ICAI Notes- Unit 1: Meaning and Types of Markets | Business Economics for CA Foundation PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
 
 
 
UNIT - 1: MEANING AND TYPES OF 
MARKETS 
 
 
 
After studying this unit, you would be able to:  
? Explain the Meaning of Market in Economics. 
? Describe the key Characteristics of the Four Basic market Types Used 
in Economic Analysis. 
? Provide Explicit Real Examples of the Four Types of Markets. 
? Explain the Behavioural Principles Underlying these Markets. 
 
PRICE DETERMINATION  
IN DIFFERENT MARKETS 
 
 
 
    
 
 
CHAPTER 
4 
© The Institute of Chartered Accountants of India
Page 2


 
 
LEARNING OUTCOMES 
 
 
 
UNIT - 1: MEANING AND TYPES OF 
MARKETS 
 
 
 
After studying this unit, you would be able to:  
? Explain the Meaning of Market in Economics. 
? Describe the key Characteristics of the Four Basic market Types Used 
in Economic Analysis. 
? Provide Explicit Real Examples of the Four Types of Markets. 
? Explain the Behavioural Principles Underlying these Markets. 
 
PRICE DETERMINATION  
IN DIFFERENT MARKETS 
 
 
 
    
 
 
CHAPTER 
4 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.0  MEANING OF MARKET 
We have seen in Chapter 1 that people cannot have all that they want because they need to 
pay price for goods and services and the resources at their disposal are scarce. We have 
come across some goods which are free or having zero prices i.e. we need not make any 
payment for them. Example: air, sunlight etc. These are called free goods. Free goods being 
abundant in supply do not have scarcity and need no cost to obtain them. In contrast, 
economic goods are scarce in relation to their demand and have an opportunity cost. Unlike 
free goods, they are exchangeable in the market and command a price. What do we 
understand by the term price and why do people pay a price?  
In common parlance, price signifies the quantity of money necessary to acquire a good or 
service. Price connotes money-value i.e. the purchasing power of an article expressed in 
terms of money. In other words, price expresses the value of a thing in relation to money i.e. 
the quantity of money for which it will be exchanged. Value in exchange or exchange value, 
Determination of Prices 
Monopoly 
Monopolistic 
Competition 
Oligopoly 
Perfect 
Competition 
Markets 
Behavioural Principal 
PRICE DETERMINATION IN DIFFERENT MARKETS 
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


 
 
LEARNING OUTCOMES 
 
 
 
UNIT - 1: MEANING AND TYPES OF 
MARKETS 
 
 
 
After studying this unit, you would be able to:  
? Explain the Meaning of Market in Economics. 
? Describe the key Characteristics of the Four Basic market Types Used 
in Economic Analysis. 
? Provide Explicit Real Examples of the Four Types of Markets. 
? Explain the Behavioural Principles Underlying these Markets. 
 
PRICE DETERMINATION  
IN DIFFERENT MARKETS 
 
 
 
    
 
 
CHAPTER 
4 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.0  MEANING OF MARKET 
We have seen in Chapter 1 that people cannot have all that they want because they need to 
pay price for goods and services and the resources at their disposal are scarce. We have 
come across some goods which are free or having zero prices i.e. we need not make any 
payment for them. Example: air, sunlight etc. These are called free goods. Free goods being 
abundant in supply do not have scarcity and need no cost to obtain them. In contrast, 
economic goods are scarce in relation to their demand and have an opportunity cost. Unlike 
free goods, they are exchangeable in the market and command a price. What do we 
understand by the term price and why do people pay a price?  
In common parlance, price signifies the quantity of money necessary to acquire a good or 
service. Price connotes money-value i.e. the purchasing power of an article expressed in 
terms of money. In other words, price expresses the value of a thing in relation to money i.e. 
the quantity of money for which it will be exchanged. Value in exchange or exchange value, 
Determination of Prices 
Monopoly 
Monopolistic 
Competition 
Oligopoly 
Perfect 
Competition 
Markets 
Behavioural Principal 
PRICE DETERMINATION IN DIFFERENT MARKETS 
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
  PRICE DETERMINATION IN DIFFERENT MARKETS 
 
