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J Main Market Forms J

Q1. What is Market Structure?

Market structure refers to the number and types of firms operating in the industry

Q2. Define market? Give the characteristics of market?

Market refers to the mechanism by which buyers and sellers come in contact with each other to affect the sale and purchase of the commodity.

J Characteristics of Market:

a) Area = market does not refer to any particular place. It spreads over an area in which buyers and sellers come in contact with each other.

b) Buyers and sellers = buyers and sellers both form the part of market.

c) Commodity = in economies, one commodity has one market. For the existence of the market, there must be a commodity which will be sold and purchase among buyers and sellers.\

d) Competition = the existence of competition among the buyers and sellers is also an essential condition for the existence of market.

Q3. What are the different form of market?

a) Perfect competition market.

b) Monopoly market.

c) Monopolistic market.

d) Oligopoly market.

Q4. Define perfect competition market. Explain its features?

Perfect competition market refers to a market situation where there are very large number of buyers and sellers dealing in a homogenous product at a price fixed by an industry.

Example: Agricultural goods like wheat and rice.

J Features of perfect competition market:

a) Large number of buyers and seller = in a perfect competition market, there are very large number of buyers and sellers. The number of seller is so large that each individual seller sells a very small portion of market supply. Similarly, the number of buyers is so large that demand of each buyer id very small portion of the market demand. Under such condition, no individual buyer can influence the market price of the commodity by his individual actions. Example: Wheat, Rice.

b) Homogenous Product = the products offered for sale in the market are identical or same in size, shape, quality and colors etc. so, no producer is in a position to change a different price of the commodity, it produces i.e. a uniform price prevails in the market.

c) Freedom of entry and exit for the firms in the long run = there are no obstacles in the way of new firms joining the industry and existing firms leaving the industry in the long run. This insures that there are neither super normal profit nor losses by any firm in the long run. In short period, profits and losses are possible because firms are not in a position to take a decision to enter or leave the industry. If firms are making profits, new firms enter and increase the total supply of the industry. This reduces market price and wipes out profit. However in the long run, these firms who are incurring losses will leave the industry which reduces the market supply and raises the prices till losses are wipes out.

d) Perfect knowledge = the seller have perfect knowledge about a product market and inputs market. The buyers also have a perfect knowledge implies that no seller could charge a higher price than the market price as they have perfect knowledge. So, a uniform price prevails in the market. For the input markets, each firm has an equal access to the knowledge and inputs used in the technology. As a result, there is a uniform price and uniform cost for all the firms, implies the uniform profits.

e) No transportation cost and selling cost = In order to ensure uniform price in the market, it is assumed that transportation cost are zero. A producer can sell his product at any place and buyer can buy it.

Selling cost refers to the cost of advertisement of the product. In perfect competition, there is no selling cost because of perfect knowledge amongst buyers and sellers.

f) Perfect Mobility = factors of production (land, labor, capital and entrepreneur) are perfectly mobile. There are no geographical or occupational restrictions on their movements. The factors are free to move to an industry in which they get the best price.

g) Firms are price takers but not the price makers = in this, market prices are determined by an industry and no firm can change the price. All the firms have to accept the price determined by an industry.

Shape of AR and MR curve = shape of AR curve on demand curve facing perfectly competition market is perfectly elastic because price is determined by an industry and no firm can change the price.

Price

Quantity

TR (P´Q)

AR (TR÷Q)

Perfectly Elastic

MR (TR_n – TR_n-1)

AR = MR

Conclusion = AR = MR = Price

Q5. Define monopoly market? Explain the features of monopoly market?

Monopoly market refers to a market situation where there is a single seller selling a product which has no closed substitutes.

Example: Railways in India.

J Features of Monopoly Market are:

a) Single seller but large number of buyers = Under monopoly, there is a single seller selling the product and monopolist has a full control over the supply and price of the commodity. However, there are large number of buyers and no single buyer can influence the market price.

b) No closed substitute = the product produced by a single seller has no closed substitutes, so the monopoly firm has no fear of competition from the new product.

c) Restrictions on the entry of new firms = There exist string barriers on the entry of new firms and exit of existing firms. As a result, a monopoly firm can earn supper normal profits in the long run. These barriers may be due to legal restrictions like license, patent right etc.

d) Price discrimination = a single seller mat charge different prices for his product from different consumers at the same time. For example: electricity charges are lower fro household purposes as compared to commercial.

e) Price maker or full control over price = in case of monopoly, a firm has complete control over the price. It can influence the market price by charging the supply of the commodity.

f) Shape of AR and MR curve = AR curve is downward sloping having less elastic demand. Downward sloping means a seller is aware of the negative relationship between price and demand and he knows more output can be sold by reducing the price where as less elastic means with the given percentage change in price, there is not much change in its demand because there is no closed substitute of a given commodity.

