ms-91 mba assignment july dec 2010 Question 3

3. Explain how are markets classified? Describe the characteristics of a Perfectly Competitive market.

 CLASSIFICATION OF MARKET STRUCTURES

            Market means a place where people gather to carry out transaction and exchange something for value. Market is an essential part of any economy and provides the sellers and buyers a meeting place to facilitate exchange. Different experts have defined market as follows:

According to Jevons, “The word market has been generalised so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity.”

In the words of Benham” Market is an area over which buyers and sellers are in close touch with one another, either directly or through dealers, that the price obtainable in one part of the market affects the prices paid in other parts.” Market is also described as an organisation whereby buyers and sellers of goods are kept in close touch with each other.

Market can be classified according to the following bases:

Area

Market can be classified as local, regional, national and international markets.

Volume of Business

Market is classified on the basis of volume of business as wholesale and retail markets. In the wholesale market quantities exchanged are large and in bulk while in retail they are exchanged in smaller lots.

Time

On the basis of time, markets are divided as very short period markets, short period markets and long period markets. Very short period markets are for commodities which are perishable and here, supply is fixed. In short period markets, supply can be increased but to a limited extent and in long period markets supply can be increased to any extent.

Status

According to status of sellers, markets are classified as primary, secondary and terminal markets. Manufacturers are part of primary markets, wholesalers constitute secondary market and retailers form part of terminal market.

Nature of Transactions

One can classify the market on the basis of nature of transactions as spot market and future market.

Regulation

When the government stipulates certain regulations on the transactions then such a market is called regulated market and when transactions are left to the market forces then such a market is called unregulated market.

 

Structure

According to market structure, markets are of the following types:

a) Pure or Perfect Competition

b) Monopoly

c) Monopolistic Competition

d) Duopoly, Oligopoly

PURE OR PERFECT COMPOSITION

Characteristics

A perfectly competitive market has a very large number of relatively small buyers and sellers.

• The product is homogeneous.
• There is free entry and exit in the industry.
• Every firm’s action is independent of the other firm.
• In this market there is perfect mobility of factors.
• The sellers operate in conditions of certainty having complete knowledge of costs,
• demand, price and quantities.

Equilibrium of the firm is attained where Marginal revenue is equal to marginal cost, i.e., MR=MC (MC curve cuts the MR curve from below).

Competition Level

If a firm in a perfectly competitive market raises the price of its product above the going price, then it will not be able to sell its products. Therefore, each firm is insignificant and also, the firm is not able to earn profit by cutting the price because it can sell any quantity of goods at the going rate. When faced with competition, all the firms sell their product at the name price. The average and marginal revenues would be consistent and equal.

Strategy

The firm should adjust its output in relation to the prevailing price so that it could maximize its profit. The entry or exit is not possible in the short run, so the firm may either earn a profit or suffer a loss in the short run. In the long run, the firms operating in the market are free to enter or exit. So, if there is a situation of profit, new firms would enter the market and compete with existing firms. Supply would increase and price would shift downwards, thus eliminating the excessive profit. However, if there is loss, some firms would exit, there would be shortage and supply would decline leading to an upward shift in the price, thus elimination in the losses.

Price Determination

Price is determined at a point where the demand of a commodity equals its supply. The determination is different in different time periods i.e. very short run, short run and long run.

a) Price Determination In Very Short Run

• Supply of commodity is fixed.
• Input supply is fixed
• The demand varies and determines the price.
• For perishable goods, the entire supply has to be sold at the earliest and for durable goods, this is not the case.
• For durable goods, supply can be adjusted with demand accordingly.

b) Price Determination In Short Run

• The firm can change its supply by changing the variable factors.
• The firm is not in a position to change the scale of its plant.
• Also supply can be changed to a limit as per the capacity of the firms.
• The number of firms can neither increase nor decrease in the short run.
• An increase in demand will lead to a rise in both quantity and price and vice versa.

c) Price Determination in the Long Run

• In the long run, it is possible to change the supply.
• Shift in demand takes place with greater adjustment in supply and smaller adjustments in price.
• It is not necessary that the new price would go in the same direction as the demand.
• The new price may be equal to, less than or more than the initial price and this depends on the industry cost conditions.