Chapter 10 Main Market Forms
Perfect competition: It is defined as a market structure in which an individual firm cannot influence the prevailing market price of the product on its on.
Features And Implications
(1). Very large number of buyers and sellers: In this competition buyers and sellers are in very large number, selling homogeneous products, because of which they form the industry to determine the equilibrium price and this price is given to all the firms. This makes the industry a 'price maker' and a firm a 'price taker'.
Implication: The entire phenomenon of price maker and taker to be explained.
(2). Homogeneous product: Under this competition goods are homogeneous or identical in terms of shape, size etc. They are perfect substitutes.
Implications: Since product are homogeneous product refer to sell at uniform price and consumer also have a choice to buy from any seller. This ensure uniform prices. No selling cost is needed.
(3). Free entry and exit of a firm: In this market form, the firms have the freedom to enter or exit anytime from the market.
Implication: Because there is free entry and exit of firms, then firms are not able to earn super normal profits in long run nor there is chances of losses. This happen because in the shot run firms earns abnormal profits then due to free entry new firms enter into the market and abnormal profits neutralized to normal profits.
Where as if the firms incurred losses then few firm might exit and market comes back to normal profits.
So we can conclude that in the long run under perfect competition a firm can only earn normal profits.
(4). Perfect Knowledge: Firms have all the knowledge about product and the market and the buyers are also well informed.
Implication: Because there is perfect knowledge at the buyers and sellers end the buyer would not pay more than the uniform price, similarly the seller would not be able to earn more than the price set by industry. uniform prices would prevail.
(5). Perfect mobility of factors of production: The factors of production can move easily from one firm to another.
Implication: New skills can be learnt easily.
(6). Selling cost: It is defined as the cost of promoting the demand of the product.
As the products are homogeneous selling cost become insignificant.
(7). Demand curve: Uniform prices therefore demand curve perfectly elastic.
(1). Very large number of buyers and sellers: In this competition buyers and sellers are in very large number, selling homogeneous products, because of which they form the industry to determine the equilibrium price and this price is given to all the firms. This makes the industry a 'price maker' and a firm a 'price taker'.
Implication: The entire phenomenon of price maker and taker to be explained.
(2). Homogeneous product: Under this competition goods are homogeneous or identical in terms of shape, size etc. They are perfect substitutes.
Implications: Since product are homogeneous product refer to sell at uniform price and consumer also have a choice to buy from any seller. This ensure uniform prices. No selling cost is needed.
(3). Free entry and exit of a firm: In this market form, the firms have the freedom to enter or exit anytime from the market.
Implication: Because there is free entry and exit of firms, then firms are not able to earn super normal profits in long run nor there is chances of losses. This happen because in the shot run firms earns abnormal profits then due to free entry new firms enter into the market and abnormal profits neutralized to normal profits.
Where as if the firms incurred losses then few firm might exit and market comes back to normal profits.
So we can conclude that in the long run under perfect competition a firm can only earn normal profits.
(4). Perfect Knowledge: Firms have all the knowledge about product and the market and the buyers are also well informed.
Implication: Because there is perfect knowledge at the buyers and sellers end the buyer would not pay more than the uniform price, similarly the seller would not be able to earn more than the price set by industry. uniform prices would prevail.
(5). Perfect mobility of factors of production: The factors of production can move easily from one firm to another.
Implication: New skills can be learnt easily.
(6). Selling cost: It is defined as the cost of promoting the demand of the product.
As the products are homogeneous selling cost become insignificant.
(7). Demand curve: Uniform prices therefore demand curve perfectly elastic.
Monopolistic competition: It is the market structure in which the firms are large in number selling differentiated product.
Features And Implications
(1). Large number of buyers and sellers: In this competition large number of buyers and sellers selling differentiated products.Implication: Because of which they can change differentiated prices also which means each firm can sell its product at own price. Because the product are differentiated the firm would incur selling cost.
(2). Product differentiation: The products in this competition are differentiated/ unidentical on the basis of shape, size, color etc.
Implication: this gives freedom to the seller to change as per its choice, means there is certain price making power in the hands of the firm. But to sell more it has to lower down the price, because of which the demand curve is downward slopping elastic curve.
(3). Free entry and exit: Implication remains same as in under perfect competition.
(4). Imperfect knowledge: Buyers and sellers do not have perfect knowledge of market conditions. Buyers preferences are guided by advertising and other selling activities.
Because of which they can charge more than the actual price.
(5). Selling costs: They are significant in this competition as the products are differentiated.
For example: Advertisements, salaries to salesman.