Whenever there is

MR < AR, AR falls

Q6. Define monopolistic competition market? Explain its features?

Monopolistic competition refers to the market situation in which there are large number of buyers and sellers selling closely related but differentiated products.

Example: toothpaste, soap etc.

J Features of monopolistic competition are:

a) Large number of buyers and sellers = a large number of sellers implies that no individual seller is big enough to influence the market on its own. A large number of buyers implies that no single consumer can exercise any big influence on the price of the product on its own.

b) Product differentiation (closed substitutes) = It implies that the product prevailing in this market are different on the basis of packing color, shapes, brand name etc. These differentiated products are closed substitutes of each other. Since, a group of buyers prefer the product of particular producer that producer enjoy some monopoly in its product and is in a position to influence the market for it. Example: toothpaste, soaps etc.

c) Freedom of entry and exit = There is a freedom of the firms to enter into the industry or leave the industry according to the needs of the circumstance. This ensures that there are neither super normal profits nor any looses to the firm in the long run.

d) Selling cost = Selling cost refers to the expenditure incurred on the marketing, sales promotion and advertisement of the product. Such cost are incurred to persuade the buyers to buy a particular brand of the product in preference to competitor’s brand.

e) Lack of perfect knowledge = Buyers and sellers do not have perfect knowledge about the market condition. As a result, a particular product is preferred by the consumer even if other less price product due of same quality.

f) Partial control over the price = sellers do not have full control over the price because they have to keep in mind the price of its competitors.

g) Shape of AR and MR curve = In the Below diagram, downward sloping AR means a seller can sell more of output by reducing the price whereas more elastic demand curve means with the given change in price, there is more change in its demand because consumer shift there demand to the closed substitutes.

Downward Sloping More Elastic

Q7. Define oligopoly market with its features?

Oligopoly refers to a market situation in which there are few firms selling homogenous or differentiated products.

Example: market of automobiles, market of steel, cement etc.

J Features of oligopoly market:

a) A few firms = oligopoly as an industries composed of a few firms. Each firm produces a significant portion of the total output. Example: the market for automobiles in India. Since there are a few large firms, each big firm is likely to have market share big enough to have some influence on the price of the commodity.

b) Firms are mutually dependent = Interdependence means that the actions of one firm affect the actions of other firms. Since a few firms dominate the market, a change in price and output by any individual firm is likely to influence the profits and output of the rival firms. Each firm in oligopoly market carefully considered how its action will affect its rival and how rivals are likely to react.

c) Barriers to the entry of firms into industry = The main cause of a limited number of firms in oligopoly is the barriers to the entry of the firm. One such barrier is that new firm may require a huge capital to enter into the industry which may be difficult for the new firms to arrange the capital. Patent right is the another barrier. The patent may give license the commodity likewise, availability of raw material only to a limited number of firms can be the other barrier.

d) Non price competition = Firms try to avoid price competition for the fear of price war. They use other methods like advertising better services to the consumers or free gifts to compete with each other. Such a competition is called Non-Price competition.

Q7. Give classification of oligopoly market?

A) Perfect v/s Imperfect Oligopoly =

In an oligopoly industry, if the firms produce homogenous products, it is called Perfect or Pure Oligopoly. Example: Cement industry, steel industry etc.

If the firms produce differentiated products, it is called Imperfect Oligopoly. Example: automobiles industry.

B) Collusive v/s Non-Collusive oligopoly =

If oligopoly firms compete with each other, it is called as Non collusive or Non cooperative oligopoly because the firms do not cooperate with each other in setting the price and output.

if the firms cooperate with each other rather than compete in setting the price and output, it is known as Collusive oligopoly. This cooperation may be exercise through a written agreement or through undertaking between the firms.

Q8. Define Cartel

Cartel is a group of firms which jointly set their output and price so as to exercise monopoly power.

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