Maharashtra Board Class 12 Economics Chapter 5 Forms of Market PDF Download

Forms Of Market

Introduction

Market is generally understood as a particular place or locality where goods are sold and purchased. But, in economics, market refers to an arrangement through which buyers and sellers come in contact with each other directly or indirectly and exchange of goods and services takes place among them.

Definition Of Market

According to Augustin Cournot, "Economists understand 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 a close contact with one another that the prices of the same goods tend to equality easily and quickly."

Thus, market is a network of dealings between potential buyers and potential sellers. At any point of time, a market will exist if there are:

1) Buyers and sellers

2) A product or service to be bought and sold

3) Price of the product

4) Close contact between buyers and sellers

5) Knowledge about market

Teacher's Note

In your city, the vegetable market is a real market. Buyers and sellers meet there every day. Price changes every day based on supply and demand.

Exam Trick

Remember: Market needs 5 things. Think of it as: Buyers, Sellers, Product, Price, and Contact. Without all five, there is no market.

Points To Remember

Market is where buyers and sellers meet to exchange goods.
Market can be a place or just an arrangement.
Both demand and supply must be present in a market.
Price is determined by buyer and seller interaction.
Good communication is needed between buyers and sellers.

Classification Of Market

Market can be classified on the basis of various criteria.

I) On The Basis Of Place

1) Local market: Local market is a market in which sellers sell and customers buy a product in the region or area in which it is produced.

2) National market: National market is a domestic market in a given country. Each national market is governed by the regulation of its own country.

3) International market: International market is a worldwide market in which buyers and sellers trade in goods and services across the national borders.

Teacher's Note

In India, tomatoes sold in Delhi market are a local market. But Indian cars sold to America are in the international market.

Exam Trick

Remember three types by place: Local = your village, National = your country, International = whole world.

Points To Remember

Local market sells goods made in that same area only.
National market follows the laws of one country.
International market has no country borders.
Local markets are small and close to home.
International markets are very large and far away.

II) On The Basis Of Time

1) Very short period: Very short period is a period in which supply is fixed and price is determined by the demand. The time period is for a few days or weeks in which the supply of commodity cannot be increased.

2) Short period: Short period is a period of less than one year. In this period, firms can only make adjustments in inputs like labour to increase the supply of goods and services.

3) Long period: Long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs. It is for a few years, generally up to five years.

4) Very long period: Very long period is a production time that is so long that all inputs are variable. It is of more than five years.

Teacher's Note

In India, during harvest season, tomato prices drop very fast because supply suddenly increases. This is a very short period market.

Exam Trick

Remember: Very short = few days, Short = less than 1 year, Long = up to 5 years, Very long = more than 5 years.

Points To Remember

Very short period means supply cannot change at all.
Short period is less than one year long.
Long period allows all costs to be changed.
Very long period takes more than five years.
Time period affects how much production can change.

III) On The Basis Of Competition

Competition among the sellers and buyers is the most important criteria for classification of markets in economics.

A) Perfect Competition

Meaning And Definition

Perfect competition is an ideal and imaginary concept of market rather than an actual market. According to Mrs. Joan Robinson, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."

A perfectly competitive market is one in which the number of buyers and sellers is very large. All the buyers and sellers are engaged in buying and selling a homogeneous product without any restrictions. Moreover both buyers and sellers possess perfect knowledge of market conditions.

Features Of Perfect Competition

1) Large number of sellers and buyers: Under perfect competitions, there are large number of sellers and buyers. As mentioned earlier, each seller forms a negligible part in the total market. Hence, none of them is in a position to influence the price and supply in the market. Thus, sellers are price takers under perfect competition. The number of buyers is also large. The share of each buyer is so negligible that none of them is in a position to influence the price in the market.

2) Homogeneous product: An important feature of a perfectly competitive market is that the product sold is homogeneous or identical in respect of size, design, colour, taste etc. All the products are perfect substitutes to each other.

3) Free entry and exit: There are no barriers to the entry and exit of firms. Any firm can enter or quit the industry at its own will. If there is hope of profit, the firm will enter the market and if there is possibility of loss the firm will leave the market.

4) Single price: A single uniform price prevails under perfect competition which is determined by the interaction of demand and supply.

5) Perfect knowledge of market: The buyers and sellers possess a perfect knowledge about the market conditions. Every seller and buyer has the knowledge about price, quality, source of supply of products etc.

