MEANING OF MARKET

There are two aspects of every market -- DEMAND and SUPPLY.

• Market is like the nervous system of modern economic life. Producers and
consumers carry out their transactions of sale and purchase through the
medium of market.
• In the layman’s language , market refers to a place where goods are
purchased and sold .
• In economics , market has no reference to a specific place .
• It is not necessary for buyers and sellers to assemble at a particular place for
sale or purchase of goods .
• The only condition is that they should be in contact with each other through
any means of communication , like internet , telephones , letters , etc .
MARKET REFERS TO THE WHOLE REGION WHERE BUYERS AND
SELLERS OF A COMMODITY ARE IN CONTACT WITH EACH
OTHER TO EFFECT PURCHASE AND SALE OF THE COMMODITY.
 ESSENTIAL CONSTITUENTS OF A MARKET:

• AREA: Market is not related to any particular place.

It spreads over an area. The area becomes the point
of contact between buyers and sellers.
• BUYERS AND SELLERS : They should be in
contact with each other. However , contact does not
necessarily mean physical presence.
• Commodity :For the existence of market, there
must be a commodity which will be sold and
purchased among buyers and sellers.
• Competition : The existence of competition among
buyers and sellers is also an essential condition for
the existence of a market, otherwise different prices
 MARKET STRUCTURE
• MEANING: Market structure refers to number
and type of firms operating in the industry .
Economists have used different ways to classify
the market in order to study the nature of
different kinds of markets and problems faced by
each of them.
• THE MAIN FACTORS,WHICH DETERMINE THE
MARKET STRUCTURE ARE :
1) Number of buyers and sellers.
2) Nature of the commodity.
3) Freedom of movement of firms.
4) Knowledge of market conditions.
PERFECT COMPETITION
• A market form where there are many firms
that sell a certain homogenous product.
• A single firm can not influence the market
price.
• It is a hypothetical situation; it cannot exist
in real case scenario.
In this nobody can influence the prices, including
buyers and sellers.
It is also believed that everyone has equal excess to
information.
 FEATURES OF PERFECT COMPETITION
(1) Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large
that none of them individually is in a position to influence the price and
output of the industry as a whole. The demand of individual buyer
relative to the total demand is so small that he cannot influence the
price of the product by his individual action.
Similarly, the supply of an individual seller is so small a fraction of the total
output that he cannot influence the price of the product by his action
alone. In other words, the individual seller is unable to influence the
price of the product by increasing or decreasing its supply.
Rather, he adjusts his supply to the price of the product. He is “output
adjuster”. Thus no buyer or seller can alter the price by his individual
action. He has to accept the price for the product as fixed for the whole
industry. He is a “price taker”.
(2) Freedom of Entry or Exit of Firms:
The next condition is that the firms should be free to enter or leave the
industry. It implies that whenever the industry is earning excess profits,
(3) Homogeneous Product:
Each firm produces and sells a homogeneous product so that no buyer has
any preference for the product of any individual seller over others. This is
only possible if units of the same product produced by different sellers are
perfect substitutes. In other words, the cross elasticity of the products of
sellers is infinite.
No seller has an independent price policy. Commodities like salt, wheat,
cotton and coal are homogeneous in nature. He cannot raise the price of
his product. If he does so, his customers would leave him and buy the
product from other sellers at the ruling lower price.
The above two conditions between themselves make the average revenue
curve of the individual seller or firm perfectly elastic, horizontal to the X-
axis. It means that a firm can sell more or less at the ruling market price
but cannot influence the price as the product is homogeneous and the
number of sellers very large
(4) Absence of Artificial Restrictions:
The next condition is that there is complete openness in buying and selling of
goods. Sellers are free to sell their goods to any buyers and the buyers are
free to buy from any sellers. In other words, there is no discrimination on
the part of buyers or sellers.
(5) Profit Maximisation Goal:
Every firm has only one goal of maximising its profits.
(6) Perfect Mobility of Goods and Factors:
Another requirement of perfect competition is the perfect mobility of goods and
factors between industries. Goods are free to move to those places where they
can fetch the highest price. Factors can also move from a low-paid to a high-
paid industry.
(7) Perfect Knowledge of Market Conditions:
This condition implies a close contact between buyers and sellers. Buyers and
sellers possess complete knowledge about the prices at which goods are being
bought and sold, and of the prices at which others are prepared to buy and sell.
They have also perfect knowledge of the place where the transactions are being
carried on. Such perfect knowledge of market conditions forces the sellers to
sell their product at the prevailing market price and the buyers to buy at that
price.
(8) Absence of Transport Costs:
Another condition is that there are no transport costs in carrying of product from
one place to another. This condition is essential for the existence of perfect
competition which requires that a commodity must have the same price
everywhere at any time. If transport costs are added to the price of the product,
even a homogeneous commodity will have different prices depending upon
 FIRM IS A PRICE TAKER

