Transcript Managerial economics

Unit-4
market
The term market refers to a particular place where
goods are purchased and sold.
According to Prof. r. chapman, “ The term market
refers to necessarily to a place but always to a
commodity and the buyers and sellers who are
in direct competition with one another”.
Characterstics of market
 An Area
 One Commodity
 Buyers and Sellers
 Free Competition
 One Price
Classification of market
 Classification of Market is done on the following basis:
1.
2.
3.
4.
5.
On the basis of Place or Area.
On the basis of Time.
On the basis of Competition
On the basis of function
On the other basis.
 On the Basis of Place or Area(i) Local Market- Here, competition between
purchaser and seller is localized and limited
at a specific market.
eg- Sale of vegetable, milk etc.
(ii) Regional Market- In this market sale and
purchase of articles is localized to state only
and not outside the state.
(iii) National Market- It is that market in which
the demand of the goods is in the nation as a
whole where you are living.
(iv) International Market- If the competition of
goods is world-wide, the market will be
International.
 On the Basis of Time(i) Daily or very short period market- In daily or
short period market supply of goods is stable,
therefore price of goods is determined
according to the demand of the goods.
(ii) Short period Market- Slight variations can be
made regarding the demand for the goods.
(iii) Long Period Market- When demand for
goods increases, supply also increases. Here,
the price is influenced more by supply of the
goods.
(iv) Secular Period- It is a period of more than ten
years in which changes in demand fully adjust
themselves to supply.
 On the Basis of Competition-
(i) Perfect Market- A market is said to be perfect
when all sellers and buyers are aware of the
prices at which transactions take place and all
the offers made by other sellers and buyers and
when any buyer can purchase from any seller.
(ii) Imperfect Market- A market is said to be
imperfect when some buyers or sellers or both
are not aware of the offers being made by
others. Therefore different prices come to
prevail for the same commodity at the same
time in an imperfect market.
(iii) Monopoly- There is a single producer or
seller who controls the market. There are no
substitutes for his products. Eg- Indian
Railways
(iv) Duopoly- In Duopoly, there are two sellers ,
selling either a homogeneous or differentiated
product. eg- Visa and Mastercard.
(v) Oligopoly- There are only a few sellers. Eg-
The manufacturer of Motor cars by Hindustan
Motors (Ambassador Car); Premier
Automobiles (Fiat Cars).
(vi) Monopsony- It refers to a situation where
there is single buyer of the commodity.
Eg- A single payer universal health care system, in
which the government is the only "buyer" of
health care services.
 Defense industry in the USA, with only one
buyer (the US Department of Defense) and
several sellers (such as Lockheed Martin,
Boeing, Northrop Grumman, and Raytheon.
 Example of a situation where both a monopoly and
a monopsony exist involves the market for nuclearpowered aircraft carriers: the monopsony being
with only one purchaser (the United States Navy)
and the monopoly being with only one producer
(Huntington Ingalls Industries).
 On the Basis of Function-
(i) Mixed Market- It is that market where several
types of goods are purchased or sold
simultaneously. It is also called General Market.
(ii) Specialized Market- Here only one kind of
goods are sold and purchased. Eg- Cloth
Market, Jewellery Market etc.
(iii) Sample Market- Where goods are purchased
and sold as specimen of any variety of goods.
(iv) Marketing by Grades- Goods are purchased
and sold according to grades.
 On the Other Basis(i) Fair Market- Goods are purchased and sold
on the price fixed by the govt. and no other
price can be charged by the other seller.
(ii) Black Market or Illegal Market- In this
market the seller charges higher price than
the price fixed by the government. This price
is taken by seller secretly.
•
A market is an arrangement through which
buyers and sellers exchange their goods and
services, anything of value.
•
Market structure is a set of characteristics that
determine business environment under which
firms operate.
Determinants of market structure
– Level of Freedom of entry and exit
– Nature of the product – homogenous
(identical)/ differentiated?
– Control over supply/output
– Control over price
Market Situations
Perfect
Competition
Monopolistic
Competition
ImPerfect
Competition
Oligopoly
Monopoly
Duopoly
Perfect competition
A market is said to be perfect when all the
potential buyers and sellers are promptly aware
of the prices at which the transaction takes
place. Under such conditions the price of the
commodity will tend to be equal everywhere.
Eg-A stock exchange approximates a perfect
competition, as do street food markets in
developing countries, fish markets and
vegetable vendors operating in the same area.
Characterstics of perfect
competition market
 Large number of buyers and sellers.
 Homogeneity of products.
 Perfect knowledge of Market.
 Absence of price control or any artificial restrictions.
 Free entry and exit of firms.
 Independent relationship between buyers.
Imperfect competition
In Imperfect competition market, the price of any
commodity cannot be one. There will always be
difference because buyers and sellers are not
aware of the offers made by others.
Characteristics of imperfect
competition market
 Small number of Buyers and Sellers.
 Difference in quality and shape of the goods.
 More expenses on Advertisement.
 Difference in Price.
 Product Differentiation.
 Lack of Knowledge on part of Consumers.
Oligopoly market
 It is a market situation in which there are few firms
selling homogeneous or differentiated product.
 Eg- Telecom companies.
Characterstics of Oligopoly market
 Few Sellers
 Mutual Interdependence
 Entry and Exit of Firms is difficult.
 Heavy Expenditure on Advertisement.
duopoly
 Duopoly means such type of Business in which there
are two sellers, selling either a homogeneous product
or a differentiated product.
 Eg: Visa and Mastercard
Monopolistic competition market
 It refers to a market situation in which there are many
producers producing goods which are close substitutes
of one another.