 
4.3 
according to Ricardo, means command over commodities in general, or power in exchange 
over purchasable commodities in general.  
We need to distinguish between two important concepts namely, ‘value in use’ and ‘value in 
exchange’. Value in use refers to usefulness or utility i.e the attribute which a thing may have 
to satisfy human needs. Value in exchange or economic value is the amount of goods and 
services which we may obtained in the market in exchange of a particular thing.  It is 
measured by the amount someone is willing to give up in other goods and services in order 
to obtain a good or service. In a market economy, the amount of currency (e.g. Dollar, 
Rupees) is a universally accepted measure of economic value, because the number of units 
of money that a person is willing to pay for something tells how much of all other goods 
and services they are willing to give up to get that item.  
In Economics, we are only concerned with exchange value. Considerations such as 
sentimental value mean little in a market economy. Sentimental value is subjective and 
reflects an exaggerated judgment about the worth of a commodity. For example, If a person 
says to his best friend that I like your car and if you give it to me then I will be lifetime 
obliged to you. In this case, lifetime obligation is a sentimental value and has no meaning as 
against monetary consideration. 
Exchange value is determined in the market where exchange of goods and services takes 
place. In our day to day life, we come across many references to markets such as oil market, 
wheat market, vegetable market etc. These have connotations of a place where buyers and 
sellers gather to exchange goods at a price. In Economics, markets are crucial focus of 
analysis, and therefore we need to understand how this term is used. A market is a collection 
of buyers and sellers with the potential to trade. The actual or potential interactions of the 
buyers and sellers determine the price of a product or service. 
A market need not be formal or held in a particular place. Second-hand cars are often 
bought and sold through newspaper advertisements. Second-hand goods may be disposed 
off by listing it in an online shop or by placing a card in the local shop window. In the 
present high tech world, goods and services are effortlessly bought and sold online. Online 
shopping has revolutionized the business world by making nearly everything people want 
available by the simple click of a mouse button. 
While studying about market economy, it is essential to understand how price is determined. 
Since this is done in the market, we can define the market simply as all those buyers and 
sellers of a good or service who influence price. 
The elements of a market are: 
(i) Buyers and sellers; 
(ii) A product or service; 
© The Institute of Chartered Accountants of India
Page 4


 
 
LEARNING OUTCOMES 
 
 
 
UNIT - 1: MEANING AND TYPES OF 
MARKETS 
 
 
 
After studying this unit, you would be able to:  
? Explain the Meaning of Market in Economics. 
? Describe the key Characteristics of the Four Basic market Types Used 
in Economic Analysis. 
? Provide Explicit Real Examples of the Four Types of Markets. 
? Explain the Behavioural Principles Underlying these Markets. 
 
PRICE DETERMINATION  
IN DIFFERENT MARKETS 
 
 
 
    
 
 
CHAPTER 
4 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.0  MEANING OF MARKET 
We have seen in Chapter 1 that people cannot have all that they want because they need to 
pay price for goods and services and the resources at their disposal are scarce. We have 
come across some goods which are free or having zero prices i.e. we need not make any 
payment for them. Example: air, sunlight etc. These are called free goods. Free goods being 
abundant in supply do not have scarcity and need no cost to obtain them. In contrast, 
economic goods are scarce in relation to their demand and have an opportunity cost. Unlike 
free goods, they are exchangeable in the market and command a price. What do we 
understand by the term price and why do people pay a price?  
In common parlance, price signifies the quantity of money necessary to acquire a good or 
service. Price connotes money-value i.e. the purchasing power of an article expressed in 
terms of money. In other words, price expresses the value of a thing in relation to money i.e. 
the quantity of money for which it will be exchanged. Value in exchange or exchange value, 
Determination of Prices 
Monopoly 
Monopolistic 
Competition 
Oligopoly 
Perfect 
Competition 
Markets 
Behavioural Principal 
PRICE DETERMINATION IN DIFFERENT MARKETS 
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
  PRICE DETERMINATION IN DIFFERENT MARKETS 
 
