Market

In the context of economics, a market refers to a system or arrangement where buyers and
sellers interact to exchange goods, services, or resources. It is a mechanism through which
supply and demand forces determine the prices of goods and services.
In a market, buyers seek to obtain products or services that fulfil their needs or desires, while
sellers offer goods or services to meet those demands. The interaction between buyers and
sellers leads to the establishment of prices, quantities exchanged, and overall market
dynamics.

Marketing
Marketing refers to any actions a company takes to attract an audience to the company's
product or services through high-quality messaging. Marketing aims to deliver standalone
value for prospects and consumers through content, with the long-term goal of demonstrating
product value, strengthening brand loyalty, and ultimately increasing sales.

Markets Division: -
Economists have defined and classified markets on the following basis:
a) The number of buyers and sellers of the commodity.
b) The nature of the commodity produced by the seller.
c) Freedom in the movement of goods and factors of production.
d) Knowledge of the buyers and sellers regarding prices in the market.

Forms of Market
 PERFECT COMPETITION/MARKET

Introduction
Perfect competition refers to a market situation where there is no rivalry among the firms. In
this market there are very large number of buyers and sellers dealing in a homogeneous
product at a price fixed by the market. Example- in recently, perfect competition has never
existed. The closest example we may have for such kind of market can be market for
agricultural goods (like wheat and rice)
Features or Assumptions of Perfect Competition
1. Very large number of Buyers and Sellers-
2. Homogeneous Product-
3. Freedom of Entry and Exit- Every seller has the freedom to enter or exit the industry.
4. Perfect knowledge among buyers and sellers- Both buyers and sellers are fully informed
about the market price.
5. No selling (Advertisement) cost-
6. No transportation costs-
7. A Firm under Perfect Competition is Price-Taker and not a Price-Maker
8. There is no government interference
Pure Competition and Perfect Competition: -
The competition is said to be ‘Pure Competition’ when the 3 fundamental conditions exist.
1. Very large number of Buyers and Sellers
2. Homogeneous Product
3. Freedom of Entry and Exit
‘Perfect Competition’ is a wider concept. For the market to be perfectly competitive, in
addition to 3 fundamental conditions, 4 additional conditions must be satisfied:
1. Perfect knowledge among buyers and sellers
2. Perfect mobility of factors of production
3. No selling (Advertisement) cost
4. No transportation costs
AR (Demand Curve) and MR Curves of a firm under Perfect Competition
In perfect competition, a firm can sell any amount of output at a given market price. It means
firm’s additional revenue (MR) from the sale of the commodity will be just equal to the
market price (i.e. AR).

TR Curve

Cost Curve
Traditional cost curve
Equilibrium of the Firm and Industry under Perfect Competition

Meaning of Firm and Industry:

Firm is an organisation which produces and supplies goods that are demanded by the
people with the goal of maximising its profits.

According to R.L.Miller, “Firm is an organisation that buys and hires resources and
sells goods and services.”

According to Lipsey, “Firm is the unit that employs factors of production to produce
commodities that it sells to other firms, to households, or to the government.”

Industry is a group of firms producing homogeneous products in a market.

According to Lipsey, “Industry is a group of firms that sells a well-defined product

or closely related set of products.” For example, Raymond, Maffatlal, Arvind, etc., are
cloth manufacturing firms, whereas a group of such firms is called the textile industry.

Conditions of Equilibrium of the Firm and Industry

(1) The MC curve must equal the MR curve (MR=MC). This is the first order and
necessary condition. But this is not a sufficient condition which may be fulfilled yet the
firm may not be in equilibrium.

(2) The MC curve must cut the MR curve from below and after the point of equilibrium
it must be above the MR.

This is the second order condition or slope MC > slope MR’

Therefore, the firm is in equilibrium when

MC=MR=AR (Price).

And slope of MC>slope of MR

MC = MR … (1)

AC = AR … (2)

AR = MR

MC = AC = AR

Short-Run Equilibrium of the Firm:

The short-run is a period of time in which the firm can vary its output by changing the
variable factors of production. The number of firms in the industry is fixed because
neither the existing firms can leave nor new firms can enter it.

The short-run equilibrium of the firm can be explained with the help of marginal
analysis and total cost- total revenue analysis.

(1) Marginal Cost-Marginal Revenue Analysis:

a> Super Normal profit (AR>AC) (AR=P)

b> Normal Profit (AR=AC)
c> Losses (AC>AR>AVC)
d> Shutdown (AC>AVC>AR)
Thus in the short-run, there are firms which earn normal profits, supernormal profits and
incur losses.

(2) Total Cost-Total Revenue Analysis

The short-run equilibrium of the firm can also he shown with the help of total cost and
total revenue curves. The firm is able to maximize its profits when the positive
difference between TR and TC is the greatest.
Short-Run Equilibrium of the Industry:
An industry is in equilibrium in the short-run when its total output remains steady, there
being no tendency to expand or contract its output. If all firms are in equilibrium, the
industry is also in equilibrium. For full equilibrium of the industry in the short-run, all
firms must be earning only normal profits.

The condition for this is SMC = MR = AR = SAC.

Long-Run Equilibrium of the Firm and Industry:

Long-Run Equilibrium of the Firm:

The long run is a period of time in which the firm can change its plant and scale of
operations. Thus in the long-run all costs are variable and there are no fixed costs. The
firm is in the long-run equilibrium under perfect competition when it does not want to
change its equilibrium output.

It is earning normal profits. If some firms are earning supernormal profits, new firms
will enter the industry and supernormal profits will be competed away. If some firms are
incurring losses, some of the firms will leave the industry till all earn normal profits.

Thus there is no tendency for firms to enter or leave the industry because every firm
must earn normal profits. “In the long-run, firms are in equilibrium when they have
adjusted their plant so as to produce at the minimum point of their long-run AC
curve, which is tangent (at this point) to the demand (AR) curve defined by the
market price” so that they earn normal profits.

Thus the first equilibrium condition is:

(1) SMC = LMC = MR = AR = P = SAC = LAC at its minimum point, and

(2) LMC curve must cut MR curve from below

Since we assume equal costs of all the firms of industry, all firms will be in equilibrium
in the long-run. At OP price a firm will have neither a tendency to neither leave nor enter
the industry and all firms will earn normal profits.

Long-Run Equilibrium of the Industry:

The industry is in equilibrium in the long-run when all firms earn normal profits. There
is no incentive for firms to leave the industry or for new firms to enter it. With all factors
homogeneous and given their prices and the same technology, each firm and industry as
a whole are in full equilibrium where LMC = MR = AR (-P) = LAC at its minimum.

Such an equilibrium position is attained when the long-run price for the industry is
determined by the equality of total demand and supply of the industry.

The long-run equilibrium of the industry is illustrated in Figure 6 (A) where the long-run
price OP is determined by the intersection of the demand curve D and the supply curve S
at point E and the industry is producing OM output. At this price OP, the firms are in
equilibrium at point A in Panel (B) at OQ level of output where LMC = SMC = MR =P
( = AR) = SAC = LAC at its minimum.

At this level, the firms are earning normal profits and have no incentive to enter or leave
the industry. It follows that when the industry is in long-run equilibrium, each firm in the
industry is also in long-run equilibrium. If both the industry and the firms are in long-run
equilibrium, they are also in short-run equilibrium.