Business Economics Notes

For B.com (1st Year)

4TH 1ST
Unit Part
 Concept and Definition of Market
In the economy the goods and services produced is basically for satisfaction of the
consumers. The process of exchange is a very vital and for that market is required.
Market is basically a place where the buyers and sellers get together in order to buy
or sell particular good. The market is not restricted to particular building or place or
area.
In the economic sense market basically refers to the area in which the buyers and
sellers are there and there is free competition with each other
Definition
 In words of Ely, “Market means the general field within which the forces determining
the price of a particular commodity operates.”
 According to Prof. Cournot, “Economist understand by the firm market not any
particular place at which things are brought and sold but the whole of region in
which buyers and sellers are in such a free intercourse with one another that price of
the same goods lend to equality easily and quickly.”
Features of Market

Area

Commodity

Buyer and Seller

Competition

Close Contact

Price
 Features of Market
 Area: The area is not specifically related to geographical territory but the
whole area where there is existence of buyer and seller and is in a
competitive contact to each other.
 Buyer and Seller: The most important is existence of buyer and seller for a
market. No place can be termed as market without existence of buyer and
seller. Even if there is one buyer or seller it would be termed as market. This
type of market is termed as monopoly and monopsony.
 Commodity: The market must have a specific commodity. Without the
commodity the existence of market is not possible. In economics each
commodity can different market such as vegetable market, Iron market,
wood market, fruit market etc.
 Features of Market
 Competition: Another important feature is that there must be existence of
competition between the buyer and the sellers. But the competition should
be ethical and according to the norms of then market.
 Close Contact: There should be close contact between the buyer and the
seller and because of which the competition will also prevail. It is not
mandatory that the buyer and seller to be physically present. They can build
contact through different media such as email, message, call, online mode
etc.
 Price: Price is one of the important features of market. In the case of high
competition there is tendency of similar price of specific commodity but
when the competition is comparatively low there will be different price.
Classification of Forms of Market

Basis of Basis of
Area Time

Basis of Basis of
Seller Buyer
On the Basis of Area

Local Market

Provincial Market

National Market

International Market
 On the Basis of Area
 Local Market: In local market the demand for the commodity is limited to
small area. For example the Lanka market of Varanasi, it will be serving the
local purposes.
 Provincial Market: When demand of any product limited to any wide area or
region it is termed as provincial market. For example: The market of Gujarat or
Haryana.
 National Market: The National market in which the buyers and sellers of any
commodity are spread in the whole nation or country. It is termed as national
market.
 International Market: In International market the buyers and sellers of the
commodity is spread to different countries or nations of the world. Such
market is termed as International market.
 On the Basis of time

Very
Short Long Very Long
Short
Period Period Period
Period
Market Market market
Market
 On the Basis of time
 Very Short Period Market: Such kind of market is also termed as daily market. In
such kind of market the seller has no time to increase the supply of the product on
the basis of demand, the supply here is constant. Like in the case of vegetables, milk,
fruits etc.
 Short Period Market: In such kind of market there is more time duration than the
very short duration market. The time duration can be of six months approx. In this
case the producer can increase the supply of the product in case of increase of
demand, but there the production capacity of the plant is constant.
 Long Period Market: In this market the duration is quite long that supply can be
increased or decreased according to the market demand. In long period the demand
and supply have effect on the price of the commodity. The price of this market is
termed as normal price.
 Very Long Period Market: Such market is also termed as imaginary market. In the
very long period market the supply can be raised according to the taste, preference
or other factors by establishing new firms. The duration can be from more than 20
years.
 On the Basis of seller
Imperfect
Perfect Competition Competition

On the Basis
of Seller

Monopoly
 On the Basis of seller
 Perfect Competition: In perfect competition there is large number of buyers
and sellers who are dealing in identical products. They have perfect
knowledge of the market and they deal in homogenous products.
 Monopoly: In monopoly there is a single seller in the market and there is
absence of close substitutes here. In monopoly the firms and industry and
synonyms and there is restriction on the entry of new firms in the market.
 Imperfect Competition: The perfect competition and the monopoly are two
extremes of market on one hand there is large number of sellers and on the
other there is single seller. In imperfect competition number of seller is less
in comparison to perfect competition and monopoly. Here there is product
differentiation and more transportation and selling cost is involved.
 Imperfect Competition
Monopolistic
Oligopoly Competition

