Markets

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Markets

  1. 1. MANAGERIAL ECONOMICS MARKETS
  2. 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. 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. 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. 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. 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. 7. CLASSIFICATION BASED ON TIME ELEMENT• Very short period markets Not possible to change the stock of commodity• Short 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. 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. 9. PRICING• DETERMINANTS OF PRICE• Demand• Cost of production• Objectives of the firm• Government policy• Nature of competition
  10. 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. 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. 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. 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. 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. 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. 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. 17. POSSIBILITIES OF ABSOLUTE PROFIT OR LOSS POSITION• Firm makes supernormal profits• Firm makes only normal profits• Firm incurs losses• Shut down point
  18. 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. 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. 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. 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. 22. CONDITIONS TO MAKE A MONOPOLIST STRONG• A gap in the chain of substitutes• Possibility of securing control over all the cost substitutes
  23. 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. 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. 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. 26. MONOPSONY• Only one buyer• Buyer in a position to determine the price
  27. 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. 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. 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. 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. 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. 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. 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. 34. TYPES OF PRICE LEADERSHIP• Dominant Price Leadership• Barometric Price Leadership• Exploitative or Aggressive Price Leadership
  35. 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. 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. 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. 38. WAGES• ‘Wages ‘ means payments made for the services of labor• It may be under contract
  39. 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. 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. 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. 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

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