MCom I Semester Managerial Economics Market Structure Study Material Notes

MCom I Semester Managerial Economics Market Structure Study Material Notes: Meaning and Definition of Market Essential of a Market Extent of Marker Factors Affecting Extent of Market Meaning and Definition f perfect Competition Essential Elements of Perfect Competition Is Perfect Competition a Myth Meaning and Definition of Monopoly for Pure Monopoly Meaning and Definition of Pure Competition Forms of Imperfect Competition Meaning and Definition of Oligopoly Characteristics of oligopoly

MCom I Semester Managerial Economics Theory Revealed Preference Study Material Notes

MARKET STRUCTURE

MEANING AND DEFINITION OF MARKET

In common usage, market refers to a particular place or locality where the goods are bought and sold. In economics, market means whole of the network in which buyers and sellers of a commodity keep in close touch with one other. The term ‘market’ has been defined as under:

1 “By a market, economists mean any organisation whereby buyers and sellers of a goods are kept in close touch with each other.” – Stonier and Hague

2. “The market, in economics, is simply the network of dealings in any factor or product between buyers and sellers.” -Cairncross

3. “The term market refers not to a place but a commodity or commodities and buyers and sellers of the same who are in direct competition with each other.”

Thus, market includes any area over which buyers and sellers of a commodity are in direct touch with one another.

ESSENTIALS OF A MARKET

(1) Market is an Area and not a Place. Market does not mean a particular place or locality. It means whole of the area over which buyers and sellers of a commodity are spread over and keep in close touch with one another.

(2) Presence of Buyers and Sellers. There must be both the buyers and seilers in a market. However, the number of buyers and sellers may be large or small depending upon many factors.

(3) A Single Commodity. The term market means the market for a single commodity. There may be different markets for different commodities.

(4) Close Touch Between Buyers and Sellers. The buyers and sellers of a market should be in close touch with one another.

EXTENT OF MARKET

Extent of market means the size and area of a market. Market of one commodity may be local, confined to a particular village or area while the market of other commidities may be national or even international.

FACTORS AFFECTING EXTENT OF MARKET

(A) Characteristics of the Commodity

(1) Demand. Demand bears direct relationship with the extent of market. More the demand, wider will be the market.

(2) Portability. Market for the commodities that can be carried easily at minimum cost from one place to another, will be wider. Market for the commodities that cannot be so carried, will be narrow.

(3) Durability. The market of durable commodities will be wider and the market of perishable commodities will be narrow.

(4) Adequacy of Supply. If supply of a commodity is adequate to meet wide demand, its market will also be wide. If the supply of a commodity if limited, its market will also be limited.

(5) Suitability of Sampling and Grading. If a commodity can be divided into different grades and can be sold through samples, its market will be wide.

(B) Internal Conditions of Country

(1) Means of Transportation and Communication. If the means of transportation and communication are well developed in a country, market will be wide.

(2) Stable Currency and Sound Banking System. If the currency of a country is stable and banking system of the country is sound, market will be wide.

(3) Government Policy. If government has adopted the policy of free trade, the market will be wide. If government has imposed restrictions of quota, licence, etc., market will be limited.

(4) Peace and Security. If there is peace and security in the country, the market will be wide.

(5) Scientific Methods of Sales. If the producers and sellers adopt scientific methods of sale and stress upon advertising, market will be wide. O

MEANING AND DEFINITION OF PERFECT COMPETITION

Perfect competition is a state of market in which there is a large number of buyers and sellers and a homogeneous product. In the words of Mrs. John Robinson, “Perfect competition prevails when the demand for the output of each producer is perfectly elastic. The entails first, that number of sellers is large, so that output of any one seller is negligibly small proportion of the total output of a commodity and second, that buyers are all alike in respect of their choice between rival sellers, so that the market is perfect.”

ESSENTIAL ELEMENTS OF PERFECT COMPETITION

(1) Large Number of Buyers and Sellers. There is a large number of buyers and sellers in the market. No individual buyer or seller is in a position to influence the demand and supply of product.

(2) Homogeneous Product. All the firms produce a homogeneous product. As a result, all sellers have to sell their product at an uniform price.

(3) Free Entry and Exit of Firms. There is no restriction upon the entry of a new firm in market or exit of an existing firm. Due to this characteristic, all the firms can get only normal profit.

