CHAPTER
– 09
FORMS OF MARKET
In ordinary sense the
word market means a place where buyers and sellers are contact each other or it
is a place where goods and services are bought and sold.
CLASSIFICATION
OF MARKET
Economists
have classified market on the basis of the following facts:
1. On
the basis of place:
i.
Local market
ii.
National market
iii.
International market
2. On
the basis of time:
i.
Very short period market
ii.
Short period market
iii.
Long period market
3. On
the basis of competition:
i.
Perfect competition
ii. Monopoly
iii. Monopolist
competition
iv. Oligopoly
PERFECT COMPETITION
MARKET
It
is a market structure in which there are large number of buyers and sellers,
producing homogeneous product. No individual seller can influence the market
price of the commodity. Under perfect competition price is determined by demand
and supply. The firm under perfect competition is a price taker.
Features of Perfect
Competition Market
A perfect competition
market must satisfy the following features.
1. Large Number of Buyers and Sellers
Under
perfect competition market there exist the large number of buyers and sellers
for a commodity.
2. Homogeneous Product
Under
perfect competition all firm’s produce homogeneous or identical product. In
other words, firm’s product must be considered to be same.
3. Freedom of Entry and Exit
Under
perfect competition the new firms are free to enter the industry and the
existing firms are free to leave the industry if they so desired. There is no
restriction.
4. Perfect Mobility of Resources
Under
perfect competition factors of production can be freely move from one place to
another place or from one job to another job.
5. Perfect Knowledge about the Market
Conditions
Under
perfect competition buyers and sellers have perfect knowledge about the market
conditions.
6. Absence of Transport Cost
Under
perfect competition all firms are facing the same transport cost that is why it
will not affect the price.
7. Profit Maximization
In
perfect competition the firms’ goal must be profit maximization.
8. Price Taker
In
perfect competition, it is impossible for any firm to set its own prices of the
product
MONOPOLY
It
is a market structure in which there exists only a single seller of a product
who is the sole producer of the product which has no close substitute.
Features of Monopoly
1.
Single
Seller
It is a market situation in which there exists only
one seller or producer for a commodity.
2.
No
Close Substitute
The monopolistic producer produces such a commodity
which has no close substitute.
3.
Closed
Entry
There are some restrictions on the entry of new
firms in the monopoly industry. The closed entry may results from natural,
legal or man-made restrictions,
4.
Price
Maker
Under monopoly the producer or seller is a price
maker.
5.
Possibility
of Price Discrimination
It refers to a situation when a producer sells the
same product to different buyers at different prices.
MONOPOLISTIC
COMPETITION
It
is a form of market in which there are large numbers of sellers of a particular
product, each sellers sells different product.
Features of
Monopolistic Competition
1.
Large
Number of Buyers and Sellers
Under monopolistic competition there
exist the large number of buyers and sellers.
2.
Differentiated
Product
Product differentiation is the key
element of monopolistic competition.
3.
Free
Entry and Exit
Under monopolistic competition the firms
can freely enter and exit from the industry.
4.
Selling
Cost
By competing with others, the firms
under monopolistic competition bearing the selling cost, it is in the form of advertisement
charge, sales promotion, discount etc.
5.
Non
Price Competition
Because of the product differentiation, price
competition does not exist under monopolistic competition.
OLIGOPOLY
It
is a form of market where there exist a few sellers for a commodity. Generally
when the numbers of sellers for a product are two to ten, it is called
oligopoly.
Features of Oligopoly
1.
Intensive
Competition
When there are few sellers of a commodity, keen
competition among them is bound to exist.
2.
Inter-dependence
of the Firm
It means inter-dependence of the firms in respect of
decision making.
3.
Nature
of Product
In oligopoly, they may produce homogeneous or
differentiated product.
4.
Selling
Cost
Under oligopoly, firms compete with the selling
cost.
5.
Barrier
to Entry
It means in oligopoly it necessitates the barrier to
entry.
EQUILIBRIUM
OF FIRM UNDER SHORT RUN AND LONG RUN UNDER VARIOUS MARKET FORMS
SHORT RUN EQUILIBRIUM OF
A FIRM UNDER PERFECT COMPETITION
In
perfect competition, there are THREE
possible short run equilibrium positions. They are:
1. Abnormal
Profit
2. Abnormal
Loss
3. Normal
Profit
1.
ABNORMAL
PROFIT
In
the perfect competition, a firm would be in equilibrium under following
conditions:
a) MC
= MR
b) MC
intersecting MR from below.
