CONCEPTS AND TYPES OF MARKETS,ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING, SRI SAIRAM INSTITUTE OF TECHNOLOGY, CHENNAI

1. Dr.K.Baranidharan
Present by…
131-07-2013

2. Engineering Economics
& Financial Accounting
MANAGERIAL
ECONOMICS
231-07-2013

3. CONCEPTS AND
TYPES OF MARKETS
ENGINEERING ECONOMICS &
FINANCIAL ACCOUNTING
CS FINAL YEAR & IT THIRD YEAR

4. MARKET
• Market is defined as a place or point at which
buyers and sellers negotiate for exchange of
well-defined products or services.
• Traditionally, market was referred to a public
place in a village or town where provisions and
other objects were brought for sale.
• Based on location, markets are classified as
rural, urban, national or world markets.
• Market is said to exist wherever there is a
potential for trade
13 August 2013 4

5. • Today with improving technology and modern
facilities, the definition of market has undergone a
sea change
• In the modern context, market refers to a meeting
point of buyer and seller, but not necessary a
geographical one.
• It is not necessary that the buyer must meet the
seller in person.
• While traditional avenues such as Value payable by
Post (VPP) continue to be popular, e-commerce
through internet has been the latest avenue for
firms to sell larger volumes of their products and
services via online negotiations where necessary.
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6. SIZE OF MARKET
• The size of the market depends on
many factors such as nature of
products, nature of their demand,
tastes and preferences of customers,
their income level, state of technology,
extent of infrastructure, including
telecommunications and information
technology, time factor in terms of
short run or long run and so on13 August 2013 6

7. MARKET CONDUCT
• Market conduct refers to the behavioral aspects
of sellers and buyers operating in a market.
Market conduct consists of:
• A) the business objectives of the firms such as
profit maximization and sales maximization or
market share.
• B) customizing the products as per the specific
requirements of buyers such as assembling of a
personal computer as per the specifications of
the buyer and making it cost effective.
• C) improving the quality of the product and
making it available at a lower price
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8. • D) marketing strategies and tactics adopted by
the firms to establish competitive edge over rival
firms.
• These include various pricing strategies such as
deliberately charging a low price in order to
penetrate into the market and expand sales
quickly, pricing the product deliberately as a
higher level in order to make as much profits as
possible in the quickest possible time.
• Change in advertising and sales promotion
strategies, variations in the quality and make of
the products, innovative packaging techniques
and design etc.,13 August 2013 8

9. MARKET PERFORMANCE
• When the suppliers/sellers utilize the economic
resource/inputs to their maximum efficiency and to the
ultimate benefit of consumers, the market is said to be
effective in its performance.
• The following are the essentials of market performance:
• A)Efficiency in production:
• When the process of production of goods and services
is cost effective, efficiency is said to prevail in
production processes.
• The firm should make efforts to minimize the costs
while maximizing the output. Scale economics should
be fully exploited.13 August 2013 9

10. • B) Efficiency in distribution:
• Distribution is the process of storing and
moving the products to consumers often though
intermediaries such as wholesalers and retailers.
• Channel of distribution is the route followed for
physical distribution of a product form the
manufacturer to the ultimate consumer.
• The channel of distribution should be effectively
manag3ed to bring down the distribution costs
to the minimum and to make the product
available to the ultimate customer without any
sort of inconvenience.13 August 2013 10

11. • C) Fixation of Prices:
• The price should be fixed at reasonable level leaving
reasonable profit/return to the suppliers/sellers.
• D) Product performance:
• The customers always look for
variety, sophistication in design and quality at
reasonable price. The firm should provide value-for-
money.
• E) Improved technology:
• Innovations in technology bring down the costs of
product and process manufacturing and inprove the
features of the product.
• The growing demands of the customers can be met
better though introduction of process and product
innovations. These also reduce the supply costs in
real terms.13 August 2013 11

12. MARKET STRUCTURE
• Market structure refers to the
characteristics of a market that influence
the behavior and performance of firms that
sell in that market.
• The structure of market is based on the
following features:
• 1.The degree of seller concentration:
• This refers to the number of sellers and
their market share for given product or
service in the market13 August 2013 12

13. • 2.The degree of buyer concentration:
• This refers to the number of buyers and their extent
of purchase of a given product or service in the
market.
• 3.The degree of product differentiation:
• A firm may differentiate its product form that of the
competitor though advertising, creating a brand
image, product design, variation in
quality, packagining location and so on.
• This refers to the extent by which the product of
each trader is differenciated from that of the other.
• Product differentiation can take several forms such
as varieties, brands, all of which are sufficiently
similar to distinguish them, as a group, from other
product
13 August 2013 13