(4) Perfect Knowledge of Market. Both the buyers and sellers have perfect knowledge of market conditions.

(5) Perfect Mobility of the Factors of Production. Factors of production are perfectly mobile. These factors can freely move from one industry to another.

(6) Absence of Selling and Transportation Costs. Perfect competition assumes that all the producers of a market are sufficiently close to each other and as a result, there are no selling and distribution costs.

Important Conclusions Regarding Perfect Competition :

1 There is a single price for a commodity in the whole market.

2. All the firms are price-takers. They have to sell their product at the price fixed by industry. No individual firm can influence the price.

3. A firm can sell any quantity of its product at given price. Therefore, average revenue and marginal revenue of a firm are always equal (AR = MR). It is equal to price also (AR=MP =P).

4. Marginal productivity of factors of production remains constant.

5. Demand of a commodity is perfectly elastic. Therefore, demand curve is parallel to OX axis.

IS PERFECT COMPETITION A MYTH ?

Perfect competition is not a real state. It is an imaginary concept due to following reasons :

(1) Homogeneous Product is not Practical. As essential element of perfect competition is homogenous product but it is not a practical element.

(2) Large Number of Buyers and Sellers is not Always Practical. Another essential element of perfect competition is that there is a large number of buyers and sellers. This element is not always practical.

(3) Lack of Perfect Knowlege of Market. Experience of real life does not establish this element of perfect competition also, that buyers and sellers have perfect knowledge of market.

(4) Lack of Free Entry and Exit of Firms. For perfect competition. there should be free entry and exit of firms but it is not practical.

(5) Perfect Mobility of Factors is not Practical. Perfect competition assumes perfect mobility of factors which is not practical.

(6) Lack of Absence of Selling and Distribution Costs. Perfect competition assumes lack of selling and distribution costs which cannot be possible today. A producer or seller cannot think of success in the absence of selling and distribution costs.

Thus, it may be concluded that perfect competition is not a real concept of life.

Market Structure Study Material

MEANING AND DEFINITION OF PURE COMPETITION

Pure competition is a part of perfect competition. The term ‘pure competition’ has been defined as under:

“Pure competition exists when there are a great many sellers whose products are all identical and no one seller controls a large enough part of the total output to exert an appreciable influence on price.” -Bye and Hewett

Thus, pure competition is the state of market that satisfies following three conditions:

(i) Large number of buyers and sellers;

(ii) Homogeneous product; and

(iii) Free entry and exit of firms.

It is important to note that other conditions of perfect competition do not apply on pure competition. Therefore, pure competition is comparatively easier and less inclusive concept than perfect competition. There is no fundamental difference between these two. The only difference is of the degree. Q. 4. Explain the meaning and essentials of monopoly.

Or What is meant by monopoly? What are its essentials ? Ans.

MEANING AND DEFINITION OF MONOPOLY OR PURE MONOPOLY

The term “monopoly’ has been derived from two Greek words-‘MONOS’ and ‘POLUS’. The term “MONOS’ means single and the term “POLUS’ means a seller. Thus, monopoly is a state of market in which there is a single producer or seller of a particular commodity. The term ‘monopoly’ has been defined as under:

1 A pure monopoly exists when one and only one firm produces or sells the commodity in question. In other words, monopoly is a one firm industry.” t -Ferguson and Kreps

2. “By monopoly, we usually mean a single firm whose product has only very distant substitutes.” –William Fellner

Thus, monopoly is a state of market which satisfies the following conditions:

(i) There is a single seller or producer of a particular commodity.

(ii) There is no close substitute of the commodity.

(iii) No new firm can enter into the market easily. Important Conclusions Regarding Monopoly:

1 A monopolist has complete control over the supply of his commodity. Being so, he influences price to a considerable extent.

2. A monopolist can control supply only and not the demand. Being so, in order to sell more quantity of his commodity, he will have to lower the price. As a result, average revenue curve of a monopolist slopes downwards to the right.

3. Marginal revenue curve of a monopolist also slopes downwards to the right and his average revenue is more than marginal revenue (AR > MR).

4. Pure monopoly is a myth. Practical experience does not prove it. Every monopolist has to face competition from substitutes of his commodity.

