The important elements of market are as follows:
1.
Product – This is the most important element of market also considered as fundamental element of any market structure. It is observed that there are some consumers and some producers who are interested to participate in transaction activity and they are interested to purchase or sell a particular product.
2.
Consumers – Another element of market is consumers. The basic objective of consumer is utility maximization. Utility is the satisfaction the consumer is getting from the consumption of a particular goods or service in the market. Goods is external while service is internal.
3.
Producers - element of market is producers and the basic objective of producer is profit maximization. Profit is the difference between total revenue and total cost.
total revenue = (total output) X (per unit price of the product)
total cost = (total output) X (per unit cost of production)
4.
Market Equilibrium – The requirement of market is the existence of market equilibrium point where
market demand = market supply.
When market demand> market supply, the price of the product is increasing. Similarly when market demand < market supply, the price of the product is diminishing. Therefore price fluctuation in the market is eliminated.
DIFFERENT TYPES OF MARKET
Market an be classified on the basis of following criteria
1. On the basis of Area of the market
2. On the basis of Duration of the market
3. On the basis of Nature of Competition in the market
1. On the basis of area of the market
In this category we get 3 types of market – local market, national market and international market. In the local market the consumer and the producers are coming on a particular locality. In case of national market the consumers and producers are coming from different provinces of a particular nation. In case of international market different nations are participating in transaction activities.
2. On the basis of Duration of the market
In this category we get 3 types of market:
(i) Very short run market
(ii) Short run market
(iii) Long run market
In the very short run market the duration of market is very limited so that the producers do not get any chance to increase the supply of the product in the market and hence in such type of market supply parameter is perfectly inelastic. As supply parameter is constant in this type of market, when demand for the product is increasing price of the product is also going up and similarly when demand for the product is declining price of the product is also declining.
In short run market the duration of the market is more compared to very short run market. In this situation the producer can increase the supply of the product by changing the variable factors of production, i.e., by purchasing more raw materials, by employing more workers on contract basis.
However in the long run market the producer can supply parameter by changing both fixed factors of production and variable factors of production. Long run market is also known as Permanent Market and therefore in this market structure the manager can introduce new technologies into the existing production process and at the same time the manager can employ workers on permanent basis.
3. On the basis of Nature of Competition in the market
In this category we get Perfect Competition, Imperfect Competition and Monopolistic Competition.
Perfect competition has 4 components –
(i) Monopolic
(ii) Discriminating monopoly
(iii) Duopoly
(iv) Oligopoly
Features of Perfect Competition:
1. Under perfect competition we get the existence of large number of buyers and large number of sellers in the market. The number of buyers and sellers is such that no individual buyer ir seller can influence the market price.
2. Under perfect competition we get the existence of identical products which is known as homogenous product. Consumers are getting same satisfaction from the consumption of any unit of the product in the market.
3. Under perfect competition we observe the identical price, therefore in this market the firm behaves like price-taker. Therefore the business activities must be performed against identical price.
4. Under perfect competition due to the existence of identical products and identical prices, marginal revenue and average revenue parameter both become identical. In this market demand is perfectly elastic which means there may be a very significant change in demand due to a very small change in price or even sometimes there is at all no change in price.
Features of Imperfect Competition:
1. Monopoly is best example of imperfect competition where we observe the existence of single firm controlling the market both in the short run and in the long run.
2. Under monopoly we observe the existence of a situation where a firm decides to select a product which does not face any substitute product in the market.
3. Under monopoly the firm behaves like a price-maker. It means monopolist is position to control the market price depending on the demand parameter. This is the main difference between the perfect competition and monopoly.
4. Under monopoly the demand of the product is inelastic. It means in this market situation we observe that rate of change in demand is always less than the rate of change in price.
5. Under monopoly the rate of decline in marginal revenue parameter is more than the rate of decline in average revenue parameter. This is an important feature of monopoly.
