
eg- Mica production in India and Nickel production in
Canada.
 Social Monopoly- When Govt. in any particular area gives right of doing buss. To any one business man or buss. Institution.
eg- To supply water or to generate electricity or to install telephone lines.

 Legal Monopoly- When right is given to any body under certain law to do certain work. eg- Patent Rights or Copy rights.
 Industrial Monopoly- When an entrepreneur because of his efforts and ability starts producing more goods in comparison to other producers and captured highest market share.
eg- SAIL

 In Short- run
 Abnormal Profit/ Supernormal Profit-
At the equilibrium level of output a firm may get abnormal profit if its average revenue exceeds its average cost of production.
 AR = MR because there is no price difference.

Cost/Revenue
AC
Abnormal profit
Q
MC
AC
P = MR = AR
Output/Sales

 Loss-
At equilibrium output, a firm may suffer loss. It is because of the fact that a part of fixed cost may not be recovered in the short run. Inspire of these losses the firm would decide to produce, so long as it is able to recover the average variable cost.

Cost/Revenue
AC
Loss
Q
MC
AC
P = MR = AR
Output/Sales

 Normal Profits or Break Even-
When the firm just meets its average total cost, it earns normal profits.
Here, AR = ATC

Cost/Revenue
Q
MC
AC
P = MR = AR
Output/Sales





AR = AC – Normal Profit
AR > AC – Supernormal Profit
AR < AC – Loss
AR< AVC - Stop Production

Cost/Revenue
Q1
LMC
LAC
P = LMR = LAR
Output/Sales

 In Short- run
 Abnormal Profit/ Supernormal Profit-

Costs / Revenue
MC
Monopoly
Profit
Q
MR
AR
AC
Output / Sales

Costs / Revenue
Monopoly
Loss
MC
AC
Q
MR
AR
Output / Sales

Costs / Revenue
MC
Q
MR
AR
AC
Output / Sales

Costs / Revenue
LMC
Monopoly
Profit
Q
LMR
LAR
LAC
Output / Sales

 In Short- run
 Abnormal Profit/ Supernormal Profit-

Costs / Revenue
MC
Monopolistic
Profit
Q
MR
AR
AC
Output / Sales

Costs / Revenue
Monopolistic
Loss
MC
AC
Q
MR
AR
Output / Sales

Costs / Revenue
MC
Q
MR
AR
AC
Output / Sales

Costs / Revenue
LMC
Q
LMR
LAR
LAC
Output / Sales

 It includes two models-
(i)
(ii)
Non-Collusive Oligopoly (Kinked Demand
Curve)
Collusive Oligopoly Model

 The Kinked demand curve is drawn on the assumption that the kink in the curve is always at the ruling price.
 Taking the ruling price, as given, it assumes that a rise in price beyond the ruling price will lose his customers to his rivals.
D
P
D’

 The upper part of the curve is more elastic than the lower part of the curve.
 The reduction of the price below the ruling price will immediately invite the rivals to reduce their price to protect their own sales.
 The lower part of the curve is less elastic than the upper one.

 It does not explain how prevailing price is determined. It simply explain how a price once determined in market remains constant.
 It does not explain price-output relationship.

When competing firms make some kind of agreement about pricing and output, they are said to collude. Collusion can be of two types:
1.
Perfect
2.
Imperfect (Price Leadership)
Perfect Collusion: In case of perfect collusion there can be Centralized cartel or Market sharing cartel.

Centralized Cartel: In this cartel the price and output decisions for the whole industry is taken by CC Board to achieve maximum joint profit.
Cartel Board fixes the output quota to each member firm and total profits are distributed among the firms according to prior agreement.
Market sharing Cartel:
(i) Market sharing by non-price competition:
Here firms are agreed to sell at an uniform price but member firms are free to produce and sell that quantity at which their profits are maximised.

(ii) Market sharing by Quota: In this quota of different firms is decided by bargaining between firms on the basis of past sales or the productive capacity of firms.
Imperfect Collusion: Under Price leadership one firm assumes the role of a price leader and fixes the price of the product for the entire industry.
The other firms in the industry simply follow the price leader and accept the price fixed by him and adjust their output to his price.

 Dominant Firm: In this type of firm , it is found that there is generally one firm among the firms operating in the industry which produce the bulk of the product in the industry.
 Barometric Firm: Under this type an old, experienced and the largest firm assumes the role of a leader but undertake also to protect the interest of all firms instead of merely promoting his own interest.

 Exploitative or Aggressive: In this case one big firm comes to establish its supremacy in the market by following aggressive price policies.
The firm compels other firms to follow and accept the price followed by him.