Wednesday, August 23, 2017

NOTES ON FORMS OF MARKET

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)

No comments:

Post a Comment