Characterstics of monopolistic
competition market
 Existence of Many Firms
 Large number of Sellers
 Product Differentiation
 Free entry and exit of Firms.
 Independent Price Policy.
Monopoly Market
 The word monopoly has been derived from Greek
word Mono+Poly. Mono means Single and Poly means
Producer. Therefore, Monopoly means Single
Producer.
 Monopoly is that form in which a single producer
controls the whole supply of a single commodity which
has no substitutes.
Characterstics of monopoly market
 Single Seller
 Absence of Substitutes
 Barriers to the Entry of New Firm
 Full Control over Supply of Commodity.
Kinds of monopoly
 Natural Monopoly- When monopoly is established
due to natural reasons.
eg- Mica production in India and Nickel production in
Canada.
 Social Monopoly- When Govt. in any particular area
gives right of doing buss. To any one business man or
buss. Institution.
eg- To supply water or to generate electricity or to
install telephone lines.
 Legal Monopoly- When right is given to any
body under certain law to do certain work.
eg- Patent Rights or Copy rights.
 Industrial Monopoly- When an entrepreneur
because of his efforts and ability starts
producing more goods in comparison to other
producers and captured highest market share.
eg- SAIL
Price determination under perfect
competition market
 In Short- run
 Abnormal Profit/ Supernormal Profit-
At the equilibrium level of output a firm may
get abnormal profit if its average revenue
exceeds its average cost of production.
 AR = MR because there is no price difference.
Cost/Revenue
MC
AC
P = MR = AR
Abnormal profit
AC
Q
Output/Sales
 Loss-
At equilibrium output, a firm may suffer loss. It
is because of the fact that a part of fixed cost
may not be recovered in the short run. Inspire
of these losses the firm would decide to
produce, so long as it is able to recover the
average variable cost.
Cost/Revenue
MC
AC
AC
Loss
P = MR = AR
Q
Output/Sales
 Normal Profits or Break Even-
When the firm just meets its average total cost,
it earns normal profits.
Here, AR = ATC
Cost/Revenue
MC
AC
P = MR = AR
Q
Output/Sales
conclusion
 AR = AC – Normal Profit
 AR > AC – Supernormal Profit
 AR < AC – Loss
 AR< AVC - Stop Production
In long- run
Cost/Revenue
LMC
LAC
P = LMR = LAR
Q1
Output/Sales
Price determination under
monopoly market
 In Short- run
 Abnormal Profit/ Supernormal Profit-
MC
Costs / Revenue
AC
Monopoly
Profit
AR
MR
Q
Output / Sales
LossMC
Costs / Revenue
AC
Monopoly
Loss
AR
MR
Q
Output / Sales
Normal Profits
MC
Costs / Revenue
AC
AR
MR
Q
Output / Sales
In long- run
Costs / Revenue
LMC
LAC
Monopoly
Profit
LAR
LMR
Q
Output / Sales
Price determination under
monoPOLISTIC COMPETITION
market
 In Short- run
 Abnormal Profit/ Supernormal Profit-
MC
Costs / Revenue
AC
Monopolistic
Profit
AR
MR
Q
Output / Sales
LossMC
Costs / Revenue
AC
Monopolistic
Loss
AR
MR
Q
Output / Sales
Normal Profits
MC
Costs / Revenue
AC
AR
MR
Q
Output / Sales
In long- run
LMC
Costs / Revenue
LAC
LAR
LMR
Q
Output / Sales
Price determination under
oligopoly market
 It includes two models-
(i) Non-Collusive Oligopoly (Kinked Demand
Curve)
(ii) Collusive Oligopoly Model
Kinked demand curve
 The Kinked demand
curve is drawn on the
assumption that the
kink in the curve is
always at the ruling
price.
 Taking the ruling
price, as given, it
assumes that a rise in
price beyond the
ruling price will lose
his customers to his
rivals.
D
P
D’
 The upper part of the curve is more elastic than
the lower part of the curve.
 The reduction of the price below the ruling
price will immediately invite the rivals to
reduce their price to protect their own sales.
 The lower part of the curve is less elastic than
the upper one.
Criticism:
 It does not explain how prevailing price is
determined. It simply explain how a price once
determined in market remains constant.
 It does not explain price-output relationship.
Collusive olig0poly
When competing firms make some kind of
agreement about pricing and output, they are
said to collude. Collusion can be of two types:
1. Perfect
2. Imperfect (Price Leadership)
Perfect Collusion: In case of perfect collusion
there can be Centralized cartel or Market
sharing cartel.
Centralized Cartel: In this cartel the price and
output decisions for the whole industry is taken
by CC Board to achieve maximum joint profit.
Cartel Board fixes the output quota to each
member firm and total profits are distributed
among the firms according to prior agreement.
Market sharing Cartel:
(i) Market sharing by non-price competition:
Here firms are agreed to sell at an uniform price
but member firms are free to produce and sell
that quantity at which their profits are
maximised.
(ii) Market sharing by Quota: In this quota of
different firms is decided by bargaining
between firms on the basis of past sales or the
productive capacity of firms.
Imperfect Collusion: Under Price leadership one
firm assumes the role of a price leader and fixes
the price of the product for the entire industry.
The other firms in the industry simply follow
the price leader and accept the price fixed by
him and adjust their output to his price.
Types:
 Dominant Firm: In this type of firm , it is found
that there is generally one firm among the firms
operating in the industry which produce the
bulk of the product in the industry.
 Barometric Firm: Under this type an old,
experienced and the largest firm assumes the
role of a leader but undertake also to protect
the interest of all firms instead of merely
promoting his own interest.
 Exploitative or Aggressive: In this case one big
firm comes to establish its supremacy in the
market by following aggressive price policies.
The firm compels other firms to follow and
accept the price followed by him.