Features of Discriminating Monopoly:
1. Price discrimination means monopolist is taking different prices to the different consumers for the same type of product either in one market or in the markets controlled by the monopolist.
2. There is distinction between personal price discrimination and market price discrimination. In case of personal price discrimination the monopolist is taking different prices to the different consumers for the same type of product in one market and there is no economic justification in such price discrimination. However in market price discrimination it is seen that the monopolist is taking different prices to the different consumers for the same type of products in two different markets which are directly controlled by the monopolist and in such case price is being charged depending on the nature of elasticity of demand in the market.
3. The condition of possibility of price discrimination highlights that markets controlled by the monopolist must be distinctly separated from each other so that reselling of products is not possible. Also markets controlled by the monopolist must have different types of elasticity of demand.
4. The condition of Profitability of price discrimination highlights the fact that there must be inverse relationship between elasticity of demand in the market and price of the product in the market. It means that the market which is having less Elasticity of Demand will face higher prices and vice versa. This is the most important condition of discriminating monopoly with the help of which price discrimination becomes profitable. It is known that the fundamental objective of discrimination monopolist is to achieve maximum profit with the help of price discrimination technique.
5. Therefore it is observed that total output is distributed into the market where the monopolist is charging different prices to different consumers. The condition of possibility and the condition of profitability must be strictly followed in order to generate benefit with the help of the strategy of price discrimination.
6. Under discrimination monopoly there is super normal profit where total revenue is greater than the total cost as there is only one firm controlling the market both in short run and in long run.
Features of Duopoly:
1. In duopoly market there is the existence of two sellers who are competing between themselves in order to gain profit.
2. The price of the product of one firm is directly dependent on the price of the product of the other firm. Therefore the firm under duopoly must take decision regarding price of the product observing the nature of change of price of the substitute product.
3. Duopoly is one form of imperfect competition. Therefore in this market two firms will get super normal profit indicating a situation that total revenue of the firm will always be more than total cost of the firm.
4. Under duopoly market demand curve becomes inelastic in nature indicating the situation where the rate of change in demand is always less than rate of change in price and therefore duopoly market is facing inelastic demand which is important property of imperfect competition.
Features of Oligopoly Market:
1. Oligopoly is one form of imperfect competition where there are a few firms that are operating in the market and making competition among each other in order to get benefit from the existing market structure.
2. The important property of the oligopoly market is the existence of price-rigidity which can be explained with the help of kinked-demand curve.
3. Under oligopoly market we get that kink is the point where elastic portion of the demand curve and inelastic portion of the demand curve is meeting. This point is known as Price-Determination Point and therefore under oligopoly market structure price always becomes rigid.
4. Under oligopoly market if one firm increases the price of the product other firms will not follow the example so that the former firm does not get any benefit from price increase. On the other hand if one firm reduces the price of the product, other firms will immediately follow the example so that the former firm does not get any benefit from price decline. Therefore it is observed that the individual firm can’t generate benefit either from price increase or price decline. Therefore price becomes rigid in oligopoly market structure.
Features of Monopolistic Competition:
Monopolistic Competition Market has been identified by Chamberlin.
1. Under Monopolistic Competition there is the existence of many buyers and many sellers in the market. The number of sellers under Monopolistic Competition is more than Oligopoly market but less than Perfect Competition.
2. Under Monopolistic Competition there exist differentiated products. These products are not identical in nature but they are acting as close substitute of each other.
3. Under Monopolistic Competition in the short run equilibrium we get the features of imperfect competition. Therefore Under Monopolistic Competition short run equilibrium point different firms are getting different types of Super Normal Profit depending on their nature of level of efficiency.
4. Under Monopolistic Competition at the long run equilibrium point we observe the behavior the Perfect Competition where each firm is getting Normal Profit.
On the basis of above features of Monopolistic Competition Chamberlin has proved that “Monopolistic competition is market structure where in the short run the features of imperfect competition are observed and in long run the features of perfect competition are observed and therefore monopolistic competition market is the combination of imperfect competition and perfect competition.”