(6). Demand curve: Demand curve under any competition is called AR curves become AR curve is nothing but price which is shown in relation to the quantity. So AR curve is also called as demand curve in any competition.
Under monopolistic competition demand curve is more elastic but downward slopping.
Oligopoly Market: It is a market form in which there are few dominant firms interdependent on each other for their decisions.
Features and implications
(1). Few firms: Oligopolists are generally few large firms producing the major output.Implications: they would have tough competition which would lead to interdependence in terms of price and output.
(2). Homogeneous and Differentiated products.
(3). Regulated Entry: Two types of Barriers
(a). Natural Barrier: high investment needed, large set up capital.
(b). man-made Barrier: Predatory Pricing
implication: Because there are barriers, firms can easily earn abnormal profits/super normal profits as they do not pose a threat of new entrant.
(4). Mutual Interdependence: since the market is dominated by few firms the price and output and output decision of one firm affect the profitability of remaining firms in the market.
Therefor they abstain from price competition and prefer non-price competition like giving extra services, benefits etc.
Implication: Since there are few firms interdependence is a natural outcome because of which it becomes difficult to determine the demand curve. as law of demand might fail because with the fall in the price of the good the demand might not increases. as rival firm react much more in terms of reduction in price. therefor the demand curve remains indeterminate.
(5). Price rigidity: In oligopolistic firms, prices are administered and do not change frequently due to following reasons:
(a). Fear of rival reaction.
(b). administered price already cover profit margin.
(c). Cost of changing price would be heavy because it would involve cost of informing customers, cost of advertising etc.
(6). Demand curve: Since there are few firms interdependence is a natural outcome because of which it becomes difficult to determine the demand curve. as law of demand might fail because with the fall in the price of the good the demand might not increases. as rival firm react much more in terms of reduction in price. therefor the demand curve remains indeterminate.
Implication: Since there are few firms interdependence is a natural outcome because of which it becomes difficult to determine the demand curve. as law of demand might fail because with the fall in the price of the good the demand might not increases. as rival firm react much more in terms of reduction in price. therefor the demand curve remains indeterminate.
(5). Price rigidity: In oligopolistic firms, prices are administered and do not change frequently due to following reasons:
(a). Fear of rival reaction.
(b). administered price already cover profit margin.
(c). Cost of changing price would be heavy because it would involve cost of informing customers, cost of advertising etc.
(6). Demand curve: Since there are few firms interdependence is a natural outcome because of which it becomes difficult to determine the demand curve. as law of demand might fail because with the fall in the price of the good the demand might not increases. as rival firm react much more in terms of reduction in price. therefor the demand curve remains indeterminate.
Monopoly Market: It is a market in which there is a single seller selling entire output. The goods being sold are having no close substitutes.
Features and Implications
(1). single seller: The monopolist is the only selling firm producing the good.
Implication: Because he is the only seller he can exercise dominant central over price and can even practice price discrimination.
(2). Single product having no close substitutes: there are no close substitute of the product produced by the monopolist.
Implication: this give him the power to make price but even a monopolist is called as price maker with constraint. Which means that to sell more even a monopolist will have to lower down the prices because of which the demand curve would downward slopping. AR would be downward slopping and Mr would be twice below AR.
(3). Restricted entry: Under monopoly the entry is highly restricted.
Implication: The monopolistic can enjoy earning abnormal profits as there would be no other firm entering the market form.
(4). Price maker with a constraint: This give him the power to make price but even a monopolist is called as price maker with constraint. Which means that to sell more even a monopolist will have to lower down the prices because of which the demand curve would downward slopping. AR would be downward slopping and Mr would be twice below AR.
(5). Price discrimination: A monopolist being the only seller of the product can easily discriminated the price.
Price discrimination means charging prices from different people for the same commodity.
For example: Electricity in rural area is cheaper than electricity in urban areas.
(6). Demand curve: To sell more the monopolist has to lower down the prices between of which the demand curve is downward slopping.
(4). Price maker with a constraint: This give him the power to make price but even a monopolist is called as price maker with constraint. Which means that to sell more even a monopolist will have to lower down the prices because of which the demand curve would downward slopping. AR would be downward slopping and Mr would be twice below AR.
(5). Price discrimination: A monopolist being the only seller of the product can easily discriminated the price.
Price discrimination means charging prices from different people for the same commodity.
For example: Electricity in rural area is cheaper than electricity in urban areas.
(6). Demand curve: To sell more the monopolist has to lower down the prices between of which the demand curve is downward slopping.
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