CH.9: Forms of Market Flashcards
Market and market structure meaning
In Economics, market refers to all areas in which buyers and sellers are in close contact with each other for the purchase and sale of commodity.
Market structure refers to the types of market in which producers or firms operate.
Features of Market
Commodity - For the existence of a market, commodity is essential, which is to be bought or sold.
Buyers and sellers - Without buyers and sellers, the sale and purchase of commodities cannot be conducted.
Area - There should be an area in which buyers and sellers should come to a particular place to transact business.
Close contact - There should be close contact and communication between buyers and sellers.
Competition - There should be some competition between the buyers and sellers of the commodity in a market.
Factors determining market forms
- Number of buyers and sellers - The power of a seller to influence the market depends upon its share in the total supply. The smaller the number of sellers, the larger would be the power of the firm to influence the price because it produces a larger proportion of total supply. On the other hand, if the number of sellers in the market is large, the power of a seller to influence the market would be less because its share in the total supply is less.
- Nature of the product - The amount of competition in a market depends on how similar the goods are which are produced by different firms. In a perfectly competitive market, goods produced by different firms are homogeneous.
- Knowledge about market - If buyers and sellers have full information about the market conditions, the price at which the product is being sold by other sellers and the nature and the quality of the product, then a single price would prevail in the market.
- Freedom of entry and exit - Freedom of entry or exit of firms means that there are no restrictions - natural, man-made on the entry of new firms and on the exit of existing firms.
Markets may be classified into 5 types:
i) Perfect competition
ii) Monopoly
iii) Monopolistic competition
iv) Oligopoly
v) Monopsony
Perfect competition meaning
Perfect competition is the market situation where there are a large number of buyers and sellers, dealing with homogeneous products. It is that market which is automatically regulated by the forces of demand and supply over which individual sellers have no control.
Implications of perfect competition*
- Large number of buyers and sellers -Buyers and sellers of the product are just price takers. A competitive firm faces a perfectly elastic demand curve. It also has no bargaining power in the market.
- Homogeneous product - This feature ensures uniform price in the market.
- Freedom of entry and exit - This feature ensures that there are neither abnormal profits nor losses in the long-run.
- Perfect mobility of resources - This feature ensures uniform structure in all the firms.
- Absence of transport costs - Transport costs do not affect the market price. It is a price taker.
Pure competition meaning and main requisites
Pure competition is a market situation in which a commodity sells for a uniform price in the market.
This exists only if the three features of perfect competition also exist namely, large number of buyers and sellers, homogeneous products and freedom of entry and exit.
i) Large number of buyers and sellers
ii) Freedom of entry and exit
iii) Homogeneous product
iv) Consumers have perfect knowledge about the markets
Pure vs Perfect competition
Pure competition exists when there are a large number of buyers and sellers who deal in the homogeneous product and the industry is characterised by free entry and exit. Pure competition is free from any monopolistic element.
Perfect competition is a much wider compared to pure competition, which is a narrower one.
Monopoly meaning
Monopoly refers to the market firm in which there is only a single seller or producer, large number of buyers of a commodity which has no close substitutes. For example, Indian Railways and KSEB.
Features of monopoly
- Single seller and large number of buyers - Under monopoly, there is a single producer of a commodity. He may be alone or there may be a group of partners or a joint stock company or a State. However, there is a large number of buyers of the product.
- No close substitute of the commodity - A monopoly firm produces a commodity that has no close substitutes. For example, there is no close substitute for Microsoft. They have the monopoly of operating systems.
- Closed or restricted entry of new firms - Under monopoly, there are some restrictions on the entry of new firms in the monopoly industry. Generally there are patent rights or exclusive control over a technique or raw material.
- Full control over price - Since there is only one seller in the market, he has full control over the price. He is a price maker. He can make variations in the price according to the market conditions.
