The topic contains different Forms of Market and the factors determining the Forms of Market for class 11 -12 Economics
Forms of Market:
Market:
In general, the word market refers to a physical pace where commodities are bought and sold.
But in economics, the term ‘market’ does not necessarily refer to a particular place, but to the mechanism or arrangement by which buyers and sellers of a commodity are able to contact each other for having economic exchange and are able to strike a deal about the price and the quantity to be bought and sold.
Distinguish features of the market:
1. The market need not be a particular place. The geographical area of a market may be large or small depending upon how scattered the buyers and sellers are. It may be a small market like a local market or as large as the world market like market for wheat, computers, aeroplanes etc.
2. The essential feature of a market is that the buyers and sellers should be able to strike a deal about the price and the quantity to be bought and sold. For this purpose the buyer and sellers need not have a direct contact with each other. They need to have a system of communication with each other through correspondence, telephone, internet etc. so as to be able to strike a bargain.
Market Structure :
Market structure refers to the characteristics of a market such as the number of firms, the nature of their products, the availability of knowledge and the extent of barriers to entry of any firm etc.
Competitiveness of Market Structure :
- Various market forms are broadly classified on the basis of competitiveness of the market structure.
- The competitiveness of the market structure refers to the extent to which individual firms have the power to influence the market price of the commodity.
- It refers to the power of an individual firm to influence the market price of the commodity.
- The lesser the power of an individual firm to influence the market price, the more competitive is the market structure.
- In perfect competition a firm has absolutely no power to influence the price as there are so many firms and none of them have any control on the price, each one of them is a price taker.
- In monopoly market, where there only one producer of a good who has a considerable Influence on the price of the good, there is no competition and the firm is price maker.
- In between these two extreme forms of market, there are a number of market forms where the individual producer has the power to influence the price and the other elements of the market but only to a limited extent.
- Monopolistic competition, oligopoly, etc. are two such market forms which are neither fully competitive nor fully monopolistic.
- For example, the producer of a particular brand of toothpaste or a car can influence the price of his product, but to a limited extent.
- The power of a seller to influence the market depends on its share in the total supply.
- The smaller the number of seller, the larger would be the share of each firm in total supply and therefore the larger would be the power of each firm to influence the price.
- On the other hand, if the number of sellers is large, the power of sellers to influence the price would be less because their share in total supply is less.
- Number of seller is used to distinguish between monopoly (only one seller) and perfect competition and monopolistic competition (large number of sellers) and oligopoly (only a few sellers).
- The number of buyers determine the degree of control a buyer has on market, for example, in monopoly there is only one buyer, due to this buyer has a large control on the market.
- Different market forms can be distinguish on the basis of nature of Product.
- The product or good may be homogeneous or differentiated.
- If the products are similar or homogeneous, no single firm is able to influence the price of the good. For example, Perfect competition.
- If the product are differentiated means different firms produce differentiated (not identical ) product each firm can charge different price for their goods, example, monopolistic competition.
- Different forms of market can be distinguished on the basis of the buyer’s knowledge about the market.
- If the buyer have proper information about market condition, the price of the good charged by other sellers, nature and quality of the product etc, there would be a uniform price in the market.
- If the buyer is ignorant about the market price, market conditions, quality of different brands, the firms would charge different price from different buyers for same product.
- For example, in Perfect Competition market – the buyers have perfect knowledge about market, while in Monopolistic Competition market the buyers are ignorant about the market.
- Freedom of entry or exit means there are no restrictions – natural or man – made on the entry of new firm or on the exit of existing firm.
- The freedom of entry or exit led the producers to earn only minimum or normal profit while the restricted entry would led them to earn abnormal profit.
- In Perfect or Monopolistic competition there is a freedom of entry and exit. If the producers earn high profit, new firms would enter into the market, this would led to increase in total output and fall in the price. this ultimately wipe out the abnormal profit.
- In Monopoly, the entry and exit is restricted or closed. If the firm enjoys abnormal profit, no new firm can enter into the industry and the existing firms can enjoy the profit without any fear of rival producers.
- Different forms of market can also be distinguished on the basis of their influence on market price determination.
- In Perfect Competition there are so many firms, no firm has any influence on the price – they are considered to the Price – Takers.
- In Monopoly, only one firm is present and has considerable influence on market price – they are the Price – Makers.
- In Monopolistic competition, the firm has a limited influence on the price so they are Price Makers but within a certain limits.