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Unit-3

1. Market concept in economics

Generally market refers to a place where buyers and sellers exchange their goods. In Economics,
market refers to group of buyers and sellers who involve in the transaction of commodities
and services.

Product and factor market Classification of market

1. Market according to area
Product market: Households demand products and
services and firms supply products and services.
Local market
Regional market
Factor market: Firms demand factors (inputs) like land, National market
labour, capital and organization. Households supply factors. International market
2. Market according to time
Very short period market
Short period market
Long period market
3. Market according to competition
a. Perfect competition( Sellers are
Price takers)
b. Imperfect competition (Sellers are
price makers)
a. Monopoly
b. Monopolistic competition
c. Oligopoly
Characteristics of Market d. Duopoly
1. Buyers and sellers: Existence of buyers and sellers
with commodity
2. Contact: Establishment of contact between buyers
and sellers
3. Distance and correspondence: Distance if no
consideration buyers and sellers could contact through
telephone, agents, letter correspondence and internet.
4. Commodity: In economics market gives preference
for commodity hence buyers and sellers deals with
same commodity or variety.
5. Price: There should be a price of bought and sold
of commodity.

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2. Perfect competition/Pure Competition (Seller/producer is price taker)

Perfect competition
“Perfect competition refers to a market situation where there are a large number of buyers and
sellers dealing in homogenous products, there is no rivalry (competition) in a market and sellers are price
taker”. Examples: Agriculture, Wheat and Corn.
Characteristics of perfect competition
Short-run equilibrium price and output
1. Large number of buyers and sellers determination under perfect competition
2. Homogeneous product
1. Abnormal profit
3. Perfect knowledge about market conditions
4. Free entry and free exit
5. Perfect mobility of factors of production
6. Absence of transport cost
7. Absence of government or artificial
restrictions or collusions

Price and output determination under perfect

competition

Average Revenue (AR) = Marginal Revenue (MR) =

Demand
Reasons for abnormal profit is Average Revenue is
1. Short-run equilibrium price and output determination greater than Average Cost
under perfect competition
2. Normal Profit
1. Abnormal profit or Super normal profit
2. Normal profit
3. Loss

2. Long-run equilibrium price and output determination

under perfection competition

1. Normal Profit

Conditions for equilibrium under perfect competition

1. Marginal Cost (MC) curve must cut Marginal

Reason for loss is Average Revenue is lesser than
Revenue (MR) curve from below which is a point
Average cost
equilibrium.
3. Loss: AR=AC=MR=MC
Long run equilibrium under perfect competition: Normal profit

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 PRICE DISCRRIMINATION
Advantages of perfect competition
3 “Price discrimination means the practice of selling the
1) Knowledgeable and rational consumer same commodity at different prices to different buyers.
2) Producers dealing homogeneous product and price If the monopolist charges different prices from different
takers so there is no need for advertisement charges. consumers for the same commodity, it is called price
3) Reduced the wastage of resources. There is no idle discrimination or discriminating monopoly”
or excess or unused capacity. METHODS OF CONTROLLING MONOPLOY

1. Legislative method
2. Controlling price and output
3. Taxation
4. Nationalization
3. MONOPOLY MARKET STRUCTURE 5. Consumer association

“A monopoly is a market structure in which there is only one producer/seller for a product.
There are no close substitutes for the commodity. There are barriers to entry of the other
firms. In other words, the single business is the industry.

Monopoly examples:

1. For instance electricity, a government can create a monopoly over an industry that it wants to control.
2. In Saudi Arabia the government has sole control over the oil industry.

Characteristics of monopoly Price and output determination under Monopoly

1) Single seller Abnormal profit: Monopolist like a perfectly

2) No close substitutes competitive firm tries to maximize his profits.
3) Price discrimination (fix different prices for different
consumers) A monopoly firm faces a downward sloping
4) No entry (there is no freedom to enter others in the demand curve, that is, its average revenue curve. The
downward sloping demand curve implies that larger
industry)
output can be sold only by reducing the price. Its
5) Firm and Industry same
marginal revenue curve will be below the average
Advantages of monopoly revenue curve. The average cost curve is ‘U’ shaped.
The monopolist will be in equilibrium when MC
1. Natural: (Diamonds in South Africa, Nickel in Canada)
= MR and the MC curve cuts the MR curve from
2. Technical: (Know how secrets of a company coca cola
below.
formula)
3. Legal: (through copy rights, patents and trademarks)
4. Large Amount of capital: (Indian railways, TATA iron
and steel industry)
5. State: (Public or government undertakings railway and
electricity)

Advantages/Disadvantages of Monopoly

Advantages of Monopoly Disadvantages of Monopoly

Internal economies Customer exploitation
External economies Price discrimination
Low price output Creation of artificial demand/
3 Scarcity
Innovation inequality
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4. MONOPOLISTIC COMPETITION

Monopolistic the name itself explains the blending of Monopoly and competition.
“Monopolistic competition refers to the market situation in which a large number of sellers produce goods which
are close substitutes of one another. The products are similar but not identical”

The following are the examples of monopolistic competition in Indian context.

