�MARKET AND ITS FORMS �
UNIT-4
MICROECONOMICS
Market
Market refers to the system that bring the buyer and seller in contact with each other to sale and purchase of goods.
Classification of market
Perfect competition
Imperfect competition
Mono poly
Monopolistic competition
Oligopoly
Perfect competition
It refers to the market structure in which there are large number of buyers and sellers of a homogeneous commodity.
Features of perfect competition:�
1: Large numbers of buyers and sellers
Due to this feature individual buyer and individual seller has a small fraction of market demand and market supply respectively.
Implication:
- Market price is given to a firm .it can not effect the market price.
2: Homogeneous product
A product is said to be homogeneous when each unit of it is same in size, shape, colour, weight. So that buyers do not find any difference in the product. This is known of ZERO DIGREE OF PRODUCT DIFFERENTITATION.
Implication:
-Homogeneous product leads to uniform price in the market.
-Due to this feature goods are perfectly substitute each other.
3:Free entry and exit of the firm
In this market a new firm is free to enter the industry and existing firm is free to leave it. But this can be possible in long period , not in the short period.
Implication:
-Due to this firms in the long run earn only normal profits.
4: perfect knowledge about market :
In this market buyers and sellers are fully aware of the prevailing price in the market. So producers cannot charge different prices from different buyers.
5: perfect mobility of factors:
Perfect mobility of factors leads to uniform price of the factor
6: Absence of transport cost:
Conclusions:
1: A firm under the perfect competition is a price taker , not price maker because of : large no. of firms , homogeneous product , perfect knowledge
2: Demand curve is perfectly elastic
3: In the long run firm earn only normal profit
TR , AR (Demand) and MR Curve
Quantity | Price =AR | TR=P*Q | MR |
1 | 3 | 3 | 3 |
2 | 3 | 6 | 3 |
3 | 3 | 9 | 3 |
4 | 3 | 12 | 3 |
5 | 3 | 15 | 3 |
TR
AR & MR
Quantity
Quantity
y
o
x
y
o
x
45*
TR
AR=MR=DD
MONO POLY��single seller
It is a market form in which there is a single seller of a product with no close substitute.
In this market, distinction between firm and industry disappears.
Features of monopoly:
1: Single seller and large number of buyers
In this market producer may be alone , or may be a group of partners or a joint stock company , however there is a large umber of buyers.
Implication: because of this monopolist has full market control. He can fix price of his product , so monopolist is a price maker.
2: No close substitute: Railways
patent rights , control over a technique or over the raw material for production.
Implication: due to this monopolist earns extra normal profit.
4: Price discrimination:
It refers to the art ,charging different prices from different buyers. A monopolist may charge different prices from different buyers.
Being a single seller of the product, a monopolist
has full control over its price. A monopolist, thus, is a price maker. He can fix whatever price he wishes to fix for his product.
its demand curve is the market curve.
Demand curve (AR) of Monopoly
Full control over the price does not mean that the monopolist can sell any amount of quantity at any price. Q.D. depend on the buyers , buyers will demanded more if price low , so that there is inverse relation between price and quantity demanded , accordingly demand curve slopes downward.
Y
O
X
Price
Quantity
P
P*
Q
Q*
A
B
Why monopolist arise?
1: Licensing by the government
2: Patent rights on the product or on the production process
3: control of the supply of key raw materials.
Barriers to entry is the single most important factor that contributes the existence of monopolies.
Monopolist competition
It is a form of market in which there are many buyers and many sellers of the product, but the product of each seller is differ from of other. Differentiation is generally by trademark or brand name.
It includes the features of monopoly and perfect competition
Features of monopolistic competition
1: large numbers of buyers and sellers:
Each firm has a limited share of the market
2: Product differentiation:
It implies that firms are selling product which are not perfect substitute but close substitute . ……
Implication : partial control over the price of a firm ,high elasticity of demand (e>1) , increase consumer choice .
3:Selling cost: product differentiation supported with high advertisement it leads to selling cost .
4: free entry and exit :
Implication : normal profit in long run
5:lack of perfect mobility:
6: Lack of perfect knowledge : due to product differentiation it is not possible to have perfect knowledge about market.
7: Non price competition: it is a strategy for increase market share through advertisement. Examp. --
Implication: high advertisement cost , price of product remain sticky
8: Down ward sloping demand curve:
Y
O
X
AR
MR
Price
Quantity
Demand curve Comparison among Perfect competition , Monopolistic competition , and Monopoly
Price
Quantity
Perfect competition
Monopolistic competition
Monopoly
Y
O
X
Oligopoly
It is a form of market in which there are a few big firms and a large numbers of buyers of a commodity.
In this market each firm has a significant share of the market. Price and output decision of one firm impacts the price and output decisions of the rival firms.
Features of oligopoly:
1: Small number of big firms:
In this market a firm has partial control over price by brand loyalty. It is achieved by heavy advertisement.
Implication : oligopoly can be convert in to monopoly
2: High degree of interdependence :
In this market price and output policy of one firm depends on the price and output policy of other. This is known as cut - throat competition .
3: Formation of cartels:
A cartel is a formal agreement among the firms to avoid competition. It is a sort of collusion of the competing firms, but against competition. So, it is called collusive oligopoly. collusive oligopoly is likely a monopoly form of the market.
4: Difficult to trace demand curve:
Due to high degree of interdependence among the firms , when a firm reduce its price , demand of its product may not rise , because of rival firms may lower the price more so no specific response of demand to change in price.
5: Entry barriers:
Barriers created by patent rights.
So existing firms are not worry about
the entry of new firms in the market.
6: Non price competition :