In
perfect competition, sellers are charging same price for all the units of
commodities. So in this market price is always equal to AR and MR. So AR and MR
curve are a straight line parallel to OX axis.
Suppose,
the price in the market (AR) is greater than the average cost of the firm, then
the firm will be earning super normal profit. This is illustrated in the
following figure:
(Leave
space for diagram)
In
the above figure, OP is the price and OQ is the output in the market. SMC
intersect MR at point E. At this point average cost is OR or OS and average
revenue is OP or QE. The difference between average revenue and average cost
represents abnormal profit. That is the shaded area PESR.
The
existence of super normal profit will attract more firms to the industry. So
supply will increase and price will falls and super normal profit will
disappear, then it will leads to abnormal loss.
2.
ABNORMAL
LOSS
If
the price (AR) in the market is less than the average cost of the firm, the
firm will be incurring losses. This is illustrated in the diagram below:
(Leave
space for diagram)
In
the above figure, OP is the price and OQ is the output in the market. At this
point average cost is OR and average revenue is OP. The difference between
average revenue and average cost represents abnormal loss. The shaded area PESR
is the abnormal loss incurred to the firm.
The
presence of abnormal loss will force some firms to leave industry. So supply
will decrease and price will increase and it will leads to normal profit.
3.
NORMAL
PROFIT
When the price (AR) in the market is equal to
average cost at the equilibrium point, the firm earns the normal profit. This
situation is shown in the figure below:
(Leave space for Diagram)
In
this figure, E is the equilibrium point and Q is the equilibrium output. Here;
P = AR = MR = SMC = SAC, that is the price is equal to both average cost and
average revenue. Hence, the firm is getting normal profit.
LONG RUN EQUILIBRIUM OF
A FIRM UNDER PERFECT COMPETITION
A
firm under perfect competition will be in equilibrium in the long run when they
earn only normal profit. The key of long run equilibrium is free entry and
exit. It ensures that the firm earns only normal profit in long run.
If
the existing firms are making abnormal profit in the short run, new firms will
enter into the industries to earn this profit. So the total supply of the
industry will increase and it leads to fall in price. As the price falls, they
will get only normal profit (AR = AC).
On the other hand, if
the existing firms are incurring loss in the short run, there is a signal foe
exit in the long run. As some firms exit, the industry’s supply falls and price
will increase. It leads to normal profit (AR = AC). This is illustrated in the
figure below:
(Leave space for Diagram)
SHORT RUN EQUILIBRIUM OF A FIRM
UNDER MONOPOLY
A
monopolistic firm would be in equilibrium under the following conditions:
a) MC
= MR
b) MC
intersect MR curve from below.
In
monopoly, THREE equilibrium possibilities are there:
1. Abnormal
Profit
2. Abnormal
Loss
3. Normal
Profit
1.
SUPER
NORMAL PROFIT
When
the P (AR) > AC, the firm will earn super normal profit. This is illustrated
in the figure below:
(Leave space for
Diagram)
2.
ABNORMAL
LOSS
When
the P (AR) < AC, the firm will incur super normal loss. This is illustrated
in the figure below:
(Leave space for
Diagram)
3.
NORMAL
PROFIT
When
the P (AR) = AC, the firm will earn normal profit. This is illustrated in the
figure below:
(Leave space for
Diagram)
LONG RUN EQUILIBRIUM OF A FIRM
UNDER MONOPOLY
In
the long run only TWO possibilities
are there, they are abnormal profit and normal profit because the entry of new
firms are completely blocked in the long run. Therefore, the monopolist can
earn either abnormal profit or normal profit in the long run.
(Leave space for
Diagram)
SHORT RUN EQUILIBRIUM
OF A FIRM UNDER MONOPOLISTIC COMPETITION
Under
monopolistic competition also, the profit maximization rule is:
a) MC
= MR
b) MC
curve intersects MR curve from below.
There are THREE
equilibrium possibilities under monopolistic competition in the long run:
1. Abnormal
Profit
2. Normal
Profit
3. Abnormal
loss.
1.
ABNORMAL
PROFIT (P / AR > AC)
(Leave space for
Diagram)
2.
NORMAL
PROFIT (P / AR = AC)
(Leave space for
Diagram)
3.
ABNORMAL
LOSS (P / AR < AC)
(Leave space for Diagram)
LONG RUN EQUILIBRIUM OF
A FIRM UNDER MONOPOLISTIC COMPETITION
In
the long run all the firms are getting normal profit. The conditions of the
long run equilibrium are:
a) MC
= MR
b) MC
curve intersect the MR curve from below.
c) P
/ AR = LAC
(Leave space for
Diagram)
