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Chapter VII & VIII

Competition

Dr. Gopalakrishna B.V.,


Faculty in MBA,
SDM, Mangalore
 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

Long Period Money Market Duopoly


National

Oligopoly

International Very Long Period Capital Market Monopolistic


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

Perfect Very large Very large Identical None


competition products

Monopoly Very large One Single Very large


product

Monopolistic Very large Large Minimum None


competition differences

Oligopoly Very large Very few Large Large


differences
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) Monopolistic competition
2) Pure Oligopoly
3) Differentiated Oligopoly
4) 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 Supply Pressure on
commodities price

5 12 1
Excess
10 10 2
Demand
15 08 4
20 06 6 Equilibrium
25 04 8
Excess
30 02 10
Supply
35 01 12
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. Market Period
2. Short Period and
3. 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. Perishable commodities
2. 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 S

D1
D
D2
P1
P
Price
P2 D2
D
D2

O M X
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. Price in future – if seller expects that a high price will prevail in future.
2. Liquidity preference – if the seller is in urgent need of money his reserve price
will be low & vice-versa.
3. 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.
4. 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.
5. Durability of commodity – more durable commodity is higher will be the
reserved price.
6. 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
S

E1
P1

D
E2
Price

P2
P E

S D1

M M1
Out put
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.

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