MEANING AND DEFINITION OF IMPERFECT COMPETITION

Both perfect competition and monopoly are imaginary states of market. Only imperfect competition is experienced in real life. Imperfect competition is the stage of affairs when some of the buyers and sellers do not have perfect knowledge of market conditions. Though the number of sellers is large but each seller has a product differentiated from that of other producers. The term imperfect competition has been defined by Prof. A.P. Learner as, “Imperfect competition obtains when the seller is confronted with a falling demand curve for his product.” Thus, imperfect competition is the state between perfect competition and monopoly.

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FEATURES OF IMPERFECT COMPETITION

(1) Large Number of Buyers and Sellers. There is a large number of buyers and sellers in the market. However, this number is less than that prevailing under perfect competition.

(2) Imperfect Knowledge of Market. Most of the buyers and sellers do not have perfect knowledge of market conditions. Buyers do not know from where they can get the commodity at lowest price. Similarly, sellers do not know where they can sell it at the highest price.

(3) Product Differentiation. Under imperfect competition, product of each firm is different from that of other firms. This difference may be in the quality or style or colour or size or packaging or after sale and services or credit facilities etc.

(4) Free Entry and Exit of Firms. Under imperfect competition, the firms are free to join and leave the industry at any time, they like.

(5) Immobility of Buyers. An important feature of imperfect competition is that the consumers are not perfectly mobile. They continue to purchase the commodity of a particular brand or from a particular seller for one reason or the other.

(6) High Transportation Cost. Cost of transporting the commodity from one place to another comes very high. As a result, price may be different at different places.

FORMS OF IMPERFECT COMPETITION

Imperfect competition may be of the following forms:

1 Oligopoly,

2. Monopolistic competition,

3. Duopoly.

MEANING AND DEFINITION OF OLIGOPOLY|

Oligopoly is a type of imperfect competition. It is a market situation in which a few sellers compete with each other producing either a homogeneous product or a differentiated product. The term ‘oligopoly’ has been defined by George T. Stigler as, “Oligopoly is the situation in which a firm bases its market policy in part on the expected behaviour of a few close rivals.”

CHARACTERISTICS OF OLIGOPOLY

(1) A Few Sellers. Most important feature of oligopoly is that there are only a few sellers in the market. Every seller produces a substantial part of total production of industry and therefore, is in a position to influence price of the product

(2) Standardised Product or Differentiated Product. The product under oligopoly may be either standardised or differentiated. When the product is standardised, it is called pure oligopoly and when the product is differentiated, it is called differentiated oligopoly.

(3) Difficult Entry and Exit of Firms. Another important characteristic of oligopoly is that the entry and exit of firms is comparatively difficult.

(4) Advertisement and Sales Promotion Activities. All the firms have to depend upon advertisement and other sales promotion activities to increase the sales of their product.

MEANING AND DEFINITION OF MONOPOLISTIC COMPETITION

The concept of monopolistic competition was introduced by Prof. Edward Chamberlin. It has been defined as under:

1 “Monopolistic competition is found in the industry where there is a large number of small sellers differentiated but close substitute products.” -Joe S. Bain

2. “Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other -Leftwitch

Thus, the focus point of monopolistic competition is product differentiation. Due to it, each producer works as a monopolist but among producers there is though competition. Each producer adopts individual price policy.

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CHARACTERISTICS OF MONOPOLISTIC COMPETITION

(1) Large Number of Sellers and Buyers. There is a large number of sellers and buyers. Each firm acts independently.

(2) Product Differentiation. Product of each firm is different from that of other firms. Such difference may be in respect of quality or size or colour or design or packing or presentation or after sale and service etc.

(3) Free Entry and Exit of Firms. A new firm can join the market at any time and an existing firm may leave the market at any time.

(4) Individual Price Policies of Firms. Under monopolistic competition, every firm may have its own price policy.

(5) Imperfect Knowledge of Market. Most of the buyers and sellers do not have perfect knowledge about market conditions. Consumers continue to purchase a particular brand or from a particular seller.

(6) Non-price Competition. Another important feature of monopolistic competition is non-price competition. All firms try to capture the market through various methods such as and free repairs, after sale and service, gift scheme with a particular purchase, special discount on a particular purchase etc.

Market Structure Study Material