Services sector: Restaurants and Hotels

Characteristics of Monopolistic competition Abnormal profit: Average Revenue is greater than Average
1. Existence of large number of firms Cost
2. Product difference: Physical difference,
quality difference, purchase benefit
difference
3. Selling cost
4. Freedom of entry and exit of firms

Price and output determination under monopolistic

competition
The monopolistic competitive firm will come to
equilibrium on the principle of equalizing MR with MC.
Each firm will choose that price and output where it will
be maximizing its profit.

The different firms in monopolistic

competition may be making either abnormal profits
or losses in the short period depending on their costs
and revenue curves. Wastages in monopolistic competition

1. Unemployment of resources: (due to inefficient

Equilibrium: MC curve must cut MR curve
utilization of available resources within a firm can cause
from below
unemployment of resources)
1. Abnormal profit or Super normal Profit
2. Excess capacity: (Difference between actual produced and
2. Normal Profit optimum output that can be produced)
3. Loss
3. Advertisement charges
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4. Too many varieties of goods

5. Inefficient firms
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5. Oligopoly

Oligopoly: “Oligopoly refers to a form of imperfect competition where there will be only a few
sellers producing either homogenous or differentiated products”
Generally this measure expresses the market share of the four largest firms in an industry as a percentage. For
example, as of fourth quarter 2008, Verizon, AT&T, Sprint, and T-Mobile together control 97% of the US cellular
phone market.
Kinked demand curve and Oligopoly
Characteristics of oligopoly
Small price rises will lose many customers so
1. Interdependence oligopoly competition non price competition in order
2. Group behavior to accrue greater revenue and market share.
3. Price rigidity(price is sticky at prevailing
level) "Kinked" demand curves are similar to traditional
4. Product differentiation demand curves, as they are downward-sloping. They
5. No small price rises Nor large price are distinguished by a hypothesized convex bend with
decreases a discontinuity at the bend–"kink".

However, even a large price decrease will gain only

a few customers because such an action will begin
5. Duopoly
a price war with other firms. The curve is therefore
“Duopoly refers to the two firms have dominant more price-elastic for price increases and less so for
control over a market” price decreases. Theory predicts that firms will enter
the industry in the long run.
1) A few large firms
2) Standardized or differentiated products
3) Significant barriers to entry
4) Market power (Interdependent)
5) Examples: Steel, petrochemical oil,
automobiles.

Kinked demand curve

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6. Factors (input) Market

Factors of Production: Land, Labour, Capital, Entrepreneurship

Factor’s Price : Rent Wages Interest Profit
Market: In economics, market refers to the transactions takes place on the commodities and
services.
“Factors (Input) Market is a market of factors/commodities like Land, Labour, Capital and
Organization. Firm demand (buy) factors hence households’ supplies (sell) factors”
Characteristics of factor market/Determinants Determinants of factor price under perfect
of factor price competition
1) Factors market is a derived demand: Demand
for an input (factors) is derived from demand for a
firm’s output.
E.g.: Demand for labours to produce car is depend
upon demand for cars.
2) Factors demand are interdependence
(Depends upon productivity labour can get salary)
3) Price of substitute factors: When wages rise,
many companies seeks to substitute machinery for
relatively expensive labor.
4) Distribution of Marginal Revenue
Product/Value of Marginal Product: How much
factors/Resources Purchased? Depends on three
things.
1) Price of the resources: Wages are the price of
labor; Rent is the price of Land.
2) The productivity of those resources
3) The selling price of the final product.
Factors hiring rule (or) Factors demand determined

Factors demand determined on the basis of

Marginal Revenue Product (MRP), is the
additional revenue generated by employing an
additional unit of a factor.

Hiring rule
MRP> Price of the factor: Firm should continue to
hire of the factor.

MRP = Price of the factor: Firm should stop hiring

at 6the unit of the factor

MRP < Price of the factor: Firm should reduce the

quantity of factor
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