 
4.3 
according to Ricardo, means command over commodities in general, or power in exchange 
over purchasable commodities in general.  
We need to distinguish between two important concepts namely, ‘value in use’ and ‘value in 
exchange’. Value in use refers to usefulness or utility i.e the attribute which a thing may have 
to satisfy human needs. Value in exchange or economic value is the amount of goods and 
services which we may obtained in the market in exchange of a particular thing.  It is 
measured by the amount someone is willing to give up in other goods and services in order 
to obtain a good or service. In a market economy, the amount of currency (e.g. Dollar, 
Rupees) is a universally accepted measure of economic value, because the number of units 
of money that a person is willing to pay for something tells how much of all other goods 
and services they are willing to give up to get that item.  
In Economics, we are only concerned with exchange value. Considerations such as 
sentimental value mean little in a market economy. Sentimental value is subjective and 
reflects an exaggerated judgment about the worth of a commodity. For example, If a person 
says to his best friend that I like your car and if you give it to me then I will be lifetime 
obliged to you. In this case, lifetime obligation is a sentimental value and has no meaning as 
against monetary consideration. 
Exchange value is determined in the market where exchange of goods and services takes 
place. In our day to day life, we come across many references to markets such as oil market, 
wheat market, vegetable market etc. These have connotations of a place where buyers and 
sellers gather to exchange goods at a price. In Economics, markets are crucial focus of 
analysis, and therefore we need to understand how this term is used. A market is a collection 
of buyers and sellers with the potential to trade. The actual or potential interactions of the 
buyers and sellers determine the price of a product or service. 
A market need not be formal or held in a particular place. Second-hand cars are often 
bought and sold through newspaper advertisements. Second-hand goods may be disposed 
off by listing it in an online shop or by placing a card in the local shop window. In the 
present high tech world, goods and services are effortlessly bought and sold online. Online 
shopping has revolutionized the business world by making nearly everything people want 
available by the simple click of a mouse button. 
While studying about market economy, it is essential to understand how price is determined. 
Since this is done in the market, we can define the market simply as all those buyers and 
sellers of a good or service who influence price. 
The elements of a market are: 
(i) Buyers and sellers; 
(ii) A product or service; 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.4 
(iii) Bargaining for a price; 
(iv) Knowledge about market conditions; and 
(v) One price for a product or service at a given time. 
1.0.0 Classification of Market 
Markets are generally classified into product markets and factor markets. Product markets 
are markets for goods and services in which households buy the goods and services they 
want from firms. Factor markets, on the other hand, are those in which firms buy the 
resources they need – land, labour, capital and entrepreneurship- to produce goods and 
services. While product markets allocate goods to consumers, factor markets allo­cate 
productive resources to producers and help ensure that those resources are used efficiently. 
The prices in factor markets are known as factor prices.  
In Economics, generally the classification of markets is made on the basis of  
(a) Geographical Area 
(b) Time 
(c) Nature of transaction 
(d) Regulation 
(e) Volume of business  
(f) Type of Competition. 
On the basis of geographical area 
From the marketing perspective, the geographical area in which the product sales should be 
undertaken has vast implications for the firm. On the basis of geographical area covered, 
markets are classified into:- 
Local Markets: When buyers and sellers are limited to a local area or region, the market is 
called a local market. Generally, highly perishable goods and bulky articles, the transport of 
which over a long distance is uneconomical’ command a local market. In this case, the 
extent of the market is limited to a particular locality. For example, locally supplied services 
such as those of hair dressers and retailers have a narrow customer base.  
Regional Markets: Regional markets cover a wider area such as a few adjacent cities, parts 
of states, or cluster of states. The size of the market is generally large and the nature of 
buyers may vary in their demand characteristics. For eg. Mekhela Chador (Traditional Assamese 
Saree) is primarily worn by women in Assam and adjoining areas. 
© The Institute of Chartered Accountants of India
Page 5


