Markets

1. MANAGERIAL ECONOMICS MARKETS

2. MEANING OF MARKET A market is a place where commodities are bought and sold at retail or wholesale prices In economics, however, the term “market” does not refer to a particular place as such but it refers to a market for a commodity or commodities The market is an arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods is described as market It does not refer only to a fixed location. It refers to the whole area of operation of demand and supply Markets may be physically identifiable

3. PRODUCTS AND FACTOR MARKETS PRODUCT MARKET A product market or commodity market refers to an arrangement in effecting buying and selling of commodities i.e. cotton market, wheat market, rice market, bullion market, etc. The households or the consumers are the buyers in the product market Their demand is the direct demand for consumption goods

4. FACTOR MARKET Factor markets are markets in which factors of production such as land, labor and capital are transacted. They are called: Land market, labor market and capital market The firms or the producers are the buyers in the factor markets Their demand for productive resources or factors of production is a derived demand

5. CLASSIFICATION OF MARKET STRUCTURES Markets may be divided on the basis of different criteria such as Geographical area Time element Nature of competition

6. CLASSIFICATION BASED ON GEORGRAPHICAL AREA Local Markets Regional Markets e.g. Films produced in local languages National Markets World Markets e.g. exports and imports

7. CLASSIFICATION BASED ON TIME ELEMENT Very short period markets Not possible to change the stock of commodity S hort period markets Output could be expanded by altering variable factors Long period markets Permits changes in scale of production by changing plant size Very long period markets This period runs over a series of decades

8. CLASSIFICATION BASED ON NATURE OF COMPETITION Perfect competition Many sellers and many buyers Monopoly Only one seller Duopoly Two monopolists Monopsony Only one buyer Monopolistic competition Product differentiated only by branding Oligopoly More than two in a monopolistic position

9. PRICING DETERMINANTS OF PRICE Demand Cost of production Objectives of the firm Government policy Nature of competition

10. ENTRY BARRIERS Entry barriers are certain structural features of a market that enable existing companies to raise the prices of their products persistently above costs without attracting new entrants Companies are able to retain their market share in spite of increasing their profit margins

11. VARIOUS CAUSES OF ENTRY BARRIERS Product differentiation/Strong brands e.g. Fevicol , Prestige pressure cooker, Maggie Switching costs e.g. Microsoft Distribution network e.g. Maruti , Parachute of Marico

12. VARIOUS CAUSES OF ENTRY BARRIERS Contd … Absolute cost advantage e.g. privileged access to scarce resources, research and development, government tariffs, subsidies, trade quotas, Lowest cost producer/Economies of scale e.g. Hindustant Zinc, Wall Mart Unique business model e.g. South West Airlines, Shriram Transport Finance

13. PERFECT COMPETITION Single market price prevails for the commodity Price is determined by demand and supply Every participant (whether seller or buyer) is a price-taker No one is in a position to influence the price

14. CHARACTERISTICS OF PERFECT COMPETITION Large number of buyers Large number of sellers Homogeneous product No entry and exit barriers Perfect knowledge of market conditions such as the demand, cost, price and quality is available freely to all participants Non-intervention by the Government Absence of transport cost element

15. PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETION Price is market determined Firm cannot influence the price by its own action Average Revenue Curve and Marginal Revenue Curve must coincide with each other MC = MR = Price

16. EQUILIBRIUM IN THE SHORT RUN Short run is a period during which output can be adjusted by altering variable inputs but fixed factors of production remain constant

17. POSSIBILITIES OF ABSOLUTE PROFIT OR LOSS POSITION Firm makes supernormal profits Firm makes only normal profits Firm incurs losses Shut down point

18. EQUILIBRIUM IN THE LONG RUN Long run is a period during which all factors of production viz. variable and fixed can be changed In the long run, old plants can be replaced with new plants, new plants can be added New firms also can enter the industry Existing firm can exit Firm to be in equilibrium in the long run, in addition to Marginal Cost being equal to price, price must be equal to average cost

19. SUPER NORMAL PROFIT If the price is greater than the average cost, the firm will be making super normal profit New firms will enter until price is depressed down to average cost and all firms can make only normal profits

20. LOSSES If price happens to be below average cost, firms will be incurring losses Then some of the firms will quit the industry As a result, output of the industry will decrease and the price will rise to equal the average cost and firms can make only normal profits

21. MONOPOLY MAIN FEATURES: Only one seller of a particular good or service Rivalry from producers of substitutes insignificant Monopolist is in a position to set the price

22. CONDITIONS TO MAKE A MONOPOLIST STRONG A gap in the chain of substitutes Possibility of securing control over all the cost substitutes

23. CAUSES OF MONOPOLY Government license to any particular operator of public utilities like a gas company or an electricity undertaking Possession of certain scarce raw materials, patent rights, secret methods of production or specialized skill Necessity for large resources Ignorance, laziness and prejudice of the buyers in favor of a particular producer

