Forms of Market | Chapter 12 | Class 11 | Economics | CBSE |

FORMS OF MARKET | CHAPTER 12 | CLASS XI | ECONOMICS |

Market

Market refers to a mechanism or an arrangement that facilitates contact between the buyer and seller for the sale and purchase of goods and services.

Forms of Market

Perfect Competition

It is a form of the market where there is a large number of buyer and seller of a commodity. Homogeneous product is sold and its price is determined by the forces of market supply and market. An individual buyer or a seller has no control over price.

Features 

  • Perfect knowledge – Byron cellar a fully aware of the prevailing price in the market. There are also aware of the fact that homogeneous product is being sold in the market. Accordingly, producer cannot charge different price from the market from different buyer. High profit through prices discrimination is ruled out.
  • Freedom of entry and exit  – Firm in the long run and only normal profit because of free entry and exit. In case extra normal profit earned zero form will join the industry. Market supply quiz will increase and market price will fall. Extra normal profit will be wiped out. In case of extra normal losses some of the existing firm will leave the industry. Extra normal losses will be wiped out. During short period, entry and exit of firm is not possible.
  • Independent decision making – There is no agreement between different firms regarding quantity to be produced or price to be charged. The perfect competition facilitates highest output and lowest price, compared with any other form of the market.
  • Large number of buyers and sellers – The share of each seller in total market supply is very small. A single buyer’s share in the total market demand is so insignificant that the buyer and not influence the market price by changing his demand. Large number indicates effectiveness of a single seller or buyer in influencing the prevailing market price on its own.
  • Homogeneous product – It is a situation of zero degree of product differentiation. So, that product at different firms are perfect substitutes of each other. Zero degree of product differentiation leads to zero degree of market control or zero degree of monopoly control of the market. Accordingly, minimum possible price prevails in the market.
  • Perfect mobility – Factors of production are perfectly mobile. They will move to that industry where they get high prices. Accordingly, uniform factor price prevails in the market
  • No extra transport cost – Buying a commodity from one seller, rather than the other, does not involve any extra transportation cost. It ensures that any producer is not able to charge higher price for the product.

Monopoly

It is a form of the market in which there is a single seller or producer of a commodity. There are no close substitute of the monopoly product and there are legal, technical or natural barriers of the entry of new firm in the monopoly market.

Features 

  • No close substitutes – A Monopoly firm produces a commodity that has no close substitute.
  • Full control over price – Being a single seller of the product, a monopolist has full control over its price. A monopolist is a price maker.
  • One seller and large number of buyers – Under monopoly, there is a single producer. He may be alone or there may be a group of partners or a joint stock company for a state. However, there is a large number of buyers of the product.
  • Restriction on entry of new firms – There are patent rights granted to the Monopoly firm. A Monopoly firm has control over a technique and raw material of production.
  • Price discrimination – A monopolist may practice price discrimination.

You may also read Economics and Economy, Central Problem of an Economy, Consumer Equilibrium – Utility Analysis, Consumer Equilibrium – Indifference Curve Analysis, Theory of Demand Change in Demand, Price Elasticity of Demand, Production Function and Returns to a Factor, Concept of Cost, Concept of Revenue, Producer’s Equilibrium, Theory of SupplyMarket Equilibrium Under Perfect Competition for better output, higher scores and greater grasping of the other chapters.

Imperfect Competition 

Monopolistic Competition

Features 

  • Large number of buyers and sellers – There is a large number of buyers and sellers. Also, the size of each firm is small and each firm has a limited share of the market.
  • Product differentiated – It allows of form a partial control over price of its product. It implies a partial Monopoly power of a firm in the market. Due to availability of close substitute, it causes high elasticity of demand
  • Lack of perfect knowledge and mobility – Seller and buyers of the products lakh perfect knowledge about the market because of product differentiation. Factors of production, goods and services lack perfect mobility.
  • Freedom of entry and exit – Firms are free to enter the industry or leave it. Products of some firms may be legally patented. New forms cannot produce identical product.
  • Selling cost – These costs incurred by a firm to increase its market share. In order to sell more unit of the product, each firm gives wide publicity of its product through advertisements.
  • Non-price competition – Even when product differentiation allows the firm to pursue their independent price policy, they often avoid getting into price wars.

Oligopoly

Features 

  • Small number of big firm – Oligopoly market is the one in which a small number of big firms dominate the market for a product. Producers have partial control of a price. It makes demand relative less elastic.
  • High degree of interdependence – The market share of each form is so significant that its price and output policy leaves a significant impact on the price and output policy of the rival firms.
  • Difficult to trace firm’s demand curve – An Oligopoly firm can never predict its sales correctly because any change in price leads to a series of reaction by the Rival firms. Therefore, demand curve is indeterminate.
  • Formation of cartels – A cartel is a formal agreement among the firms to avoid competition. It is a sort of collusion against competition. Under it, output and prices are fixed by different forms as a group.
  • Entry barriers – There are barriers to the entry of new firm. These are created largely through patent right.
  • Non-price competition – Firms try to avoid price competition for the fear of price War. The use other method like advertising acceptor to compete with each other.

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