 
 
LEARNING OUTCOMES 
 
 
 
UNIT - 1: MEANING AND TYPES OF 
MARKETS 
 
 
 
After studying this unit, you would be able to:  
? Explain the Meaning of Market in Economics. 
? Describe the key Characteristics of the Four Basic market Types Used 
in Economic Analysis. 
? Provide Explicit Real Examples of the Four Types of Markets. 
? Explain the Behavioural Principles Underlying these Markets. 
 
PRICE DETERMINATION  
IN DIFFERENT MARKETS 
 
 
 
    
 
 
CHAPTER 
4 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.0  MEANING OF MARKET 
We have seen in Chapter 1 that people cannot have all that they want because they need to 
pay price for goods and services and the resources at their disposal are scarce. We have 
come across some goods which are free or having zero prices i.e. we need not make any 
payment for them. Example: air, sunlight etc. These are called free goods. Free goods being 
abundant in supply do not have scarcity and need no cost to obtain them. In contrast, 
economic goods are scarce in relation to their demand and have an opportunity cost. Unlike 
free goods, they are exchangeable in the market and command a price. What do we 
understand by the term price and why do people pay a price?  
In common parlance, price signifies the quantity of money necessary to acquire a good or 
service. Price connotes money-value i.e. the purchasing power of an article expressed in 
terms of money. In other words, price expresses the value of a thing in relation to money i.e. 
the quantity of money for which it will be exchanged. Value in exchange or exchange value, 
Determination of Prices 
Monopoly 
Monopolistic 
Competition 
Oligopoly 
Perfect 
Competition 
Markets 
Behavioural Principal 
PRICE DETERMINATION IN DIFFERENT MARKETS 
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
  PRICE DETERMINATION IN DIFFERENT MARKETS 
 
 
4.3 
according to Ricardo, means command over commodities in general, or power in exchange 
over purchasable commodities in general.  
We need to distinguish between two important concepts namely, ‘value in use’ and ‘value in 
exchange’. Value in use refers to usefulness or utility i.e the attribute which a thing may have 
to satisfy human needs. Value in exchange or economic value is the amount of goods and 
services which we may obtained in the market in exchange of a particular thing.  It is 
measured by the amount someone is willing to give up in other goods and services in order 
to obtain a good or service. In a market economy, the amount of currency (e.g. Dollar, 
Rupees) is a universally accepted measure of economic value, because the number of units 
of money that a person is willing to pay for something tells how much of all other goods 
and services they are willing to give up to get that item.  
In Economics, we are only concerned with exchange value. Considerations such as 
sentimental value mean little in a market economy. Sentimental value is subjective and 
reflects an exaggerated judgment about the worth of a commodity. For example, If a person 
says to his best friend that I like your car and if you give it to me then I will be lifetime 
obliged to you. In this case, lifetime obligation is a sentimental value and has no meaning as 
against monetary consideration. 
Exchange value is determined in the market where exchange of goods and services takes 
place. In our day to day life, we come across many references to markets such as oil market, 
wheat market, vegetable market etc. These have connotations of a place where buyers and 
sellers gather to exchange goods at a price. In Economics, markets are crucial focus of 
analysis, and therefore we need to understand how this term is used. A market is a collection 
of buyers and sellers with the potential to trade. The actual or potential interactions of the 
buyers and sellers determine the price of a product or service. 
A market need not be formal or held in a particular place. Second-hand cars are often 
bought and sold through newspaper advertisements. Second-hand goods may be disposed 
off by listing it in an online shop or by placing a card in the local shop window. In the 
present high tech world, goods and services are effortlessly bought and sold online. Online 
shopping has revolutionized the business world by making nearly everything people want 
available by the simple click of a mouse button. 
While studying about market economy, it is essential to understand how price is determined. 
Since this is done in the market, we can define the market simply as all those buyers and 
sellers of a good or service who influence price. 
The elements of a market are: 
(i) Buyers and sellers; 
(ii) A product or service; 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS ECONOMICS  
 4.4 
(iii) Bargaining for a price; 
(iv) Knowledge about market conditions; and 
(v) One price for a product or service at a given time. 
1.0.0 Classification of Market 
Markets are generally classified into product markets and factor markets. Product markets 
are markets for goods and services in which households buy the goods and services they 
want from firms. Factor markets, on the other hand, are those in which firms buy the 
resources they need – land, labour, capital and entrepreneurship- to produce goods and 
services. While product markets allocate goods to consumers, factor markets allo­cate 
productive resources to producers and help ensure that those resources are used efficiently. 
The prices in factor markets are known as factor prices.  
In Economics, generally the classification of markets is made on the basis of  
(a) Geographical Area 
(b) Time 
(c) Nature of transaction 
(d) Regulation 
(e) Volume of business  
(f) Type of Competition. 
On the basis of geographical area 
From the marketing perspective, the geographical area in which the product sales should be 
undertaken has vast implications for the firm. On the basis of geographical area covered, 
markets are classified into:- 
Local Markets: When buyers and sellers are limited to a local area or region, the market is 
called a local market. Generally, highly perishable goods and bulky articles, the transport of 
which over a long distance is uneconomical’ command a local market. In this case, the 
extent of the market is limited to a particular locality. For example, locally supplied services 
such as those of hair dressers and retailers have a narrow customer base.  
Regional Markets: Regional markets cover a wider area such as a few adjacent cities, parts 
of states, or cluster of states. The size of the market is generally large and the nature of 
buyers may vary in their demand characteristics. For eg. Mekhela Chador (Traditional Assamese 
Saree) is primarily worn by women in Assam and adjoining areas. 
© The Institute of Chartered Accountants of India
 