24. REVENUES AND COSTS OF MONOPOLISTS If prices are reduced more quantity can be sold and vice versa Monopoly may get profit, incur loss or face neither profit nor loss in the short run But, in the long run, a monopoly will get only profit otherwise will not continue in the business

25. DISADVANTAGE OF MONOPOLY Supply will be restricted and monopolist will become richer at the expense of consumer Consumers’ choice is restricted Due to absence of competition, wasteful costs may not be curtailed reflecting in higher prices Society’s resources will get misallocated. When monopolist restricts output, resources may go into production of goods with low consumer preferences Will result in severe setback to economy when a monopolist in strategic sector slows down or stops production

26. MONOPSONY Only one buyer Buyer in a position to determine the price

27. PRICE DISCRIMINATION A practice of charging different prices to same buyer or to different buyers Also known as differential pricing FIRST DEGREE DISCRIMINATION Seller charges same buyer different prices for each unit bought e.g. quantity discounts SECOND DEGREE DISCRIMINATION Seller segregates buyers according to income, geographical location, individual tastes, kinds of uses for the product and charges different prices to each group or market despite equivalent costs in serving them

28. OBJECTIVES OF PRICE DISCRIMINATION To appropriate the consumer’s surplus so that it accrues to the producer rather than to the consumer To dispose of occasional surplus To develop new market To make the maximum use of unutilized capacity To earn monopoly profits To enter into or retain export markets To destroy or forestall competition To increase future sales. Lower price is quoted to enable buyers to develop a taste for the allied products produced by the same manufacturer

29. MONOPOLISTIC COMPETITION Refers to a market situation in which there are many producers producing goods which are close substitutes of one another DISTINGUISHING FEATURES Produce differentiation Existence of many firms supplying the market Goods made by them are close substitutes

30. OLIGOPOLY More than two or a few sellers found in monopolistic position is called Oligopoly IMPORTANT CHARACTERISTICS Every seller can exercise an important influence on the price-output policies of his rivals Every seller is so influential that his rivals cannot ignore the likely adverse effect on them of given change in the price-output policy of any single manufacturer

31. DUOPOLY Situation in which there are two monopolists instead of one who share the monopoly power is called Duopoly DUOPOLY WITHOUT PRODUCT DIFFERENTIATION Selling identical commodity without product differentiation There will be collusion between the two They may agree on a price, assign quotas and divide the territory in which each is to market his products In case, there is no agreement between the two, a constant price war will be the probable consequent

32. DUOPOLY Contd … DUOPOLY WITH PRODUCT DIFFERENTIATION No fears of immediate retaliatory measures by the rivals If one changes price-output policy, there is less danger of price war The firm with better products can earn supernormal profits

33. PRICE LEADERSHIP UNDER OLIGOPOLY In an oligopolistic situation, there are more than two or a few sellers who are able to exercise monopolistic influence In such a situation, we generally find ‘price leadership’ Under price leadership, one firm assumes the role of a price leader and fixes the price of the product for the entire industry The other firms simply follow the price leader and accept the price fixed by him and adjust their output to this price The price leader is generally a very large or a dominant firm It often happens, price leadership is established as a result of price war in which one firm emerges as the winner

34. TYPES OF PRICE LEADERSHIP Dominant Price Leadership Barometric Price Leadership Exploitative or Aggressive Price Leadership

35. PRICE LEADERSHIP OF A DOMINANT FIRM One firm produces the bulk of the product of the industry It is able to dominate the entire market Other firms unable to exercise any influence on the market price So, the dominant firm fixes a price so as to maximize its profits Other firms have to adjust their output to the price so fixed by the dominant firm

36. BAROMETRIC PRICE LEADERSHIP An old, experienced and the largest firm assumes the role of a leader It protects the interests of all firms instead of merely promoting its own interest It fixes a price which is found to be suitable for all the firms in the industry

37. EXPLOITATIVE OR AGGRESSIVE PRICE LEADERSHIP One big firm establishes its supremacy by following aggressive price policies It compels other firms to accept the price fixed If other firms show any independence, this firm threatens them and coerces them to follow its leadership Ultimately, the price fixed by this firm comes to be accepted

38. WAGES ‘Wages ‘ means payments made for the services of labor It may be under contract

39. NOMINAL WAGES The money wage is known as nominal wage. Nominal wages are wages paid in terms of money According to Keynes, workers act irrationally and generally bargained for money wages They sharply react to any cut in money wages A rise in prices does not offend labor as such as a cut in money wages

40. REAL WAGES According to the classical wage theory, labor supply was considered a function of real wages After deflating nominal wages with the help of price index, we obtain real wages

41. MAIN FACTORS INFLUENCING REAL WAGES Purchasing power of money Subsidiary earnings Extra work without extra payment Regularity or irregularity of employment Conditions of work Future prospects

42. WAGE DIFFERENTIALS – CAUSES Difference in efficiency Immobility of labor Difficulty in learning a trade Future prospects Hazardous and dangerous occupations Regularity or irregularity of employment Collective bargaining