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Forms of Market and Its Equilibrium

Forms of market and its equilibrium.

Market:

Market refers to a prticular place where buyers and sellers physically meet together for  sale and purchase of goods.

Component of a market:

(a) Buyers.

(b) Seller.

(c) Contact.

(d) Price.

Market consist of the two component:

Firm - 

• A firm refers to an individual unit engarged in the task of producing goods and service.
• A firm has only one unit of entrepreneurship. for e.g.- colgate, prposodent etc.

Industry -

• A set of closely associated firms is known as industry.
• for e.g.- toothpaste industry having several firm like. cogeate. perpsodent etc.

Types of market.:

Based on competition, the markets are classified as follows.:

1. perfect competition.

2. Monopoly.

3. Menopolistic compectition:

4. Oligopoly.

Forms of Market and Its Equilibrium

Perfect competition :

• There is a perfect degree of competition and single price prevails.
• It is the type of market where there is complete absence of rivalry.
• Perfectly competitive market refers to a market situation in which there are large number of buyers and sellers, sellers, selling homogeneous goods at prevailing price.
• It is Characterized by complete absence of rivalry among firms.
• perfect competition market is also known as price taker (as it accepts the prices fixed by the industry).

Features of perfect competition market :

(a) lage number of buyers and sellers - Due to this feature, neither the buyer, nor the seller can Influence the price of the product. the demand for its product is perfectly elastic.

(b) Homogeneous products - The goods supplied by different firms are perfect substitutes of each other.

(c) Full knowledge of market - The buyers and sellers are assumed to have perfect and full knowledge of the prevailing price of the product. this helps them to take maximum benefit from the market.

(d) Economic Rationality - This market assumes that buyers and sellers are rational and will buy and sell as per their economic interest.

(e) No transportation cost - since the products of the firms are homogeneous and sell at uniform as their economic interest.

(f) Free entry and exit of firms - In this market there is not technical or legal barrier for the new firms to enter. The choice of entering or leaving an industry lies on individual firms.

Equilibrium of the firm under perfect compectition:

A firm is said to be in equilibrium when its profit are maximum, which depends upon cost and revenue of the firm:

A firm will be in eduilibrium in the short run based on two approaches.

(a) TC - TR approach

(b) MC - MR approach.

Note:- Both these approaches have been already discussed in the previous chapter.

Forms of Market and Its Equilibrium

Monopoly:

• monopoly is made from two words:"mono" and "poly" where mono means single and poly means seller.
• monopoly is that market in which there is a single seller in the market producing such goods which have no close substitue.,
• In monopoly, firm and industry are same.
• Here, the firm or industry is the price maker.
• Example - railways.
• In order to increase sales monopolist must reduce the price of his product so as to induce:

1. existing buyer to buy more.

2. new buyer to enter the market.

features of Monopoly:

(a) single seller and large number of buyers - since there is a single seller in the market, therefore prices are controlled by the seller.no buyer can influence the price.

(b) No close substitutes - 

pure monopoly: under this situation, there is no subatitute of the product.

simple monopoly: under this situation, the product has close substitutes but no perfect substitute.

(c) Restriction on entry of new firms -Due to certain legal,natural barriers no new firm is allowed to enter the industry.

(d) price discrimination - The act of charging different price from different buyers of the same good is called price discrimination.

• A monopoly performing price discrimination is called discriminating monopoly.
• Types of price discrimination:

(i) Discrimination of first degree: - When monopolist changes separate price for each unit.

(ii) Discrimination of second degree - When monopolist charges separate price of each batch or lot.

(iii) Discrimination of third degree - When monopolist charges different prices from different category of buyers.

• Reasons for price discrimination:

(i) consumer ignorance - Consumer lacks knowlege of cost of product therefore,seller can change different prices from different consumers.

(ii) Different markets - Monopolist charges different prices indifferent markets, prices in these markets may differ due to distance between one market and another.

(iii) charging different price for different customers - Monopoly may charge different prices from different consumer based on their elasticity of demand.

e.g.: A higher price from those having leaa elasticity and vice versa.

(e) Shape of AR curve - in monopoly, if a seller wants to increase the sale of his product  then he must reduce the price. Due to this the AR and MR curve are downward sloping.

Forms of Market and Its Equilibrium

Monopolistic compectition:

• It is a market situation which has large number of buyers and sellers selling differentiated goods.
• In this market every seller is a monoplist of his differentiated products
• Example - toothpaste, automobile industry, cosmetics industry, etc.

Features of Monopolistic compectition:

(a) large number of sellers - In this market although there are a large number of sellers still do not become price taker. Due to differentiated product they are free to choose the price of their product.

(b) product differentiation - This is the most important feature of monopolistic compectition.

• This is the act of producing differential goods i.e. close substitute goods which may differ in packing, colour, quality, etc. e.g. colgate, perpsodent,babool, etc.
• Types of product differentiation:       

(i) Real - it arises due to change in raw material, colour packing, etc.

(ii) Imaginary - it arises due to imaginary differences in the form of brand, trade -marks, shape, size etc.

• Some important methods of product differentiation are: trade marks, brand names, size, packing , colour etc.

(c) selling expenses -

• Selling expenses are the outlays which are made to increase / create demand.
• Various froms of selling expenses are advertisement, show rooms, selling campaigns, offer discounts, incentives etc.
• Generally, average selling cost curve is " U "shaped but if the selling budget is given, it will be a rectangular hyperbola. (similar to afc curve).

(d) Concept of group - in a monopolistic competition,it is difficult to define a industry since the firm are selling differentiated goods. Hence they may be called as ''group '' of firms instead of industry.

(e) Average revenue curve -In this market, in order to increase the sales the seller should reduce the price (becouse of presence of close substitutes). hence the Ar curve, or the demand curve has a negative slope.

(f) Free entry and exit of firms -This market allwos free entry and exit of firms.