Market

In the traditional sense, the market means a particular place or locality where buyers & sellers meet together and deals with their business transaction. For example, Bombay market, Delhi market, Calcutta market, Bangalore market, Mangalore market & Mysore market etc. But in economics, the term market, it is not a particular place/locality where goods are bought and sold. Buyers and sellers can contact through personally by the way of exchange of letters, telegrams, telephones and internet (e-mail & other ways) etc. For example trade between America and India.

Forms of Market Competition Models of Competition Perfect competition Monopoly Monopolistic competition Oligopoly Number of buyers ery large ery large ery large ery large Number of sellers ery large "ne $arge ery few Nature of products Identical products #ingle product %inimum differences $arge differences Barriers to entry and exit !one ery large !one $arge

Classification of Market Structure 1. Perfect Competition %arket, where there is a large number of producers &firms) producing a homogeneous product, homogeneous price existence. . !mperfect competition It is an important market category where in indi'idual firms exercise control o'er the price of commodity. Imperfect competition has se'eral sub(markets )) %onopolistic competition *) +ure "ligopoly ,) -ifferentiated "ligopoly .) %onopoly Perfect competiti"e market +erfect competition refers to a market situation in which there are large number of buyers & sellers of homogeneous products. /he price of the product is determined by industry with the forces of demand and supply. 0omogeneous price 1 commodities is special characterstics of perfect competition market. All the firms in the perfect competition is the price taker (price recei er! rather than price makers" /hus, perfect competition in a market structure characterised by the complete absence of ri alry among indi idual firms. Features of perfect competiti"e market# )) $arge number of buyers and sellers existed *) 0omogeneous product ,) Free entry and exist of firms in the industry .) +erfect knowledge about market 2) +erfect mobility of factors of production 3) Absence of go'ernment regulation 4) Absence of transport cost 1. $arge Number of buyers and sellers existed /here will be a large number of buyers and sellers existed in the market. Any single firms in the industry cannot influences on prices of commodity 5 they are price taker not a price makers 5 it is like a drop of water put into sea. /he price of the product is determined by the collecti'e forces of industry demand and industry supply. . %omogeneous Product 6ommodities produced by all the firms is homogenous and identical in all respects. /here is no changes in terms of #uality, si$e, fragrence etc between the firms" !o. one firms influences prices either increase%decrease in the market. &. Free entry and exists /here are no barrier to entry or exit from the industry. 7ntry or exit may take time but firms ha'e freedom of mo ement in and out of the industry. &f the industry earns abnormal profits, new firms will enter the industry and compete away the excess profits. #imilarly, if the firms in the industry are incurring losses some of them will lea e the industry which will reduce the supply of the industry and will thus raise the price and wipe away the losses. /he firms ha e full liberty to choose either to continue or go out of the industry" '. Perfect kno(ledge

It is also assumed that all sellers and buyers ha e complete knowledge of the conditions of the market. /his knowledge refers not only to the pre'ailing conditions in the current period but in all future periods as well. &nformation is free and costless. 8nder these conditions uncertainty about future de'elopment in the market is ruled out. ). Perfect mobility of factors of production /he factors of production are free to mo e from one firm to another throughout the economy. It is also assumed that workers can mo e between different 'obs. 9aw(materials 1 other factors are not monopolised 1 labour is not unionised. In short, there is perfect competition in the factor market. *. +bsence of go"ernment regulation /here is no go'ernment inter'ention in the form of tariffs, subsidies, relationship of production or demand. If these assumptions are fulfilled, it is called pure competition which re:uires the fulfillment of some more condition. ,. +bsence of transport cost In a perfectly competiti'e market, it is assumed that there are no transport cost. Price and Output -etermination +rice under perfect competition is determined by the interaction of the two forces 5 demand and supply. /hough indi'iduals cannot change the price, but aggregate forces of demand and supply can change. -emand side 5 marginal utility of commodity to the buyers #upply side 5 cost of production 5 producers /he interaction of demand and supply is called the equilibrium price. 7:uilibrium price is that price at which :uantity demanded is e:ual to the :uantity supplied at gi'e price 5 both buyers and sellers satisfied. 7:uilibrium between demand and supply -emand )* ); ;< ;3 ;. ;* ;) Supply ) * . 3 < ); )* ./uilibrium .xcess Supply Pressure on price .xcess -emand

Price of commodities 2 ); )2 *; *2 ,; ,2

Price and Output -etermination .lements of time 0 price t1eory Alfred Marshall was the first economists to introduced =Time Factor> 5 price determination. 0e di'ided time period into three ways 5 ). %arket +eriod *. #hort +eriod and ,. $ong +eriod 1. Market Period#
Market period are also called as very short period.

/he supply of a commodity is almost fixed and the demand will play a decisi'e role in determining the price of products. /his market period may be an hour, a day, or few days or e'en a few weeks 5 depends on nature of commodities. /ypes of commodities are 5 ). +erishable commodities *. !on(perishable commodities Peris1able commodities# Fish, milk, 'egetables, flowers, meat and butters etc are perishable commodities. #upply is limited in the existing stocks. /he fundamental features of this period 5 supply of the commodity is absolutely fixed and therefore, the supply cur'e of each firm will be a 'ertical straight line. -emand factors more important than supply in determining price.

Non2peris1able3-urable commodities# -urable goods are those which can be reproduced or those can be stored. $ike perishable goods, the supply of durable goods is not 'ertical throughout the length. Firms selling such goods ha'e a minimum reser'e price 5 they will not sell goods at less than reser'e price 5 wheat, soap 1 oil etc. Factors affecting 4eser"e Price ). +rice in future 5 if seller expects that a high price will pre'ail in future. *. $i:uidity preference 5 if the seller is in urgent need of money his reser'e price will be low 1 'ice('ersa. ,. Future cost of production 5 if the seller expects that in future the cost of production will fall, his reser'e price will be lower 1 'ice('ersa. .. #torage 7xpenses 5 if the seller finds that the storage expenses are higher 1 the time for which the stocks ha'e to be held are longer, his reser'e price will be lower 1 'ice('ersa. 2. -urability of commodity 5 more durable commodity is higher will be the reser'ed price. 3. 3. Future demand Future demand of a commodity also influences the reser'e price of the producer. If the producer expects a higher demand in future, his reser'e price will also be higher. S1ort period 0 Price determination #hort period refers to that period in which supply can be ad?usted to a limited extent. Stigler in his word short period is a period in which the rate of production, change by change in 'ariable with existence of fixed inputs. In short period fixed factors 5 machinery, plant, building etc cannot be altered and 'ariable factors may be increased or decreased according to the change in demand. In short period, price is determined by the interaction of two forces 5 demand and supply. -emand factors were more dominated factors in short period.

Out put

$ong period price determination# $ong period is a period of many years 2, );, )2 *; 1 abo'e. In this period supply conditions are fully able to meet the new demand conditions. In the long run no fixed 1 'ariable factors all the factors treated as 'ariable factors. !ew plants/new firms can enter into the market 1 old firms can lea'e the market.

S1ort2run ./uilibrium of t1e Firm# /he short(run is a period of time in which the firm can alter its output by changing the 'ariable factors of production while fixed factors remains constant. 51e firm may 1a"e t1ree situations. ). It may earn supernormal profits. *. It may earn normal profits and ,. It may e'en suffer minimum losses. 1.Supernormal profits#

. Normal Profit#

$ong2run ./uilibrium of t1e Firm# +rice @ %6@ %inimum A'erage 6ost