14. • 4. The conditions of entry to the market:
• Often, there could be certain
restrictions to enter or exit from the
market. The degree of ease with which
one can enter the market or exit from it
also determines the market structure.
• In other words there could be large
number of firms if there aren’t many
restrictions on entering the market and
vice versa
13 August 2013 14

15. COMPETITIVE MARKET SITUATIONS
• The lesser the power an individual
firm has to influence the market in
which it operates, the more
competitive the market is. If a firm
can influence the market by offering
products and services at better or
attractive terms and conditions, it is
said to have grater power to influence
the market.
13 August 2013 15

16. TYPES OF COMPETITION
• The interconnected characteristics of a market, such as
the number and relative strength of buyers and sellers
and degree of collusion among them, level and forms of
competition, extent of product differentiation, and ease
of entry into and exit from the market
• Four basic types of market structure are (1) Perfect
competition: many buyers and sellers, none being able
to influence prices. (2) Oligopoly: several large sellers
who have some control over the prices. (3) Monopoly:
single seller with considerable control over supply and
prices. (4) Monopsony: single buyer with considerable
control over demand and prices.
13 August 2013 16

17. PERFECT COMPETITION
• The theoretical free-market situation in which the
following conditions are met: (1) buyers and sellers are
too numerous and too small to have
any degree of individual control over prices, (2) all
buyers and sellers seek to maximize
their profit (income), (3) buyers and seller can freely
enter or leave the market, (4) all buyers and sellers
have access toinformation regarding availability, prices,
and quality of goods being traded, and (5) all goods of
a particular nature are homogeneous, hence
substitutable for one another. Also called perfect
market or pure competition.
13 August 2013 17

18. Features of perfect competition
• 1. Large number of buyer and sellers:
• Each buyer buys a small quantity of the total
amount.
• Each seller is so large that no single buyer or
seller can influence the price and affect the
market.
• Buyers and sellers are price takers in the purely
competitive market.
• Each seller (or firm) sells its products at the price
determined by the market.
• Similarly, each buyer buys the commodity at the
price determined by the market.13 August 2013 18

19. • 2.Free entry and exit:
• Under perfect competition, there will be
no restriction on the entry and exit of both
buyers and sellers. If the existing sellers
start making abnormal profits, new sellers
should be able to enter the market freely.
This will bring down the abnormal profits
to the normal level. Similarly, when losses
will occur existing sellers may leave the
market. However, such free entry or free
exit is possible only in the long run, but not
in the short-run.
13 August 2013 19

20. • 3.Perfect knowledge:
• Perfect competition implies perfect
knowledge on the part of buyers and
sellers regarding the market
conditions. As a results, no buyer will
be prepared to pay a price higher than
the prevailing price. Sellers will not
charge a price higher or lower than
the prevailing price. In this
market, advertisement has no scope.13 August 2013 20

21. • 4.Perfect mobility of factors of
production:
• The second perfection mobility of
factors of production from one use to
another use. This feature ensures that
all sellers or firms get equal
advantages so far as services of factors
of production are concerned. This is
essential to enable the firms and
industry to achieve equilibrium.13 August 2013 21

22. • 5. Homogenous Product
• In this case, all sellers produce
homogeneous i.e. perfectly
identical products. All products are
perfectly same in terms of size,
shape, taste, colour, ingredients,
quality, trade marks etc. This
ensures the existence of single
price in the market.
13 August 2013 22

23. • 6. Each firm is a price taker:
• A firm in a perfect market cannot
influence the price though its
own individual actions.
• It has no alternative other than
selling its products at the price
prevailing in the market
13 August 2013 23

24. Total Revenue(TR),
Average Revenue(AR) and
Marginal Revenue(MR)
• Total revenue ( TR ) is the total amount
of money(or some other good) that a
firm receives from the sale of its goods.
It the firm practices single pricing
rather than price discrimination, TR =
total expenditure of the consumer = P
x Q
13 August 2013 24

25. Total Revenue, Average Revenue and
Marginal Revenue
• Average revenue ( AR ) is the total
amount of money(or some other good)
that a firm receives from the sale
divided by the number of units of
goods sold.
• AR = TR/Q, since TR=P x Q, then AR =
P for single pricing practice
13 August 2013 25

26. Total Revenue, Average Revenue and
Marginal Revenue
• Marginal revenue ( MR ) is the
change in total revenue resulting
from selling an extra unit of goods.
• MR = TR/Q, where TR =
change in TR due to change in
Q, Q = change in Q
13 August 2013 26

27. • Imagine that one more book is sold. Since the selling is
done at a given market price of rs.10 the additional
revenue (MR) by selling one more unit will be rs.10
• Consider this example. Your are selling notebooks. Each
books cost rs.10 your are not going to given any discount or
concession even if a buyer purchases more number of
books at a time. Suppose 10m books are sold.
• The total (TR) revenue is rs.100. the average revenue (AR) is
rs.10 (100/10).
• Suppose you are selling one more notebook. Since you are
selling at the given market price of rs.10, the additional
revenue (MR) by selling one more unit will be rs.10
• Thus, under perfect competition Price =Average Revenue
(AR) = Marginal Revenue (MR)
13 August 2013 27

