MAIN MARKET FORMS Meaning of market It refers to the whole area in which buyers and sellers are in free competition with one another. Features of market commodity to be brought and sold buyers and sellers of the commodity area, in which buyers and sellers live, and Close contact between buyers and sellers. • • • •
Classification of market 1. on the basis of competit competition ion – perfect competition market monopoly imperfect competition market a) monopolisti monopolistic c b) oligopoly oligopoly c) duopoly duopoly 2. On the the basis basis of of area area – local market regional market national market international market 3. On the basis of time time element element very short period market short period market long period market very long period market 4. On the basi basis s of legali legality ty open market black market 5. On the basis of quantity of the commodity * Wholesale market * Retail market 6. On the basis of commodities and services * Commodity market * Factor market • • •
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Meaning of perfect competition market
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A perfectly competitive market is defined as a market in which no individual firm can influence the market price on its own. Features numbe r of buyers and sellers – The number is so large 1. Large number that no single buyer or seller can affect the market. It implies that individual output of every seller is the negligible fraction of total output, so no one of them is capable of influencing the market, so they have to accept the price prevailing in the market. Homogen ous product – Goods produced by different firms 2. Homogenous are homogenous so that all buyers buyer s are willing to pay the same price for the product of all a ll producers of a good. Free dom of entry and exit of firms – There are no obstacles 3. Freedom in the way of new n ew firms joining the industry and existing firms leaving the industry. This ensures that there are neither above normal profits nor losses by any firm in the long-run. Perfe ct knowledge of market conditions condition s – This means that all 4. Perfect producers and consumers are fully informed about the market. So, no consumer is prepared to pay a price higher than what is being charged in other parts of the market. Perfe ct mobility of factors factor s of production product ion – mobility of factors 5. Perfect from one industry to another industry, which gives them more remuneration. Shape of AR and MR curve under perfect competition market outp TR AR MR ut 1 10 10 10 2
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Under perfect competition market, a firm is only a price taker. If a firm tries to sell at a price higher than market price it will lose all its customers. Nor can it afford affor d to change a price less than the prevailing market price. It will not be beneficial for it to do so. This is because; the production of a firm under perfect 2
competition constitutes a very small fraction of the total production of the industry. A firm can sell its entire production at the prevailing market price. Hence, its marginal revenue is equal to its average revenue.
Meaning of Monopoly “Monopoly is that market situation in which a firm fir m has the sole right over production or sales of the product and it has no competitor in the market and no close substitute for its product”. 1.
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A single seller – There Ther e is only one producer of a product. produc t. It may be due to some natural conditions prevailing in the market, or may be due to some legal restriction due to patent, copyright, state monopoly etc. No close substitutes substitu tes – A monopoly monopo ly market has no such close substitutes and, therefore, practically does not face any competition. Restrictions Restri ctions on the entry of new firms – Other firms are prohibited to enter this type of market. There are strong barriers that prevent entry of new firms into the industry. Firm is a price maker – Monopoly firm has full control contr ol over the supply of its product. The firm has full control over the supply becausea) thee is no compet competition ition in in the market market b) there are barriers to the entry of new firms. Possibility Possibi lity of price discrimination discrimina tion – The act of selling the homogenous product at different prices to different buyers is known as ‘ price-discrimination’. This act is possible If the monopolist have full control over supply, supply, and operates in different market with no possibilities of resale, and different elasticities in different market. No selling cost – As there is no competition, competition , hence, there is no need to incur advertisement costs or selling cost.
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Causes responsible for emergence of monopoly Natural Natur al factors – There Ther e are certain commodities commoditi es which are available in specific geographical area and climate. When a firm owns all the deposits of some specific minerals, it has to face no direct competition. prohib itions – The law may prevent the entry of new 2. Legal prohibitions rival firms into the industry. monopo ly, if its business busine ss has 3. Cost factors – The firm enjoys monopoly, attained large size and highest order of efficiency. investme nt – If certain industry requires requir es heavy 4. Heavy investment investment, competitive firms cannot be formed easily. 1.
AR & MR curve under Monopoly Under monopoly the AR curve slopes downwards form left to right. It means that if a monopolist desires to sell more units of the output, he will have to reduce the price & vice-versa. Hence there is a negative relationship between the demand for the product of a monopolist and its price.
Meaning of Monopolistic competition market “is a market situation where there is a large number of buyers and sellers selling closely related goods but surely not homogenous”.
Features seller s and buyers – As there are large no. of 1. Large no of sellers sellers and buyers , so the individual in dividual firm or buyers is incompetent to affect the price of the industry. Every firm 4
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has its own price and output policy and does not bother much for the reactions of rival firms. Product Produ ct differentiati differ entiation on - The products product s of different differ ent firms are not homogeneous but are close substitutes. Products are differentiated from each other in terms of brand name, colour , shape, quality , and type of service etc. Due to product differentiation, firms enjoy partial control over price, and have a independent price policy. Free entry en try and exit – Firms are free to join and leave the industry at their own will. A new firm may enter the industry and produce close substitutes, without significantly affecting the market. Free entry and exit imply zero profit in long run. Selling Sellin g cost – Expenditure Expenditur e on advertisemen adver tisementt are made to persuade buyers to buy a particular brand of the product in preference to other brands. Imperfect Imperf ect knowledge knowledg e of market marke t conditions – Due to product differentiation, it become difficult to compare the price of different products. Sometimes, the products of different sellers are really the same, but consumers may come o know a particular brand name more than others.
