2. Market General meaning: A market is any place where the
sellers of a particular good or service can meet with the buyers of
that goods and service and where there is a potential for a
transaction to take place. The buyers must have something they can
offer in exchange for there to be a potential transaction.
3. Market in Economics Economists understand by the term
Market, not any particular market place in which things are bought
and sold, but the whole of any region in which buyers and sellers
are in such free intercourse with one another that the prices of
the same goods tend to equality easily and quickly---A. Cournot The
term market refers not to a place but to a commodity or commodities
the buyers and sellers of which are competition with each
other
4. Features: 1. a commodity or a set of commodities that can be
bought or sold. 2. buyers and sellers of commodities. 3. price
determination by means of bargaining 4. a region or regions whereby
the commodity will be traded. In economics market is the trading of
a commodity or commodities at a particular price reached at after
bargaining between buyer and seller.
5. Classification of market 1.On the basis of area or scope: a.
Local market: a market of commodities which is confined to a
particular region Example: Fish , Vegetables ,Milk. b. National
market: a market of commodities that covers a whole country.
Example: Cosmetics , Cloths. c. International market: a market of
commodities which is not confined to the geographical boundary of a
country. Example: Tea , Jute, Cotton, Gold.
6. On the basis of time: Very short period market: a market
that lasts few hours or few days Example: fish , vegetables , milk
Short period market: a market whereby supply can be changed to a
limited extent in response to the change in demand. Example :
cloths Long period market: a market whereby supply can be fully
adjusted to the changes in demand. A firm can change its production
capacity Very long period market: a market whereby the tastes,
habits of buyers can be changed and the supplier is in a position
to change his production s and procedures to
7. Market on the basis of competition 1.Perfect competitive
market 2.Imperfect competitive market a. Monopoly b. Duopoly c.
Oligopoly d. Monoposony e. Monopolistic competition
8. Perfect competitive market: Perfect competitive market is
characterized by many buyers and sellers, many products that are
similar in nature and, as a result, many substitutes. Perfect
competition means there are few, if any, barriers to entry for new
companies, and prices are determined by supply and demand.
9. Characteristics of perfect competition Large Number of Small
Firms A perfectly competitive market or industry contains a large
number of small firms, each of which is relatively small compared
to the overall size of the market. This ensures that no single firm
can exert market control over price or quantity. Identical Goods
Each firm in a perfectly competitive market sells an identical
product, which is also commonly termed "homogeneous goods." The
essential feature of this characteristic is not so much that the
goods themselves are exactly, perfectly the same, but that buyers
are unable to discern any difference.
10. Perfect Resource Mobility Perfectly competitive firms are
free to enter and exit an industry. They are not restricted by
government rules and regulations, start-up cost, or other barriers
to entry. While some firms incur high start-up cost or need
government permits to enter an industry, this is not the case for
perfectly competitive firms. Perfect Knowledge In perfect
competition, buyers are completely aware of sellers' prices, such
that one firm cannot sell its good at a higher price than other
firms. Each seller also has complete information about the prices
charged by other sellers so they do not inadvertently charge less
than the going market price.
11. Marginal Cost Equals Marginal Revenue The marginal cost of
a product is the cost of producing one extra unit of that product.
Similarly, the marginal revenue of a product is the revenue
generated from selling one extra unit. Marginal cost tends to
increase as production increases, while marginal revenue decreases
as production increases. Zero transaction costs - Buyers and
sellers do not incur costs in making an exchange of goods in a
perfectly competitive market. Profit maximization - Firms are
assumed to sell where marginal costs meet marginal revenue, where
the most profit is generated. Non-increasing returns to scale - The
lack of increasing returns to scale (or economies of scale) ensures
that there will always be a sufficient number of firms in the
industry. Property rights - Well defined property rights determine
what may be sold, as well as what rights are conferred on the
buyer. Rational buyers - buyers capable of making rational
purchases based on information given
12. Imperfect competitive market a. Monopoly: when there is
only one buyer in a market it is called monopoly. A monopoly is a
market structure in which there is only one producer/seller for a
product. In other words, the single business is the industry. Entry
into such a market is restricted due to high costs or other
impediments, which may be economic, social or political. For
instance, a government can create a monopoly over an industry that
it wants to control, such as electricity. Another reason for the
barriers against entry into a monopolistic industry is that
oftentimes, one entity has the exclusive rights to a natural
resource. For example, in Saudi Arabia the government has sole
control over the oil industry.
13. Characteristics of monopoly Single Supplier The essence of
a monopoly is a market controlled by a single seller. The "mono"
part of monopoly means single. The single seller, of course, is a
direct contrast to perfect competition, which has a large number of
sellers. In fact, perfect competition could be renamed multipoly or
manypoly, to contrast it with monopoly. Unique Product To be the
only seller of a product, however, a monopoly must have a unique
product.
14. Barriers to Entry and Exit A monopoly is generally assured
of being the ONLY firm in a market because of assorted barriers to
entry. Some of the key barriers to entry are: (1) government
license or franchise, (2) resource ownership, (3) patents and
copyrights, (4) high start-up cost, and (5) decreasing average
total cost. Specialized Information Monopoly is commonly
characterized by control of information or production technology
not available to others. This specialized information often comes
in the form of legally-established patents, copyrights.