Imperfect
Competition

Duopoly
 Imperfect Competition
 Monopolistic Competition: Prof Chamberlin has introduced the concept of
Monopolistic Competition. It is mixture of perfect competition and
monopoly where the sellers are large but less than perfect competition and
sell their different brands of the one commodity. So they are monopolies of
their own brands but face competition also.
 Oligopoly: In the case of oligopoly there are basically few sellers and they
produce homogenous or differentiated product. Importance of
advertisement and sales promotion is involved here.
 Duopoly: In duopoly there are only two sellers in the market and they have
complete control over the market. Both produce similar or kind of similar
products. It is simple and micro form of oligopoly.
 On the Basis of Buyers

Monopsony Perfect Competition

(Single Buyer) (Large number of
Buyers)

Imperfect Competition
Imperfect (Buyer more than Monopsony
Competition but less than Perfect
Competition)
Concept and Definition of Perfect Competition
Market refers to a place (or an arrangement) where the buyers and sellers of
a product come together for the purpose of buying/selling. There can be
different forms of market depending on number of factors such as the
number of firms in the industry, competition level, product homogeneity or
heterogeneity etc. On the basis of these factors, market can be divided into
perfectly competitive market, monopoly, duopoly, oligopoly and monopolistic
competition. In this chapter, we will focus on Perfectly Competitive Market.
Perfect Competition is a market structure in which there are large number of
buyers and sellers of a product and no single firm is in a position to influence
the price of the product being sold.
 Concept and Definition of Perfect Competition
Definitions
 According to Marshall, “The more nearly perfect a market is the stronger is
the tendency for the same price to be paid for the same thing at the same
time in all parts of the market.”

 According to Mrs Joan Robinson, “Perfect competition prevails when the

demand for the output of each producer is perfectly elastic.”

Thus, in a perfectly competitive market, there are infinite numbers of

sellers who sell homogeneous product at a price set by the industry, and
there are infinite numbers of buyers who purchase that product at the set
price.
 Large Number of Buyers and Sellers

Price Taker

Features of Perfect
Homogeneous Product

Competition
Free Entry and Exit

Perfect Knowledge

Perfect Mobility

No Transportation Costs

No Restrictions
 Features of Perfect Competition
The main features of perfect competition are as follows:
 Large Number of Buyers and Sellers: There are a large number of buyers and sellers
in a perfectly competitive market. And no individual buyer or seller can influence the
price which is set by the industry.
 Price Taker: The firms operating in such a market are price takers and not the price
makers. The price here is determined by the industry. If a firm sets a high price for its
products, then consumers will shift to other sellers who are offering the same
product at a lower price.
 Homogeneous product: The products produced by firms in a perfectly competitive
market are homogeneous in nature. In other words, the product of one firm is the
same as produced by another firm and no differentiation can be made.
 Entry and Exit: There is freedom of entry and exit for firms in a perfectly competitive
market. There is no barrier as such to their entry or exit. This is the reason why there
are a large number of sellers in this market.
 …Continued
 Perfect Knowledge: Both the buyers and the sellers have perfect knowledge
about the market. The price of the products sold is set by the industry which is
known by every participant of a perfectly competitive market. Also the sellers do
not spend on branding and advertisement because the consumers have perfect
knowledge about the products available.
 Perfect Mobility: The factors of production have perfect mobility. In other
words, the factors are free to leave and join another firm according to their will,
and move from one seller to another as and when they desire.
Apart from the above features, there is no transportation costs involved in a
perfectly competitive market. And there are no governmental or non-
governmental restrictions in such a market. However, perfect competition does
not exist in real world. Some features of this market may exist in some form but
one can never find all the features of a perfect competition in one single market.
Change in Equilibrium Price due to Change in Demand & Supply

In perfect competition, equilibrium price is determined by the total

demand and total supply in the market. If there is any change in the
demand or supply, its effect will be seen on the equilibrium price. In this
section, we will study the effect of change in demand and supply on the
equilibrium price.