- Price discrimination (Discriminating monopoly) - The act of selling the same product at different prices to different buyers is known as price discrimination. For example, State electricity board charges different rate for commercial and domestic use. Price discrimination means charging different prices for different customers. This may be local, personal or of use. For example, doctors charging different fees for poor and rich patients.
Monopolistic competition meaning
Monopolistic competition refers to that market form under which there are a large number of sellers selling similar but differentiate products having partial control over the price.
*Close substitute and acute competition
Features of monopolistic competition
- Large number of buyers and sellers - There is a large number of buyers and sellers, but when compared to perfect competition, there is a lot less, in the market.
Each firm controls a very small share of the total output of the industry. Any action on its part will influence other firms/rival firms. - Differentiated product - The products of the sellers are differentiated but are close substitutes of one another. Product differentiation can be real or artificial. Its effect is that sellers have partial control over its price. Under monopolistic competition, the products of different firms are not h homogeneous but are different from each other in terms of brand, name, colour, quality, size etc.
Buyers develop some kind of preference for the product of a particular seller because of product differentiation, each firm decides its price policy independently. - Free entry or exit of firms - Firms can freely move in and out of a group. Instead of industry, the word ‘group’ should be used in product differentiation and monopolistic competition. In monopolistic competition, the concept of industry is undefined as products are differentiated.
- Selling cost - Selling cost is the expenditure incurred by the firm to promote the sale of its product through various sales promotion measures. Selling cost refers to the additional expense which is incurred by the firms to promote sales, this expenditure may include advertisement cost, offering discounts etc. This cost becomes important in those market firms where product are differentiated, Expenses on advertisement and publicity are called selling cost which plays an important roles in the monopolistic market.
- Non-price competition - Several firms compete with each other without changing the price of their product. For example, some firms introduce gift schemes with particular purchases etc.
- Independent price policy - It can make its own price and output decisions. It means that a firm under monopolistic competition is the price-maker for its product.
Product differentiation meaning
Product differentiation means similar products but still differentiate in terms of quality, quantity, size , shape, colour etc. For example, soap, toothpaste, detergent etc.
Oligopoly meaning
Oligopoly is a market situation in which there are a few sellers dealing in homogeneous or differentiated product. It is a market situation in between that of monopolistic competition and monopoly. In this market there are only a few sellers of the commodity. Because of this it has also been called as ‘competition among the few’.
There are different types of oligopoly. If the product is homogeneous, it is pure oligopoly. If the product is differentiated (heterogeneous), it is called differentiated oligopoly.
Duopoly is a special type of oligopoly where there are two sellers.
Features of oligopoly
- Interdependence - Interdependence is an important feature of oligopoly. Oligopolistic firms sell as significant proportion of the total product. Any action on its part may produce reaction on the part of other firms. No firm can ignore the presence of its rivals in the market, and it necessitates mutual dependence of the firms under oligopoly.
Oligopolistic firms are interdependent of each other in their decision-making. No firms can take independent decisions regarding price and output. Each firm will have to take into account the possible reactions of the rival firms. - Barrier to entry - There are various barriers to the entry of new firms. These barriers are almost similar to those under monopoly. Entry of a new firm is extremely difficult.
- Few sellers - Oligopoly is a market structure in which a few firms dominate the industry. However, the number of buyer in oligopoly is quite large.
- Intense competition - Each firm, with only a few rival firms, knows that it has a significant market power to influence the market price. The number of the firms is so small that any action by one firm is likely to affect the rival firms. Therefore, every firm keeps a close watch on the actions of the rival firms. Oligopoly is the highest form of inter-firm competition among a few competitors.
- Nature of the product - The firms under oligopoly may produce either homogeneous product or differentiated product. In automobile industry, Maruti, Santro and Indica are examples of differentiated oligopoly. Whereas, cooking gas of Indane and Burshane are the examples of pure oligopoly.
- Importance of selling cost - Firms compete with each other through various sales promotion measures like price-cutting, discounts, door-to-door campaign, advertisement etc. There is a great importance of selling costs and advertisement under oligopoly.