15. Other characteristics: There are many buyers in the market.
The firm enjoys abnormal profits. The seller controls the prices in
that particular product or service and is the price maker. The
product does not have close substitutes.
16. Why might Monopolies arise? 1. State monopoly: A government
may create a statutory or legal monopoly giving a certain body the
sole right to supply a particular good or provide a certain
service. The Act which creates the monopoly places a legal
restriction on competition. 2. Control of critical resources: A
particular firm may have exclusive access to the only source of
supply of the raw materials necessary for the production of a
certain commodity. Mining firms would be examples of this type of
monopoly.
17. 3. Capital intensive monopoly: Certain industries require
such a large investment of capital in plant and equipment that any
form of competition from potential rivals is completely discouraged
e.g. aircraft manufacturing, ship-building, steel firms etc. 4.
Legal restriction: A firm which develops or invents a new product
or process can use the law of patents, franchise, copyright etc. to
obtain the sole right of manufacture of the product or use of the
process. In our country production of arms and ammunitions is done
only by BOF(Bangladesh ordnance factory) 5. Trade Agreements: All
the firms within a certain industry, may by agreement, adopt
completely uniform policies on price and output. This type of
agreement effectively creates a monopoly. (OPEC on Oil
production).
18. Duopoly: a market controlled by only two sellers. A true
duopoly is a specific type of oligopoly where only two producers
exist in one market. In reality, this definition is generally used
where only two firms have dominant control over a market. A
situation in which two companies own all or nearly all of the
market for a given product or service. A duopoly is the most basic
form of oligopoly, a market dominated by a small number of
companies. A duopoly can have the same impact on the market as a
monopoly if the two players collude on prices or output.
19. Oligopoly: In an oligopoly, there are only a few firms that
make up an industry. This select group of firms has control over
the price and, like a monopoly, an oligopoly has high barriers to
entry. The products that the oligopolistic firms produce are often
nearly identical and, therefore, the companies, which are competing
for market share, are interdependent as a result of market forces.
Assume, for example, that an economy needs only 100 computers.
Company X produces 50 computers and its competitor, Company Y,
produces the other 50. The prices of the two brands will be
interdependent and, therefore, similar. So, if Company X starts
selling the computers at a lower price, it will get a greater
market share, thereby forcing Company Y to lower its prices as
well.
20. Monoposony When there is only one buyer in a market it is
termed as monoposony. A market similar to a monopoly except that a
large buyer not seller controls a large proportion of the market
and drives the prices down. Sometimes referred to as the buyer's
monopoly. Dictionary meaning: The market condition that exists when
only one buyer will purchase the products of a number of sellers. A
situation in which the entire market demand for a product or
service consists of only one buyer
21. Monopolistic competition Monopolistic competition is a type
of imperfect competition whereby many producers sell products that
are differentiated from one another (e.g. by branding or quality)
and hence are not perfect substitutes. In monopolistic competition,
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
22. Definition of 'Monopolistic Competition' A type of
competition within an industry where: 1. All firms produce similar
yet not perfectly substitutable products. 2. All firms are able to
enter the industry if the profits are attractive. 3. All firms are
profit maximizers. 4. All firms have some market power, which means
none are price takers.
23. Monopolistic competitive market is a form of imperfect
competitive market where many competing producers sell products
that are differentiated from one another (that is, the products are
substitutes, but, with differences such as branding, are not
exactly alike). In monopolistic competition firms can behave like
monopolies in the short-run, including using market power to
generate profit. In the long-run, other firms enter the market and
the benefits of differentiation decrease with competition; the
market becomes more like perfect competition where firms cannot
gain economic profit
24. Quick Reference to Basic Market Structures Market Structure
Seller Entry Barriers Seller Number Buyer Entry Barriers Buyer
Number Perfect Competition No Many No Many Monopolistic competition
No Many No Many Oligopoly Yes Few No Many Oligopoly No Many Yes Few
Monopoly Yes One No Many Monoposony No Many Yes One
25. Profit maximization Profit is the excess of revenue over
expenses. An assumption in classical economics is firms seek to
maximize profits. Profit = total revenue total costs therefore,
profit maximization occurs at the biggest gap between total revenue
and total costs. A Firm can maximize profits if it produces at an
output where marginal revenue (MR) = marginal cost (MC)
26. Diagram of Profit Maximization
27. To understand this principle look at the above diagram. If
the firm produces less than Q1, MR is greater than MC. Therefore,
for this extra output, the firm is gaining more revenue than it is
paying in costs. Total revenue will increase. Close to Q1, MR is
only just greater than MC, therefore, there is only a small
increase in profit. But, profit is still rising. However, after Q1,
the marginal cost of the output is greater than the marginal
revenue. This means the firm will see a fall in its profit
level.
