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Forms of Market and Price Determination

This document discusses different market structures and how prices are determined in each. It describes perfect competition, monopoly, monopolistic competition, and oligopoly. For each market structure, it outlines key features such as number of buyers and sellers, product differentiation, and firm behavior. The document also discusses demand and supply equilibrium, and how government can implement price ceilings above or below equilibrium to influence markets.

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Niranjan Mishra
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233 views4 pages

Forms of Market and Price Determination

This document discusses different market structures and how prices are determined in each. It describes perfect competition, monopoly, monopolistic competition, and oligopoly. For each market structure, it outlines key features such as number of buyers and sellers, product differentiation, and firm behavior. The document also discusses demand and supply equilibrium, and how government can implement price ceilings above or below equilibrium to influence markets.

Uploaded by

Niranjan Mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Forms of Market and Price Determination

Market is a mechanism or arrangement through which the buyers and sellers of a commodity or service come into
contact with one another and complete the act of sale and purchase of the commodity or service on mutually
agreed prices.

Perfect competition- It is a market structure where there are large number of buyers and sellers selling identical
products at uniform price with free entry and exit of firms and absence of govt. control.
Under perfect competition, price remains constant therefore, average and marginal revenue curves coincide each other
i.e., they become equal and parallel to x-axis.

Under perfect competition price is determined by the industry on the basis of market forces of demand and supply. No
individual firm can influence the price of the product. A firm can takes the decision regarding the output only. So
industry is price maker and firm is price taker.
Feature of perfect competition:
(a) Very large no. of buyers and sellers.
(b) Homogeneous product.
(c) Free entry and exit of firms in the market.
(d) Perfect knowledge.
(e) Perfect Mobility.
(f) Perfectly elastic demand curve.
(g) No transportation cost.
MONOPOLY MARKET
Monopoly is that type of market where there is a single seller and large number of buyers. There is absence of close
substitutes to the products.
Features :(a) Single seller and large number of buyers.
(b) Restrictions on the entry of new firms.
(c) Absence of close substitutes.
(d) Full control over price
(e) Price discrimination.
(f) Price maker
(g) Downward sloping less elastic demand curve.
AR or MR Curve in Monopoly market :
AR (Demand) Curve slopes downward from left to right and less elastic than that of monopolistic competition. It means
that to increase demand, he has to reduce the price.
Given the demand for his product, the monopolist can increase his sales by lowering the price, the marginal revenue
also falls but the rate of fall in marginal revenue is greater than that in average revenue.
A monopolist either decides price or output. He cannot decides both at a time.
MONOPOLISTIC COMPETITION
It is that type of market in which there are large number of buyers and sellers. The Sellers sell differentiated product but
not identical. The products are close substitutes of each other.
Features :(a) Large no. of buyers and sellers
(b) Product Differentiation: The products of each firm are differentiated from the other on the basis of colour, taste,
packing, trademark, size and shape.
(c) Selling Cost: Cost on advertisement and sales promotion.
(d) Free entry or exit of firms.
(e) Lack of perfect knowledge.
(f) Partial control over price.
(g) Imperfect mobility: Factors of production and products are not perfectly mobile.
(h) Elastic and downward sloping demand curve.
AR or MR in Monopolist Market:
AR (Demand) Curve is left to right downward sloping curve and more elastic / flatter than that of monopoly. It
means that in response to change in price, the change in demand will be relatively more for a monopolistic competitive
firm than a monopoly firm.

AR and MR curves are both downward sloping because more units can be sold only by lowering the price. MR lies below
AR.
OLIGOPOLY
Oligopoly is the form of market in which there are few sellers or few large firms, intensely competing against one
another and recognising interdependence in their decision-making.
Features of Oligopoly
(a) Few Sellers
(b) All the firms produce homogeneous or differentiated product.
(c) Under oligopoly demand curve cannot be determined. It has a kinked demand curve.
(d) All the firms are interdependent in respect of price determination.
(e) Price rigidity.
On the basis of production, oligopoly can be categorised in two categories:
(i) Collusive oligopoly is that form of oligopoly in which all the firms decide to avoid competition and determine the price
and quantity of output on the basis of cooperative behaviour.
(ii) Non-collusive oligopoly is that form of oligopoly in which all the firms determine the price and quantity of output
according to the action and reaction of the rival firms.

on the basis of product differentiation, Oligopoly, can be categorised in two categories:


(i) Perfect Oligopoly: The Oligopoly is perfect or pure when the firms deal in the homogeneous products.
(ii) Imperfect Oligopoly: Whereas the Oligopoly is said to be imperfect, when the firms deal in heterogeneous products,
i.e. products that are close but are not perfect substitutes.
Equilibrium Price: The price at which the quantity demanded and supplied are equal is known as equilibrium price.
Equilibrium quantity: The quantity demanded and supplied at an equilibrium price is known as equilibrium quantity.
Market equilibrium is a state in which market demand is equal to market supply. There is no excess demand and excess
supply in the market.

Application of Demand of Supply


(a) Maximum Price Ceiling: It means the maximum price the sellers are allowed to charge less than equilibrium market
price. Government imposes such a ceiling when it finds that the demand for necessary goods exceeds its supply. That is,
when consumers are facing shortages and equilibrium price is too high. Government does it in the interest of
consumers.
Excess demand may be fulfilled by:(a) Rationing (b) Dual marketing

(b) Minimum Price Ceiling: It means that producer are not allowed to sell, the goods below the price fixed by
Government, When government finds that equilibrium price is too low for the produce, then Govt. fixes a price ceiling
higher than equilibrium price to prevent the possible loss to the producers. The price is also called floor price
or minimum support price. Generally, government buys the excess supply at this price.

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