THIS CURVE SHOWS US THAT IN CASE OF PERFECT

COMPETITION A FIRM IS A PRICE TAKER WHERE AS AN
 PERFECT COMPETITION AND
PURE COMPETITION
• Perfect competition is used in wider sense as compared to Pure
Competition.
• The condition is said to be ‘Pure Competition’ when the following 3
fundamental condition exists-;
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) Absence of transportation costs;
4) Absence of selling costs.
DEMAND CURVE UNDER
PERFECT COMPETITION
 MR= AR UNDER PERFECT
COMPETITION
In the perfectly competitive market , each
firm is a price taker . All the firms have to
accept the same price as determined by
market forces of demand and supply. As a
result , uniform price prevails in the
market . It means, revenue from every
additional unit [known as MR] is equal to
price [AR] of the product. So, MR=AR.
 PERFECT COMPETITION :
PRACTICAL APPLICATIONS
FOREIGN EXCHANGE
MARKET
 Currency is all homogenous.
 Traders will have access to
many different buyers and
sellers.
 There will be good
information about relative
prices.
RURAL AGRICULTURAL
MARKET
 In some cases, there are
several farmers selling
Identical products to the
market.
 These markets often get
close to perfect
competition.
MONOPOLISTIC
COMPETITION
OLIGOPOLY
MONOPOLY
 MONOPOLISTIC
COMPETITION
A market situation where we find a large
number of buyers and sellers .
 Sell products that are differentiated from
one another (e.g. by branding or quality)
and hence are not perfect substitutes.
 A firm takes the prices charged by its
rivals as given and ignores the impact of its
own prices on the prices of other firms.
 FEATURES OF
MONOPOLISTIC
COMPETITION
Product differentiation
Many firms
No entry and exit cost in the long run
 Independent decision making
Some degree of market power
Buyers and Sellers do not have perfect
information (incomplete information)
MONOPOLISTIC COMPETITION
CURVE

Downward Sloping Demand Curve

EXAMPLES OF MONOPOLISTIC
COMPETITION
Some restaurants enjoy monopolistic
competition
because of their popularity and reputation.
 Demand for some specific models of
automobiles outstrips the production
capacity. This creates situation of
monopolistic competition.
 Some newspaper in some places enjoy
almost
monopolistic position in spite of existence
 OLIGOPOLY
A state of limited competition, in
which a market is shared by a small
number of producers or sellers.
 There are few firms in the market,
producing wither an identical product
or differentiated but the close
substitutes goods.
 Oligopoly is derived from the Greek
words “oligos” which means a few
FEATURES OF OLIGOPOLY
a) Profit Maximization conditions
b) Ability to set price
c) Entry and Exit
d) Number of firms
e) Long run profits
f) Product differentiation
g) Perfect Knowledge
h) Interdependence
i) Non-price competition
OLIGOPOLY CURVE

KINKED DEMAND CURVE

EXAMPLES OF OLIGOPOLY
OPEC (Oil and Petroleum exporting
countries)
 Airlines
 Telecom industries.
MONOPOLY