Types of Market

                                          DIFFERENT TYPES OF MARKET

                                

Ok so before I began this topic let me just tell you one thing…don’t take it as a boring course topic…trust me on this one. This topic is very very interesting and it actually is one of the most realistic topic of economics. What makes this one so awesome is that it explains the true nature of producers..I know that in economics we usually we don’t deal with psychological behavior of the producers but here we do look at it in an indirect way. Now not wasting any more of your time let us begin this topic.

WHAT IS A MARKET?

so before I start jabbering about what are different forms of market are…let me first make sure that you people at least know what “market” is…a market does not specifically refers to a geographical place or area.. It actually is just any place where transaction b/w consumer and producer take place. The great part here is that the consumer and producer are not even required to be present there…like for example- ebay, flipkart etc. Ok, so now let’s move on to our main topic i.e. different types:

Perfect competition

Imperfect competition:

Monopoly market

Monopolistic market

Oligopoly market

Ok now just for the sake of simplicity I will not focus much on the equilibrium condition of each topic. I will just explain it you what exactly do we mean by the market and how does it exist.

PERFECT COMPETITION MARKET 

Now all you people must have had enough of perfect competition by now (thanks to our great M.D. mam) but let me just try and make it simple for you. I will give you some of the simple points here:

There are large numbers of sellers in this form of market as there is no restriction on entry and exit of the firm

The market price which remains fixed at all level of output is determined by the demand and supply forces…i.e. that very famous cross shaped graph(hopefully you know at least about that graph)

The producers are known as the price takers as individual seller has no effect on the market price and the simply has to accept the price prevailing in the market. Look at it like this, if the individual seller will reduce the price he will incur loss and if he increase the price on rational customer will buy from him so PRICE TAKER it is.

Availability of substitutes: this is one of the best and obvious part of perfect competition that there are substitutes available in the market so there is more elasticity of demand.

Since there is no restrictions on entry and exit of the firm the firms in perfect competition earns only normal profit.

Ok so those were the features of a perfectly competitive market in a nutshell. Now let’s just sneak a peek into the equilibrium condition.

EQUILLIBRIUM IN SHORT RUN

Here I won’t expand it too much. I will just give you the basic equilibrium condition in short run:

Marginal cost= marginal revenue

The rising part of MC cuts MR from below.

AR > AC

Ok now if anyone any explanation regarding it you people are very much welcome to ask me. :-)

EQUILLIBRIUM IN LONG RUN

Here also I will explain in nutshell. The requirements are:

Marginal cost=marginal revenue

The rising part of MC cuts MR from below

AR=AC

Ok so now that was all about the features and equilibrium of perfectly competitive market. Let’s talk about imperfect competition now.

IMPERFECT COMPETITION

So now you people know about perfect competition just think for a second what was so “perfect” about it and what could be imperfect in imperfect competition???

Ok so now if you have thought about it (do it for real..!! because then only you will appreciate this topic), you might have seen how there is a feature in perfectly competitive market that price is fixed at all level and is same for all consumers. You don’t find it a little too perfect. Well I do. Also in imperfect competition the price is not fixed and is also not same at all level of output. It increase with increase in output.

Some famous types of imperfectly competitive market:

Monopoly market

Monopolistic market

Oligopoly market

MONOPOLY MARKET

So what we mean basically about monopoly market is that there is only one seller in the market so he is the one responsible for taking all decision regarding price and supply. Now before I go on explaining about the various features of the market let me explain how such a situation is established. Let us take some examples:

Patent rights: this happens when a new technology of producing a particular product is discovered by someone and that individual or firm gets it patented with the government for a certain time period. Once the producer gets the patent right no other firm or individual is allowed to use that same method for producing that particular goods for the patented period.

Cartel: sometimes producers form a group and this group is called a “cartel”. Cartel is responsible for taking all the decision regarding the price and supply of product. Here also the cartel act as a single seller and therefore situation of monopoly is achieved.

Government: sometimes the government gives a single firm the right to produce certain product and thus the situation of monopoly is achieved. For example- reliance industry is given the right to produce electricity.

So these are some of the situation where there exists a monopoly market. Now let us take a look at the key features of monopoly market:

Price Giver: Since there is a single seller he only decides the price of the commodity and thus is called the price giver.

Unavailability of closed substitutes: since there is a single seller of the commodity the substitute of the product is no available. This leads to less elastic demand.

There is restriction on the entry and exit of the firm as when more than 1 firm will exist in the market it will be no longer a monopoly market. The implication of this characteristic is that the firm in monopoly market can incur loss as well as supernormal profit.

Price discrimination/ discriminating monopoly: sometimes the monopoly charges different price to different customer and at different places for the same product then that is called price discrimination or discriminating monopoly.

Equilibrium condition (short run) 

Here again I will only be giving a brief idea on the concept of equilibrium condition. So the firm in monopoly market is said to be in equilibrium when the following 3 conditions are satisfied:

MR=MC

Rising part of MC cuts MR from below

AR > AC

Equilibrium condition (long run)

So the firm is in equilibrium only when the following 3 conditions are satisfied:

MR=MC

Rising part of MC cuts MR from below

AR > AC

MONOPOLISTIC MARKET

Basically it is a type of imperfect competition where there are larger number of buyers and sellers and they sell differentiated products.

Features of monopoly market:

There exist a large number of buyers and sellers in this form of market. Therefore the individual sellers is not in a position to influence the price of the product but it can influence the price of a particular brand of product and in this way the individual firm enjoys power to some extent in monopolistic market.

Differentiated product: in this form of market, the producers produce differentiated product which is also called product differentiation. It means the product are not homogeneous but are closely related to each other. The producers create artificial difference in the product to make the different. Example: different company of ceiling fan as they differentiate their product by changing their shape, size, color etc.

Freedom of entry and exit of the firm: in this form of market also there is freedom of exist and entry of the firm so here also producers can make supernormal profit as well as incur loss.

The implication of the differentiated product is that the closed substitute of the product are available and hence there is less elastic demand. Also here the demand curve is less elastic as the firm in this market can sell more output at less price

High advertisement or selling cost: now since here we have got numerous sellers and also they are selling similar products if not identical there exist a tough competition. This leads to advertisement. Every firm spends a lot of amount on advertisement of their product so as to sell their product. This type of advertisement is called “persuasive advertisement”

Oligopoly market

It is that from of market in which there are few sellers of the product.

Features:

Few sellers of the product: due to the presence of few sellers in the market every sellers in this form of market depends on the individual action of the other seller. This implies that the price and output policy of 1 firm affects the price and output policy of other firms also.

Price rigidity/ sticky price: here since each seller depends on other seller for the price and output policy. If 1 of the seller increases the price of its products to get more profit then 1 of the assumptions is that the other sellers may not increase the price of their products. This way the objective of the firm will not be fulfilled. Hence the price will not change and will go back to original.

Group behavior: In an oligopoly market some of the firms form a group in order to avoid unnecessary competition among the firms. This group of firm is called “cartel”. This cartel takes all decision about the share of individual firms in the market and the price and the output policy for all the firms of that group.

Kinked demand curve: in oligopoly market there is no definite slope of the demand curve. The demand curve is indeterminate. This type of demand curve is known as kinked demand curve.

Conclusion

So that was all about different types of market. I hope that all of you were able to learn something and enjoyed it. If there is any queries about any of the topic mentioned above we can discuss about it in our next meet.  

-Anirudh Podder