Some information about Market

Market: The term market is used in different ways. Market can be viewed as the context

within which voluntary exchanges among buyers and sellers take place.

The oldest form of market – the traditional market – is a place where buyers meet sellers to do

business with one another. Most of our towns still have a market place where buying and

selling take place in a manner which has not changed for centuries.

In the modern world, a market can take many forms. A market is best defined as any

arrangement which enables buyers and sellers to transact business in such a way that prices

can be established and exchanges can take place. Today it is not necessary for buyers and

sellers to meet face to face for transaction.

According to Cournot, “Economists understand by the term market not any particular market

place in which things are brought and sold but the whole of any region in which buyers and

sellers are in such free intercourse with one another that the price of the same goods tends to

equality easily and quickly.”

According to Paul A. Samuelson, a market is a mechanism through which buyers and sellers

interact to set prices and exchange goods and services.

Essential of a Market

1. a commodity which is dealt with

2. the existence of buyers and sellers

3. a place, be it a certain region, a country, world

4. such intercourse between buyers and sellers that only one price should prevail for the same

commodity at the same time. Prices coordinate the decisions of producers and consumers in a

market.

Role or Importance of a Market

Market plays an important role in a capitalistic economy. Here productive activities are

undertaken to earn a profit. The profit is the difference between the total cost of production

and total sale proceeds. The producers try to make the difference as big as possible. Here

market price comes to his aid.

He tries to buy factors as cheaply as possible by comparing different prices prevailing in the

market. His efforts will be to use more of the cheaper factor and less of the dearer factor in

order to make the cost lowest possible.

Similarly to earn maximum amount of profit he will try to sell his products at the highest

possible price. He can do it by comparing different market prices. In the absence of a market

the producers cannot have a market price to indicate the limit of his production and sale.

Consumers in a capitalistic economy buy goods and services from the market of their free will.

They try to get maximum satisfaction at the minimum cost. This they can do by comparing the

different prices prevailing in the market. As goods and services are available in the market,

they can buy the best quality products at the lowest possible price. Thus, market enables

consumers to get maximum possible satisfaction out of his limited resources.

The presence of market helps quick disposal of the goods and services. Similarly, market

enables consumers to buy their necessary goods and services whenever they require. Thus, the

interest of the consumer and that of the producer is best served through the market mechanism.

So, market in a capitalistic economy serves a very important purpose of the producers as well

as of consumers.

Classification of Market

i. on the basis of area: local market, national market and world market

ii. on the basis of time: short period, long period

iii. on the basis of competition: perfect market, imperfect market

Size of the Market

The size of the market depends upon several factors:

1. Character of the Commodity: In order to have a wide market, a commodity must be (i)

portable; (ii) durable; (iii) suitable for sampling, grading and exact description; and (iv) such

as its supply can be increased. Such commodities are wheat, gold, government securities, etc.

Bulky articles like bricks and perishable articles like fresh fruit and vegetables have a narrow

market.

2. Nature of Demand: A commodity, which is in universal demand (e.g., gold and silver),

will have a wide market. Similarly, a commodity of general consumption has a wide market.

3. Means of Communication and Transport. The size of the market depends upon the extent

to which means of communication and transport have been developed. A properly developed

transport and communication system has enabled commodities to be carried long distances and

establish wide contacts. This has widened the markets.

4. Peace and Security: Obviously, goods cannot be marketed in distant places unless peace

and order prevail. In war-time, due to insecurity in war zones, markets get restricted. Thus, the

extent of the market depends on the peace prevailing in the region.

5. Currency and Credit System: If the currency and credit system of the country are well

developed, marketing can be conveniently and profitably carried on over extensive areas. The

extent of the market very largely depends on the state of the currency and the confidence it

inspires.

6. Policy of the State: Markets may be restricted by the policy of the State. Prohibitive duties

and quotas restrict the market. The zoning system (e.g., wheat zones) which allows free

movement of goods only within a certain zone has the same effect. Thus, the Government

policy can also affect the extent of the market.

7. Degree of Division of Labour: We know that division of labour is limited by the extent of

the market. The converse of this is also true. That is, the extent of the market also, in its turn,

depends upon the degree of division of labour. The greater the division of labour the cheaper

the articles and wider the market.