28. IMPERFECT COMPETITION
• Real world' competition that is less effective in
lowering price levels nearer to the cost levels than
the theoretical perfect competition. Conditions
that help cause imperfect competition include (1)
restricted flow of information on costs and
prices, (2) near monopoly power of some
suppliers, (3) collusion among sellers to keep
prices high, and (4) discrimination by sellers
among buyers on the basis of their buying power.
13 August 2013 28

29. MONOPOLY
• Market situation where one producer (or
a group of producers acting in concert)
controls supply of a good or service, and
where the entry of new producers is
prevented or highly restricted.
Monopolist firms (in their attempt to
maximize profits) keep the price high and
restrict the output, and show little or no
responsiveness to the needs of their
customers.13 August 2013 29

30. • Most governments therefore try to control
monopolies by (1) imposing price controls, (2) taking
over their ownership (called 'nationalization'), or (3)
by breaking them up into two or more competing
firms. Sometimes governments facilitate the
creation of monopolies for reasons of national
security, to realize economies of scale for competing
internationally, or where two or more producers
would be wasteful or pointless (as in the case of
utilities). Although monopolies exist in varying
degrees (due to copyrights, patents, access to
materials, exclusive technologies, or unfair trade
practices) almost no firm has a complete monopoly
in the era of globalization13 August 2013 30

31. MONOPOLY COMPETITION
• Market situation midway between the extremes of
perfect competition and monopoly, and displaying
features of the both. In such situations firms are free to
enter a highly competitive market where several
competitors offer products that are close (but not
perfect) substitutes and, therefore, prices are at the
level of average costs (a feature of perfect competition).
• Also, some consumers have a preference for one
product over another that is strong enough to make
them keep buying it even when its price increases, thus
giving its producer a small amount of market power (a
feature of monopoly). Monopolistic situation is a
common situation in all free markets
13 August 2013 31

32. DUOPOLY
• Market situation in which only
sellers supply a particular
commodity to many buyers. Either
seller can exert some control over
the output and prices, but must
consider the reaction of its sole
competitor (unless both have
formed an illegal collusive duopoly).
13 August 2013 32

33. Example
• A soft drink market with two
companies such as Pepsi and Coke is
called duopoly.
• Basic facilities for satellite
communication are presently
provided by the Mahanagar
Tlelphoine Nigam Limited (MTNL)
and Videsh Sanchar Nigam Limited
(VSNL)13 August 2013 33

34. OLIGOPOLY
• Market situation between, and much more common
than, perfect competition (having many suppliers)
and monopoly (having only one supplier). In
oligopolistic markets, independent suppliers (few in
numbers and not necessarily acting in collusion) can
effectively control the supply, and thus the price,
thereby creating a seller's market.
• They offer largely similar products, differentiated
mainly by heavy advertising and promotional
expenditure, and can anticipate the effect of one
another's marketing strategies. Examples include
airline, automotive, banking, and petroleum
markets. Mirror image of oligopsony.13 August 2013 34

35. Example
• Car manufacturing companies (such as Maruti-
Suzuki, Hindustan Motors, Daewoo, Toyota etc.,)
and Newspapers (such as The Hindu, Indian
Express, Times of India, Economic
Times, Eenadu, etc,)
• In oligopoly, each individual seller or firm can affect
the market price. When The Times of India slashed
the price of ots daily newspaper, most other
companies such as Indian Express and The Hindu
followed suit.
• Oligopolistic market situations are very common in
sectors relating to
manufacturing, transportation, communication and13 August 2013 35

36. MONOPSONY
• A term used to describe a market
where a very large buyer typically
dominates the price action. In a
monopsony, the large buyer is
typically able to force prices to
decline and this type of market
contrasts with a monopoly where a
large seller is able to drive up
prices.13 August 2013 36

37. Example
•The Food Corporation of
India is the only
government organization
that purchase agricultural
produce such as rice and
so on.13 August 2013 37

38. DUOPSONY
• Market situation in which only
two buyers create the entire
demand for a commodity
supplied by many sellers a
mirror image of duopoly.
13 August 2013 38

39. OLIGOPSONY
• Market situation where
presence of few buyers and
many suppliers creates a
buyer's market. Mirror image
of oligopoly.
13 August 2013 39

40. Example
• A few news paper publishing
companies in India and all these buy
newsprint from the Government of
India.
• A good number of computer
assembly operators who buy
computer components on a
wholesale basis.
13 August 2013 40

41. Dr.K.Baranidharan
Thank you
K YOU
4131-07-2013

42. 4231-07-2013