Forms of Markets Essay

FORMS OF MARKET PERFECT COMPETITION FEATURES AND IMPLICATION:- 1) VERY LARGE NUMBER OF BUYERS AND SELLERS:- The number of buyers and sellers is so large that none of them can influence the prevailing price in the market. Each buyer and seller buys or sells a very insignificant proportion of total supply of the commodity in the market. This shows the ineffectiveness of the seller or buyer in influencing the market price. The price is determined by interaction of market demand and market supply in the whole industry. For this all the buyers and sellers are involved, but once set, each firm or buyer has to accept it.

IMPLICATION >as share of each seller in total market supply is so small that no single seller can influence the price.. similarly for the large no of buyers i. e a buyer’s share in total demand is so small that no buyer on his own can influence the price. So both the buyer and sellers are price-takers. 2) HOMOGENEOUS PRODUCT: – products in the market are homogeneous i. e. they are identical in all respects like quality, colour, size, weight, design etc. They are perfect substitutes of each other so the buyers treat all the products of the all the firms in the industry as identical and therefore are willing to pay the same price.

Due to homogeneity of goods, purchase of commodity is a matter of chance not of choice. The product being homogeneous, no individual seller can charge higher price or he will lose his customers. This ensures uniform price in the market. As such, the cross elasticity of demand of such products is infinite. IMPLICATION > of product being homogeneous is that all firms have to charge the same price for the product; otherwise no one will buy from firm selling at a higher price i. e. price of good is uniform. ) FREEDOM OF ENTRY AND EXIT:- it means there are no artificial barriers or natural obstacles in the way of new firms wishing to enter the industry. Buyers are free to enter or leave the market at any time they like. New firms induced by large profits can enter the industry whereas losses make the inefficient firms to leave the industry. In case of abnormal profits new firms are attracted to the industry. This will lead to an increase in supply (i. e. supply curve will shift to the right) leading to a fall in price and thus profit. This entry process of firms will continue till there are no abnormal profits.

The opposite will happen in case there are losses. Firms will leave thus supply will decrease leading to a leftward shift of supply curve, which leads to increase in market price of the good. Losses fall till they are wiped out and each firm makes zero economic profit/normal profit. IMPLICATION > free entry and exit implies that no firm can earn above normal profit in the long run. 4) PERFECT KNOWLEDGE AMONG BUYERS AND SELLERS:- This menas that the buyers and sellers have full knowledge about the prices and costs prevailing in different parts of the market.

All firms have equal access to technology and inputs with the result that all firms have same per unit cost of production. No firm is in a position to charge a different price and no buyer to pay a higher price. IMPLICATION > this leads to uniform price and uniform cost of the product. As there is uniform cost and uniform price , therefore , all firms earn uniform profits . Sellers have perfect knowledge about input markets i. e each firm has equal access to the technology and the inputs used in the technology. Consequently all firms have a uniform cost structure.

Also buyers will not pay a higher price as they have perfect knowledge, so uniform price prevails in the market. 5) PERFECT MOBILITY OF FACTORS OF PRODUCTION:- The factors of production are perfectly mobile. There is no geographical or occupational restriction on their movement. The factors are free to move to the industry in which they get the best price. 6) ABSENCE OF TRANSPORTATION COST:- in order to ensure uniform price in the market, it is assumed that transportation costs are zero. A producer can sell his product at any place and a buyer can buy it from any place he wants to/likes. ) ABSENCE OF SELLING COSTS:- Selling costs refers to cost of advertisement of the product. In perfect competition, there are no selling costs because of perfect knowledge amongst buyers and sellers. NOTE:- In pure competition the first three features i. e. very large no of buyers and sellers, homogeneous goods and freedom of entry and exit of firms occur. In perfect competition all the 7 features occur. MONOPOLY MARKET FORM REASONS FOR EMERGENCE:- 1) Grant of patent rights:- The period for which a patent right is valid is called patent life.

Patent right is an exclusive right granted to a firm to produce a particular product. Motivation behind a patent right is to encourage discovery and to give official recognition that the company is the originator of the new product and technology and that no one else can use it without obtaining a licence. It is a way to give reward and incentive for the innovation and discovery of new products or technology. 2) Licensing by the government. 3) Forming a cartel:- A cartel is a business combination under which firms coordinate their output and price to reap the benefits of monopoly. ) State monopolies:- production of many defence goods is a monopoly of the government due to national securities considerations. Some public utility goods are also produced under monopoly of the states e. g. electricity, water supply. 5) Natural occurrence: – e. g. hot springs for therapeutic use in upper reaches of Himachal Pradesh. 6) Control on raw materials:- it also arises due to sole ownership or control of certain essential raw materials needed in a particular industry. FEATURES OF MONOPOLY ) Single seller many buyers:- as a result of a single seller selling the product, the monopoly firm and industry are the same thing. The monopolist can be an individual, a firm, a group of firms, a government corporation or even the government itself. A monopoly firm can exploit the buyers by charging almost any price for its product because of exclusive control over supply of the product. A monopolist has full control over the supply and price of the product i. e. he is the price maker. However there are large number of buyers of monopoly product and no single buyer can influence the price. ) ABSENCE OF CLOSE SUBSTITUTES:- A product faces competition when it has close competition. Though some substitutes of a monopoly market product may be available they are distant substitutes which may be costly or inconvenient to use. As a result thry have to buy good from monopolist or go without it. So, the monopoly firm has no fear of competition from new or existing products i. e. it does not face competition. 3) DIFFICULT ENTRY OF NEW FIRM:- The monopolist controls the situation in such a manner that it becomes difficult for a new firm to enter the monopoly market and compete with the onopolist by producing a homogeneous or identical product. The monopolist tries his utmost to block the entry of a new firm. This barrier can be economic, institutional or artificial in nature. As a result a monopoly firm earns abnormal profit in the long run due to blocked entry of new firms. 4) NEGATIVELY SLOPED DEMAND CURVE:- The demand curve ( or AR curve) facing a monopolist is negatively sloped which indicates that the monopolist can sell more only by lowering the price i. e. price has to be reduced to sell additional units.

Since the monopolist is the only seller in the market, therefore, the demand curve facing the firm is the market demand curve. Again, because the monopoly firm decides the output and price itself, therefore , there is no supply curve as such under monopoly. 5) PRICE DISCRIMINATION:- Unlike uniform price at which the product is sold in perfect competition a monopolist can charge different prices for his product from different persons and in different market areas. Price discrimination refers to the practice of charging different prices from different buyers at the same time for the same product.

It is of 3 types:- i) Personal price discrimination: the same product is sold at different to different kinds of buyers e. g. senior citizen discounts. ii) Place price discrimination: same product is sold at different prices at different places e. g. electricity charges are lower for farmers than urban factories. iii) Use price discrimination: same product is sold at different prices on the basis of different uses. e. g electricity charges are lower for domestic use as compared to commercial use.