Market Structure

Perfect Market

- All sellers and buyers are aware of prices

- Any buyers can purchase from any seller

- The same price rules throughout the market

Imperfect Market

- Some buyers or sellers or both are not aware of prices

- Different prices come to prevail for the same commodity

Types of Imperfect Market

a. Monopolistic Competition b. Oligopoly c. Monopoly

Perfect competition

A market is said to be perfect when all the potential sellers and buyers are promptly aware of

the prices at which transactions take place and all the offers made by other sellers and buyers,

and when any buyer can purchase from any seller and conversely. Under such a condition, the

price of a commodity will tend to be the same (after allowing for cost of transport including

import duties) all over the market. Thus, prevalence of the same price for the same commodity

at the same time is the essential characteristic of a perfect market.

Characteristics of Perfect Market

i. A large number of buyers and sellers: One single seller or buyer will not be able to

influence the market price.

ii. Homogeneous product: Commodity produced by all firms should be standardized or

identical.

iii. Free entry or exit: There are no restrictions on entry or exit; the farms will earn normal

profit.

iv. Perfect knowledge: Purchasers and sellers should be fully aware of the prices that are being

offered and accepted.

v. Absence of transport costs: It is necessary that no cost of transport has to be incurred.

vi. Perfect mobility of the factors of production: Mobility of the factors of production is

essential to enable the farms and industries to achieve an equilibrium position or to adjust

their supply to demand.

Monopolistic Competition

Monopolistic Competition is a market situation in which the transacted products of various

firms are not perfect substitutes.

Characteristics of Monopolistic Competition

i. The number of sellers is not large.

ii. The products are not homogeneous.

iii. Either in ignorance or on account of transport costs or lack of mobility of the factors of

production, same price does not rule in the market throughout.

iv. The producers produce under different brand names.

v. Sales promotional activities exist due to attract consumers.

vi. The demand curve or sales curve or AR curve is not a horizontal straight line;it is a

downward sloping curve.

vii. The demand for the product is not perfectly elastic; it is responsive to changes in price.

Oligopoly

Oligopoly represents the presence of a few firms in the market, producing either a

homogeneous product or products which are close but not perfect substitutes to each other.

Oligopoly can be divided into two forms, perfect oligopoly, where in a few firms produce a

homogenous product and imperfect oligopoly wherein there are a few firms producing

heterogeneous products.

Characteristics of Oligopoly Competition

i. Existence of a few sellers.

ii. Every seller can exercise an important influence on the price-output policies.

iii. There are barriers to entry of new firms. They set prices below the maximum profit level in

order to discourage the entry of new firms.

iv. Among the firms there are non-price competition rather than price competition. Non-price

competition can take many forms such as brand names, free gift, after sale services, free

delivery etc.

v. The size of firm differs considerably. Some may be very large, while others very small.

vii. The demand curve is undetermined.

viii. The product is homogenous or heterogeneous in nature.

Monopoly

A monopoly is an industry that produces a good or service for which no close substitute exists

and in which there is one supplier that is protected from competition by a barrier preventing

the entry of new firms. A monopoly has two key features – i) No close substitutes and b) b.

Barriers to entry

Monopoly competition has following features

i. A single producer controls the entire market.

ii. No substitutes for his product.

iii. Absolutely no threat from the other firms.

iv. Seller fixed the price. Uniform price for all the consumers.v. No role of individual consumer influencing the price.

vi. The cross elasticity of demand is very low for the product.

vii. The AR curve or demand curve always slopes downwards to the right it is less elastic

in monopoly than in monopolistic competition v. No role of individual consumer influencing the price.

vi. The cross elasticity of demand is very low for the product.

vii. The AR curve or demand curve always slopes downwards to the right it is less elastic

in monopoly than in monopolistic competition Market Classifications and Cross Elasticity of Demand

On the basis of the cross elasticity of demand we can distinguish between the various types of

market structure. Stonier and Hague observe that, in perfect competition, the cross elasticity of

demand for the product of a single firm with respect to a change in the price of the rest of

industry will be infinite. In monopolistic competition, the cross elasticity of demand for the

product of a single firm with respect to a change in the price of the other products made in the

monopolistic group will be very high. The cross elasticity of demand for the product of a

monopolist with respect to a fall in the price of other products in the economy will be very

low. In other words, when the cross elasticity of demand is infinite, it is a case of perfect

competition; when it is very high it is a case of monopolistic competition and when it is very

low, it is a case of monopoly.

Cross elasticity of demand is a very unsatisfactory measure of the extent of competition

prevailing in the market. It has been pointed out that cross elasticity of demand of any

perfectly competitive firm is zero (and not infinity). As mentioned above, under monopoly

also cross elasticity of demand is zero. Cross elasticity ignores the two basic determinants of

market structure: the degree of closeness or remoteness of substitution among products and the

number of firms in the relevant group or industry. Thus, the best way to classify markets is,

therefore, on the basis of number of firms in the industry and the nature of the product (that is,

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