Main market forms Flashcards
What are the two aspects of market?
Demand and supply
What is the market?
It is the whole region where buyers and sellers of a commodity are in contact with each other to effect, purchase and sale of the commodity
When we talk about the area of a market, do we refer to a particular place?
No, it does not necessarily have to be a particular place
So what is area?
The area is the point of contact between the buyer and seller
Why is competition essential for existence of market?
Competition is essential, otherwise, different prices may be charged for the same commodity
What is market structure?
It is the number and type of firms operating in the industry
What are the main factors that help us determine the market structure?
- Number of buyers and sellers
- Nature of commodity
- Freedom of movement
- Perfect knowledge
- Mobility of goods and factor of production
How does freedom of entry and exit allow price to be stable?
If there are restrictions on entry and exit, then the existing form can influence the price as it will have no fear of any competition. Without the fear of competition the firm will charge higher prices and earn abnormal profit
Higher mobility leads to _______ lower mobility leads to ________
Competition. Barriers
What are the forms of market?
Perfect competition and imperfect competition
What is perfect competition?
It is a market situation where there are very large number of buyers and sellers dealing in homogeneous product at price fixed by the industry.
Perfect competition is _______
Imaginary
Closest example of perfect competition
Agricultural goods.
As this example includes large number of buyers and sellers, and no single buyer and seller can significantly affect the market price
What are the features of perfect competition?
- Very large number of buyers and sellers.
- Homogeneous product.
- Freedom of entry and exit
- Perfect Knowledge
- Perfect mobility of factors of production
- Zero transportation cost
- No selling cost.
What is the implication of ‘ very large number of buyers and sellers’?
This means that individual seller cannot influence the market price. As the numbers of sellers is huge, so the share of each seller is insignificant in the total supply.
In perfect competition, why is purchase of a commodity a matter of chance, not choice?
The products that are sold are identical in all respects. So buyer has no specific preference to buy from particular seller only. There is no deliberate choice the buyer is making because all the products are the same. Buyer may just purchase the commodity from the shop, closest to him or her. It happens randomly, by chance.
What is the implication of ‘ freedom of entry and exit’ under perfect competition?
The freedom of entry and exit ensures the absence of abnormal profits and abnormal losses.
1. Freedom of entry is when existing firms are earning abnormal profits. So new firm enter attracted by the prospect of profit. The entry continues till each firm earns normal profit.
2. Freedom to exit refers to when firms leave when they are facing loss. The firm leaves the market supply goes down and places go high. This reduces the loss.
What does perfect knowledge refer to?
Perfect knowledge means that buyers and sellers are fully informed about the market price and the uniform price must prevail
Explain the implication of ‘ perfect mobility of factors of production’
No geographical or occupational restriction on their movement. Factors are free to move to the industry in which they get the best price.
What do you mean by selling cost?
Selling cost means the cost of advertisement of product
What is the firm and what is an industry?
Firm is a single unit that produces goods and services. Industry is an aggregate of all the firms producing the same commodity.
Price is determined at which point?
The price is determined at the point where the market supply curve intersect the market demand curve
This AR (price) curve is parallel to X axis, which means it is ________
Perfectly elastic (infinite demand at the same price)
When AR is constant ______
MR is equal to AR