AR & MR curve under monopolistic competition market The AR & MR curve under monopolistic competition market is more elastic. If a firm under monopolistic competition raises the price ; the proportionate fall in its demand will be more. It is so because in an monopolistic competitive market market goods have their substitutes and buyers are equally attracted towards them. If one firm raises the price of its products, the buyers will shift their demand to the substitute product, whose price remains unchanged. Thus, if a firm raises price, demand for its product will fall substantially and conversely, if its lowers the price, demand for its product will rise considerably.
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Returns to scale Meaning – “ returns to scale relates to the behavior beh avior of total output as all inputs are varied in same proportion and it is a long-run concept”. The output in long period may show three possibilities – a) Increasing returns to scale b) Constant returns to scale Diminishing returns to scale.
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Increasing returns to scale Increasing returns to scale occur when a given percentage increase in all factor input causes proportionately greater increase in output. Causes of increasing returns to scale Economics of scale refers to the situation in which increasing the scale of production reduces the unit cost of production or raises output per unit of the factor inputs. in puts. It can be of two types – internal economies of scale and external economics of scale. Internal economies of scale – are those economies which are firm – specific. These are available to that particular firm in the industry which seeks to increase its level leve l of output by way of increasing its scale of production. a) Technical economies – when a firm increases its scale of production, it becomes possible for it to make use of modern machines and superior technique of production. b) Labour economies – it becomes possible for the firm to introduce complex division of labour which results in greater efficiency of lab our and hence fall in the cost of production. c) Managerial economies – The firm producing on large scale can afford o engage competent and efficient manages. It also results in more efficiency and hence, less cost of production.
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d) Financial Financial economies economies – A large sized firm has high creditcreditrating. It is in a position to secure huge hu ge loans at low rate of interest. e) Economies of purchase and sale – on account of its large size firm can purchase large quantity of raw material at low price. It also succeeds in selling goods by paying low rate of commission. External economies of scale These are the economies which are industry specific. These are available to all the firms in the industry when the scale of operation of the industry as a whole expands. a) Development Development of the means means of transport transport and communication, post and telegraph office. b) Spread of banking banking and credit credit facilities facilities c) Facilities Facilities for advertis advertising, ing, insurance insurance etc. etc. d) Information Information relating relating to new invention, invention, new market, prices etc, helps in cutting down unnecessary cost. e) Setting Setting up of subsidiary subsidiary industries industries,, training schools schools for laboures etc. Constant returns to scale It occurs when a given percentage increase in all factor inputs causes equal percentage increase in output. Diminishing returns to scale It occurs when a given percentage increase in all facto inputs causes proportionately lesser increase in output. o utput. Causes of diminishing returns to scale Internal diseconomies – refers to those factors which raise the cost of production of a firm, if its scale of production is increased beyond a point. These includes – a) management management and co-ordination co-ordination of different department departments s become difficult. b) Technical difficulties in the cooperation would stat emerging. c) A firm may have have to pay more for increased increased supply supply of factos factos inputs. It may be due o relatively more demand for facto inputs. External Diseconomies – is the result of excessive ex cessive growth of the entire industry of which the individual firm are the members. a) there can be shortage shortage of raw materials materials.. lAs a result cost cost starts rising. 7
b) As an industry expand, there will be competition among it s member firms for the factors of oproduction. c) When an industry industry is developed developed at a particular particular lplace, lplace, cost cost of stransportation increases.
TEST II Q.1. a) What is the sum of households h ouseholds consumption expenditure and households savings called ? b) Are services rendered by govt. included in national income ? Give reasons. c) State two sub-sectors of secondary sector. d) Give one alternative name of expenditure method. e) What are subsidies ? 5 f) Do you include the value of retained goods for self consumption in the national income ? Q.2. Differentiate between factor payment and transfer payment giving examples. 3 Q.3. State four components of domestic capital capital formation. Explain any one of them. 3 Q.4. Are the following included in the category ‘ factor income earned by the normal resident from abroad’ . abroad’ . Give reason in support of your answer :* Salary received by an Indian employee in a foreign embassy in India. * Hotel expenses done by a foreign tourist at delhi. * Rent received by an Indian by renting his home to a foreign embassy. 3 Q.5. State the component of domestic factor income. Explain any one of them..4 Q.6. Give an outline of estimating national income by expenditure method. 4 Q.7. Given private income, how do you find out national income. 3 Q.8. Which of the following is factor payment? Why and why not ;8
* Interest paid on loan taken by a production units * Interest paid on loan taken by a household consumer. 4
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