Classification of Market and Perfect Competition

Introduction Market is an institution in which exchange of both goods and services takes place as a result of direct and indirect interaction between buyers and sellers. The main determinants of Market are: nature of commodity, number of buyers and sellers, knowledge of market and mobility of factors of production. Market can be classified on the basis of: area, time, transaction, function, quantity, control, competition, etc. Market structure refers to number of firms operating in the market and the nature of competition amongst them. It can be perfectly Competitive or Imperfectly Competitive. The main types of imperfectly competitive markets are: Monopoly, Monopolistic Competition and Oligopoly. Perfect competition is a market situation where there is large number of buyers and sellers, dealing in identical products and there is no control over price by an individual firm. Large number of buyers and sellers, homogenous products, free entry and exit, perfect knowledge of product, perfect mobility of factors of production and absence of transport cost are the salient features of perfect competition. Under perfect competition as a firm is a price taker and accepts the price determined in the industry, the price maker. Owing to this reason demand curve faced by a firm under perfect competition is perfectly elastic. The equilibrium condition of a firm under perfect competition by Total Revenue (TR) and Total Cost (TC) approach is that the difference between TR and TC should be Maximum The equilibrium condition of a firm under perfect competition by Marginal Revenue (MR) and Marginal Cost (MC) approach is MC = MR MC is rising and cuts MR from below.

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  • Q1

    What is meant by the term equilibrium?

    Marks:2
    Answer:

    Equilibrium is defined as a situation where the demand by all consumers and supply of all firms in the market match with each other. The aggregate quantity that all firms wish to sell equals the quantity that all consumers in the market wish to buy. In other words, market supply equals market demand. The price at which the commodity is sold in the market is known as equilibrium price.

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  • Q2

    Define Imperfectly Competitive market structure.

    Marks:2
    Answer:

    Imperfectly Competitive market structure refers to a market structure where at least one individual among buyers or sellers, has the power to affect the equilibrium price and quantity.

    The main Types of Imperfectly Competitive Markets are:

    • Monopoly
    • Monopolistic Competition and
    • Oligopoly

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  • Q3

    Who is a price taker under perfect competition? Why ?

    Marks:3
    Answer:

    Under perfect competition, industry is the price maker and the firm is the price taker. Industry fixes up the price and every firm has to accept the price fixed by the industry as there are large no. of buyers and sellers in the market, no individual buyer or seller can influence the market price. If any seller tries to increase his price above the market price, he would lose his customers. Also, no seller would try to sell his product below the market price since there is no incentive for lowering the price.

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  • Q4

    Explain market On the Basis of Area.

    Marks:3
    Answer:

    On the Basis of Area we have Local market, Provincial or Regional market, National Market and International market

    Local Market:- It is a Market for the goods which are traded locally, in a particular area, locality or a city, etc. For e.g. vegetables, fruits etc. have a local market.

    Provincial or Regional markets:- These are the Market for the goods which are bought and sold in a particular region or state. For e.g. sale of Bandhni turbans in Rajasthan and Iron rings in Punjab.

    National Market:- It refers to the market for the goods which are purchased and sold throughout the country.For example, toiletries such as toothpastes, soaps etc have national market

    International market:- It refers to the market for the goods which are bought and sold at international level. For example: Gold and silver have international or world market.

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  • Q5

    What are the various determinants of a market?

    Marks:3
    Answer:

    Factors determining the forms of Market are :

    (1) Number of Buyers and Sellers- A buyer or seller can influence the price of a commodity in the market depending on his/her share in the market. If there are large number of sellers in the market, prices are not influenced by a single seller.

    (2) Knowledge of Market- If buyers and sellers have perfect knowledge about prices, products and costs of different markets, there will be a uniform price everywhere or else price discrimination will exist.

    (3) Mobility of Factors of Production- Sellers in different market may charge different prices if there is restriction on the movement of goods and factors of production.

    (4) Nature of Commodity- Homogeneous commodities fetch the same price whereas for differentiated commodities, different sellers can charge different prices.

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