 
  PRICE DETERMINATION IN DIFFERENT MARKETS 
 
 
4.5 
National Markets: When the demand for a commodity or service is limited to the national 
boundaries of a country, we say that the product has a national market. The trade policy of 
the government may restrict the trading of a commodity to within the country. For example 
Hindi books may have national markets in India; outside India one may not have market for 
Hindi books. 
International markets: A commodity is said to have international market when it is 
exchanged internationally. Usually, high value and small bulk commodities are demanded 
and traded internationally. For example Gold and Silver are examples of commodities that 
have international market. 
The above classification has become more or less out-dated as we find that in modern days 
even highly perishable goods have international market.  
On the basis of Time 
Alfred Marshall conceived the ‘Time’ element in markets and on the basis of this, markets 
are classified into:  
Very short period market: Market period or very short period refers to a period of time in 
which supply is fixed and cannot be increased or decreased. Commodities like vegetables, 
flower, fish, eggs, fruits, milk, etc., which are perishable and the supply of which cannot be 
changed in the very short period come under this category. Since supply is fixed, very short 
period price is dependent on demand. An increase in demand will raise the prices vice versa.  
Short-period Market: Short period is a period which is slightly longer than the very short 
period. In this period, the supply of output may be increased by increasing the employment 
of variable factors with the given fixed factors and state of technology. Since supply can be 
moderately adjusted, the changes in the short period prices on account of changes in 
demand are less compared to market period.  
Long-period Market: In the long period, all factors become variable and the supply of 
commodities may be changed by altering the scale of production. As such, supply may be 
fully adjusted to changes in demand conditions. The interaction between long run supply 
and demand determines long run equilibrium price or ‘normal price’.  
Very long-period or secular period is one when secular movements are recorded in certain 
factors over a period of time. The period is very long. The factors include the size of the 
population, capital supply, supply of raw materials etc. 
On the basis of Nature of Transactions 
a. Spot or cash Market: Spot transactions or spot markets refer to those markets 
where goods are exchanged for money payable either immediately or within a short 
© The Institute of Chartered Accountants of India