Competition

In the traditional sense, the market means a particular place or locality where buyers & sellers meet together and deals with their business transaction. For example, Bombay market, Delhi market, Calcutta market, Bangalore market, Mangalore market & Mysore market etc. But in economics, the term market, it is not a particular place/locality where goods are bought and sold. Buyers and sellers can contact through personally by the way of exchange of letters, telegrams, telephones and internet (e-mail & other ways) etc. For example trade between America and India.

Classification of Market

Area

Time

Commodities

Competition

Local

Market Period

Bullion Market

Perfect Imperfect Competition Competition

Regional

Short Period

Share Market

Monopoly

National

Long Period

Money Market

Duopoly Oligopoly

International

Very Long Period

Capital Market

Monopolistic Competition

Forms of Market Competition

Models of Competition Number of buyers Number of sellers Nature of products Barriers to entry and exit

Perfect competition

Very large

Very large

Identical products Single product

None

Monopoly

Very large

One

Very large

Monopolistic competition

Very large

Large

Minimum differences

None

Oligopoly

Very large

Very few

Large differences

Large

Classification of Market Structure

1. Perfect Competition market, where there is a large number of producers (firms) producing a homogeneous product, homogeneous price existence. 2. Imperfect competition It is an important market category where in individual firms exercise control over the price of commodity. Imperfect competition has several sub-markets
1) 2) 3) 4)

Monopolistic competition Pure Oligopoly Differentiated Oligopoly Monopoly

Perfect competitive market Perfect competition refers to a market situation in which there are large number of buyers & sellers of homogeneous products. The price of the product is determined by industry with the forces of demand and supply. Homogeneous price & commodities is special characterstics of perfect competition market. All the firms in the perfect competition is the price taker (price receiver) rather than price makers. Thus, perfect competition in a market structure characterised by the complete absence of rivalry among individual firms.

Features of perfect competitive market 1) Large number of buyers and sellers existed 2) Homogeneous product 3) Free entry and exist of firms in the industry 4) Perfect knowledge about market 5) Perfect mobility of factors of production 6) Absence of government regulation 7) Absence of transport cost

1. Large Number of buyers and sellers existed

There will be a large number of buyers and sellers existed in the market. Any single firms in the industry cannot influences on prices of commodity they are price taker not a price makers it is like a drop of water put into sea. The price of the product is determined by the collective forces of industry demand and industry supply.

2. Homogeneous Product Commodities produced by all the firms is homogenous and identical in all respects. There is no changes in terms of quality, size, fragrence etc between the firms. No. one firms influences prices either increase/decrease in the market.

3. Free entry and exists

There are no barrier to entry or exit from the industry. Entry or exit may take time but firms have freedom of movement in and out of the industry. If the industry earns abnormal profits, new firms will enter the industry and compete away the excess profits. Similarly, if the firms in the industry are incurring losses some of them will leave the industry which will reduce the supply of the industry and will thus raise the price and wipe away the losses. The firms have full liberty to choose either to continue or go out of the industry.

4. Perfect knowledge It is also assumed that all sellers and buyers have complete knowledge of the conditions of the market. This knowledge refers not only to the prevailing conditions in the current period but in all future periods as well. Information is free and costless. Under these conditions uncertainty about future development in the market is ruled out. 5. Perfect mobility of factors of production The factors of production are free to move from one firm to another throughout the economy. It is also assumed that workers can move between different jobs. Raw-materials & other factors are not monopolised & labour is not unionised. In short, there is perfect competition in the factor market.

6. Absence of government regulation There is no government intervention in the form of tariffs, subsidies, relationship of production or demand. If these assumptions are fulfilled, it is called pure competition which requires the fulfillment of some more condition.
7. Absence of transport cost In a perfectly competitive market, it is assumed that there are no transport cost.

Price and Output Determination

Price under perfect competition is determined by the interaction of the two forces demand and supply. Though individuals cannot change the price, but aggregate forces of demand and supply can change. Demand side marginal utility of commodity to the buyers Supply side cost of production producers The interaction of demand and supply is called the equilibrium price. Equilibrium price is that price at which quantity demanded is equal to the quantity supplied at give price both buyers and sellers satisfied

Equilibrium between demand and supply

Price of Demand commodities 5 10 15 20 25 30 35 12 10 08 06 04 02 01 Supply 1 2 4 6 8 10 12 Excess Supply Equilibrium Excess Demand Pressure on price

Price and Output Determination

14

Elements of time price theory Alfred Marshall was the first economists to introduced Time Factor price determination. He divided time period into three ways
1. 2. 3.

Market Period Short Period and Long Period

1. Market Period Market period are also called as very short period. The supply of a commodity is almost fixed and the demand will play a decisive role in determining the price of products. This market period may be an hour, a day, or few days or even a few weeks depends on nature of commodities. Types of commodities are
1. 2.

Perishable commodities Non-perishable commodities

Perishable commodities

Fish, milk, vegetables, flowers, meat and butters etc are perishable commodities. Supply is limited in the existing stocks. The fundamental features of this period supply of the commodity is absolutely fixed and therefore, the supply curve of each firm will be a vertical straight line. Demand factors more important than supply in determining price.

Perishable commodities
Y D D1 S

P1 Price P P2

D2

D D2

D2

M Quantities

Non-perishable/Durable commodities

Durable goods are those which can be reproduced or those can be stored. Like perishable goods, the supply of durable goods is not vertical throughout the length. Firms selling such goods have a minimum reserve price they will not sell goods at less than reserve price wheat, soap & oil etc.

Factors affecting Reserve Price

1.
2.

3.

4.

5.

6.

Price in future if seller expects that a high price will prevail in future. Liquidity preference if the seller is in urgent need of money his reserve price will be low & vice-versa. Future cost of production if the seller expects that in future the cost of production will fall, his reserve price will be lower & vice-versa. Storage Expenses if the seller finds that the storage expenses are higher & the time for which the stocks have to be held are longer, his reserve price will be lower & vice-versa. Durability of commodity more durable commodity is higher will be the reserved price. 6. Future demand
Future demand of a commodity also influences the reserve price of the producer. If the producer expects a higher demand in future, his reserve price will also be higher.

Short period Price determination

Short period refers to that period in which supply can be adjusted to a limited extent. Stigler in his word short period is a period in which the rate of production, change by change in variable with existence of fixed inputs. In short period fixed factors machinery, plant, building etc cannot be altered and variable factors may be increased or decreased according to the change in demand. In short period, price is determined by the interaction of two forces demand and supply. Demand factors were more dominated factors in short period.

Short period price determination

D1 P1 Price P2 P S E1 D E D1 D M M1 Out put E2 S

Long period price determination

Long period is a period of many years 5, 10, 15 20 & above. In this period supply conditions are fully able to meet the new demand conditions. In the long run no fixed & variable factors all the factors treated as variable factors. New plants/new firms can enter into the market & old firms can leave the market.