 Change in Demand: If there is any change (whether increase or decrease)

in demand, then the equilibrium price will also show a positive change. If
the demand increases, the price will also increase, and with any decrease
in demand, the price will also fall down.
 Diagrammatic Representation of Change in Demand
As can be seen in figure, DD is the original demand
curve and SS is the supply curve. Both DD and SS
curves intersect at point E. At this point, OP is the
equilibrium price and OQ is the equilibrium
quantity. If the demand increases, the demand
curves DD shifts upwards to D1D1. This D1D1
curve and SS curve intersect at point E1. Here, OP1
becomes the new equilibrium price and OQ1
becomes the equilibrium quantity. On the other
hand, if demand decreases, the demand curves DD
shifts downwards to D2D2. This D2D2 curve and SS
curve intersect at point E2. In this case, OP2
becomes the new equilibrium price and OQ2
becomes the equilibrium quantity.
Diagrammatic Representation of Change in Supply
As can be seen in figure, DD is the original Change in Supply: If there is any change
demand curve and SS is the supply curve. Both (whether increase or decrease) in supply,
DD and SS curves intersect at point E. At this then the equilibrium price will show a
point, OP is the equilibrium price and OQ is the negative change. If the supply increases,
equilibrium quantity. If supply increases, the the price will fall down, and with any
supply curve SS shifts to S2S2. This S2S2 curve decrease in supply, the price will rise.
and DD curve intersect at point E2. Here, the
price decreases and OP2 becomes the new
equilibrium price and OQ2 becomes the
equilibrium quantity. On the other hand, if
supply decreases, the supply curve SS shifts to
S1S1. This S1S1 curve and DD curve intersect at
point E1. In this case, price increases to OP1and
OP1 becomes the new equilibrium price and
OQ1 becomes the equilibrium quantity.
Simultaneous Change in both Demand and Supply
Simultaneous Change in Both Demand and Supply: If both the demand and
supply change simultaneously, it will also have an effect on the equilibrium
price. This change can be of four types, which are described as follows:
 Increase in Both the Demand and Supply: If there is an increase in both the
demand and supply, then there will be opposite effect on the equilibrium
price. If the increase in demand is more than the supply, then there will be a
rise in equilibrium price. Whereas, if the increase in supply is more than the
demand, then there will be a fall in the equilibrium price. In another case, if
there is an increase in both the demand and supply at the same rate, then
there will be no change in the equilibrium price.
 …Continued
 Decrease in Both the Demand and Supply: If decrease in demand is
more than the supply, then there will be a reduction in equilibrium
price. On the other hand, if the decrease in supply is more than the
demand, in such a case the equilibrium price will rise.
 Increase in Demand and Decrease in Supply: If the demand increases
and supply falls, then this will lead to a rise in the equilibrium price of
the commodity.
 Decrease in Demand and Increase in Supply: If the demand decreases
and supply increases, then there will be a sharp fall in the equilibrium
price of the commodity.
Determination of Price Under Perfect Competition

The price under perfect competition is determined by the powers of total

demand and total supply of the industry. No individual buyer or seller is in a
position to change the price set by the industry. Sellers take the price as it is
and sell that much quantity only at which the marginal cost (MC) is equal to
the marginal revenue (MR), and on the other hand, buyers purchase at that
price. The industry becomes the price maker and the firm becomes the price
taker. The equilibrium price decided by the industry is also the average
revenue (AR) and marginal revenue (MR) curves of the firms.
 Diagrammatic Representation
Determination of Price Under Perfect Competition
The figure represents how the
price is determined by the
demand and supply curves in
the industry. The point, where
demand (DD) and supply (SS)
curves intersect, decides the
equilibrium price. This price is
then taken by firms in perfect
competition. The price
adopted by the firms is equal
to the AR and MR of the firms
too.