6) Perfect mobility of factors of production: There is perfect mobility of factors of production under perfect competition. Labour and capital are mobile not only geographically but also occupationally.

7) Absence of transport cost: In perfect competition, price is uniform because we assume that transport cost does not exist. This assumption will lead to uniformity in price.

8) No government intervention: Laissez-faire policy is an important feature of perfect competition. It means there is absence of Government intervention in economic activities.

Teacher's Note

In India, wheat market in villages is closest to perfect competition. Many farmers sell wheat, and all wheat is the same. Prices are also the same everywhere.

Exam Trick

Remember: Perfect competition = Many sellers, Many buyers, Same product, One price, No government control. Think of a vegetable market.

Points To Remember

Perfect competition has many buyers and sellers.
All products are exactly the same in this market.
Everyone knows the same price for the product.
Any new seller can easily start business here.
No one seller can change the price alone.

Price Determination Under Perfect Competition

The interaction of demand and supply determine price of the commodity in perfect competition. This is known as equilibrium price. Marshall has compared the process of price determination to the cutting of cloth with a pair of scissors. Just as both the blades of scissors are required to cut the cloth, both the forces of demand and supply are essential to determine the equilibrium price in the market.

From the table above, following conclusions can be drawn:

1) When price rises from ₹ 100 to ₹ 200 quantity demanded falls from 5000 kgs. to 4000 kgs. whereas supply increases from 1000 kgs. to 2000 kgs. This is because demand falls with rise in price and supply rises with a rise in price. This is the stage where demand is greater than supply (DD > SS).

2) When price rises to ₹ 300, quantity demanded and quantity supplied become equal that is 3000 kg. This is the stage of equilibrium where demand and supply become equal (DD = SS). Hence, ₹ 300 becomes the equilibrium price.

3) When price further rises from ₹ 400 to ₹ 500, demand falls from 2000 kgs. to 1000 kgs. and supply rises from 4000 kgs. to 5000 kgs. Thus, supply is greater than demand. (SS > DD).

Teacher's Note

When apples are cheap (₹100), many people want to buy but farmers don't have enough. When apples are expensive (₹500), farmers have too many but people don't want to buy. At ₹300, it is just right.

Exam Trick

Remember: Equilibrium price is where demand equals supply. It is the perfect balance point where both buyers and sellers are happy.

Points To Remember

When price is too low, demand is more than supply.
When price is too high, supply is more than demand.
Equilibrium price is where they are equal.
At equilibrium price, all sellers sell all they want.
At equilibrium price, all buyers get what they need.

B) Imperfect Competition

Imperfect competition is a type of market showing some but not all the features of a competitive market.

I) Monopoly

Meaning And Definition

The term monopoly is derived from the Greek word 'Mono' which means single and 'poly' which means seller. Monopoly is a market in which there is only one seller who controls the entire market supply for a product which has no close substitute.

According to E. H. Chamberlin, "Monopoly refers to a single firm which has control over the supply of a product which has no close substitute."

Features Of Monopoly Market

1) Single seller: In monopoly, there is no competition as there is only one single producer or seller of the product. But, the number of buyers is large.

2) No close substitute: There are no close substitutes for the product of the monopolist. Therefore, the buyers have no choice. They have to either buy the product from the monopolist or go without it. The cross elasticity of demand for his product is either zero or negative.

3) Barriers to entry: Entry of the rivals is restricted due to legal, natural, technological barriers which do not allow the competitors to enter the market.

4) Complete control over the market supply: The monopolist has complete hold over the market. He is the sole producer or seller of the product.

5) Price maker: A monopolist can fix the price of his own product as he controls the whole market supply. Monopolist is a price maker.

6) Price discrimination: Monopolist being a price maker, he can charge different prices to different consumers for the same product, on the basis of time, place etc. Thus, price discrimination is an important feature of monopoly market. For example, students and senior citizens are provided railway tickets at concessional rates.

7) No distinction between firm and industry: A monopolist is the sole seller and producer of the product. A monopoly firm itself is an industry.

Teacher's Note

Indian Railways is a monopoly in India. Only they provide railway services. Students and old people get cheaper tickets. This is price discrimination.

Exam Trick

Remember: Monopoly = One seller, No choice for buyers, Can set any price, Can charge different prices to different people.

Points To Remember

Monopoly means only one seller in the whole market.
The product has no other similar product to replace it.
Monopolist is a price maker, not a price taker.
New companies cannot easily enter this market.
Monopolist can charge different prices to different people.

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