28. Profit in monopoly
29. In this diagram, the monopoly maximises profit where MR=MC
at y*. This enables the firm to make supernormal profits (Blue
area). Note, the firm could produce more and still make normal
profit. But, to maximize profit, it involves setting higher price
and lower quantity than a competitive market. Therefore, for a firm
profit maximization involves selling a lower quantity and at a
higher price.
30. Profit in perfect competition In perfect competition, the
same rule for profit maximization still applies. The firm maximizes
profit where MR=MC. Here the firm earns supernormal profit.
31. Equilibrium of a firm in perfect competition Equilibrium
refers to a production level where the profit is maximum. In
perfect competition a firm takes a price which was fixed earlier.
So in perfect competition a firm only determines the amount of
output and it has no bearing in price. In perfect competition a
firm can attain equilibrium under following conditions- a.MC=MR b.
Slope of MC curve > slope of MR curve Equilibrium can be a.
Short-run equilibrium b. Long-run equilibrium
32. Short run equilibrium Short run does not indicate any time
duration. Short-run Economists define the short run as situation
when factors of production can not be changed completely fixed. For
example, for a particular company this might mean that they have
reached full capacity in a warehouse or at a factory site. These
short-run costs consist of both fixed and variable costs. In short
run a firm can face three situations A firm can earn - 1.super
normal profit 2.Normal profit 3.or can attain equilibrium at
loss.
33. Equilibrium with super normal profit In short run a firm
can earn super normal profit. A firm can reduce average cost (AC)
by using its experience , efficiency or any location benefits.
Those can make a firm able to earn super normal profit. Conditions
: P=AR=MR=SMC>SAC
34. OX axis shows quantity of out put and OY axis shows revenue
and cost. AR = MR curve shows the average and marginal revenue of
the firm. SAC and SMC curve denotes short run average cost and
marginal cost. At the point a SMC curve intersects MR line from
below. So point a is the equilibrium point. Here , equilibrium
output is OM and equilibrium price is OP. As per diagram total
revenue of the firm is OPAM and total cost is OP1BM. Total profit
is PABP1. Here the firm attains equilibrium with super normal
profit. Super normal profit as per diagram is PABP1.It is also
known as economic profit.
35. Equilibrium with normal profit In short run a firm can
attain equilibrium with normal profit Normal profit is the profit
that inspires a firm to carry on its business. Condition:
SMC=MR=AR=SAC
36. Equilibrium with losses In short run a firm can attain
equilibrium while it is incurring losses. In this situation average
cost is higher than average revenue. Condition:
SMC=MR=AR>SAC.
37. Long run equilibrium of a firm Long-run In contrast,
economists define the long-run as being the time period when all
the factors of production can be changed. So in the example above,
the company can now look to expand its warehouse or factory
capacity without any problems.
38. Equilibrium of a monopoly firm A monopoly firm can control
price and supply. So here equilibrium means determining the price
and quantity. Equilibrium in monopoly can be classified into two
types a. Short run equilibrium b. Long run equilibrium In short run
a firm can attain equilibrium in three situation- a. Equilibrium
with super normal profit b. Equilibrium with normal profit c.
Equilibrium with loss
39. In long run a firm can attain equilibrium in two situation-
a. Equilibrium with super normal profit b. Equilibrium with normal
profit To attain equilibrium in monopoly following two conditions
are to be fulfilled- a.MC=MR b.MC curve intersects MR curve from
below.
40. Short run equilibrium in monopoly Equilibrium with super
normal profit: in short run a firm can earn super normal profit.
Here the condition of equilibrium is SMC=MRSAC which means average
revenue or price will be higher than the average revenue.
41. In above diagram OX(land) axis shows quantity of supply and
OY(vertical) axis shows price , revenue and expense. AR and MR
curves show average revenue and marginal revenue. SAC curve denotes
short run average cost .and SMC curve denotes short run marginal
cost. as per diagram, the firm attains equilibrium at the point a
where SMC=MR. here equilibrium production is OM and equilibrium
price is OP. at this price total revenue=OPCM Total cost =OP1BM So
super normal profit is PP1BC.
42. Equilibrium with normal profit or zero profit In monopoly a
firm can attain equilibrium with normal profit. Condition:
SMC=MR
43. Equilibrium of a firm with loss In short run a firm can
carry on its production while it is making loss. Because in short
run a firm is to bear fixed cost. In this situation if the firm
sees that it can recover a portion of fixed cost if it keeps its
production going, the firm will continue its production on loss.
Condition: a. SMC=MR
44. Long run equilibrium in monopoly In long run a firm will
not continue its production while it is making loss. In long run a
firm can earn super normal profit due to its nature. In monopoly
only one firm produces so there is no close substitute of the
product. No new firm can enter the market. So in monopoly the only
firm can exercise sole control over market supply. So it can fix
any price for the product as it wishes. Thus it can earn super
normal profit.
45. Though the sole firm can earn super normal profit in long
run but a logical and deliberate monopolist can earn nor mal profit
in long run. The reasons are as follows 1.New competitor firm can
appear in the market seeing the super normal profit. 2.Customers
may be dissatisfied on super normal profit. 3. The government can
impose restrictions.