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Forms of Market and Price Determination Class 12 Economics

Market

Market is a situation in which buyers and sellers come into contact for the purchase and sale of goods and services.

Market structure: refers to number of firms operating in an industry, nature of competition between them and the nature of product.

Types of market 

  • Perfect competition : refers to a market situation in which there are large number of buyers and sellers. Firms sell homogeneous products at a uniform price.
  • Monopoly market : Monopoly is a market situation dominated by a single seller who  has full control over the price.
  • Monopolistic competition: It refers to a market situation in which there are many firms who sell closely related but differentiated products. 
  • Oligopoly is a market structure in which there are few large sellers of a commodity and large number of buyers.

Features of perfect competition:

  • Very large number of buyers and sellers.
  • Homogeneous product.
  • Free entry and exit of firms.
  • Perfect knowledge.
  • Firm is a price taker and industry is price maker.
  • Perfectly elastic demand curve (AR=MR)
  • Perfect mobility of factors of production.
  • Absence of transportation cost.
  • Absence of selling cost.

 Features of monopoly:

  • Single seller of a commodity.
  • Absence of close substitute of the product.
  • Difficulty of entry of a new firm.
  • Negatively sloped demand curve(AR>MR)
  • Full control over price.
  •  Price discrimination exists
  • Existence of abnormal profit.

 Features of monopolistic competition

  • Large number of buyers and sellers but less than perfect competition.
  • Product differentiation.
  • Freedom of entry and exit.
  • Selling cost.
  • Lack of perfect knowledge.
  • High transportation cost.
  • Partial control over price.


 Main features of Oligopoly

  • Few dominant firms who are large in size
  • Mutual interdependence.
  • Barrier to entry.
  • Homogeneous or differentiated product.
  • Price rigidity.

Question for Chapter Notes - Forms of Market and Price Determination
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 Features of pure competition

  • Large number of buyers and sellers.
  • Homogeneous products.
  • Free entry and exit of firm.

Determination of Price Under Perfect Competition

  • Equilibrium: It means a position of rest, there is no tendency to change.
  • Market Equilibrium: It means equality between quantity demanded and quantity supplied of a commodity in the market.
  • Equilibrium price: This is the price at which market demand of a commodity is exactly equal to the market supply.
  • Market demand: It refers to the sum total demand for a commodity by all buyers in the market.
  • Market supply: It refers to supply of a commodity by all the firms in the market

Simple Applications Tools

Price Ceiling: Means maximum price of a commodity fixed by the government that the sellers can charge from the buyers. It is imposed on necessary commodities like wheat, rice, kerosene, oil, sugar etc. Price ceiling results in excess demand and less supply in the market. It is below the equilibrium price.The shortage of commodity in the market results in following implications

  • Emergence of black market
  • Rationing

Price Floor (minimum support Price): it is fixed by the government necessarily above the equilibrium price. Sometimes when government feels that the price for a particular good or service should not fall below certain level and sets a floor or a minimum price for these goods and services

Example: Imposition of support price on agricultural commodities in case of requirement the government fixes the support price above the equilibrium price. Price floor results in excess supply and less demand. Application of Demand & Supply Analysis on FAD Theory. Food Availability decline theory is illustrated in terms of the demand Supply Analysis. A drastic fall in the total availability of food causes massive starvation and famine. The casual link is that a large scale cline in food supply pushes the market price up to such a level that many poor people can no longer afford to buy the minimum amount for survival.

The document Forms of Market and Price Determination Class 12 Economics is a part of the Commerce Course Economics Class 11.
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FAQs on Forms of Market and Price Determination Class 12 Economics

1. What is perfect competition in a market?
Ans. Perfect competition is a type of market structure in which there are many small firms operating in the market. The products produced by these firms are identical, and there are no barriers to entry or exit in the market. In perfect competition, there is no one firm that can influence the price of the product in the market.
2. How is price determined in a perfectly competitive market?
Ans. In a perfectly competitive market, the price of the product is determined by the forces of demand and supply. The price is set at the equilibrium point where the quantity of the product demanded by the consumers is equal to the quantity supplied by the firms. This price is known as the market-clearing price and is determined solely by the market forces.
3. What are the characteristics of a perfectly competitive market?
Ans. The characteristics of a perfectly competitive market include a large number of small firms, homogeneous products, free entry and exit, perfect information, no market power, and price-taking behavior. In such a market, no single firm can influence the price of the product, and all firms are price-takers.
4. What is the role of market equilibrium in a perfectly competitive market?
Ans. Market equilibrium is the point where the quantity of the product demanded by consumers is equal to the quantity supplied by the firms. In a perfectly competitive market, the market equilibrium determines the price of the product. At this equilibrium price, all firms are able to sell their products, and consumers are able to purchase the products they desire. Any deviation from this equilibrium price will lead to either a shortage or a surplus of the product in the market.
5. What are the advantages of a perfectly competitive market?
Ans. There are several advantages of a perfectly competitive market, including efficient allocation of resources, low prices, and innovation. In a perfectly competitive market, resources are allocated efficiently as firms produce at the lowest possible cost. This leads to lower prices for consumers and encourages innovation as firms strive to differentiate their products and gain a competitive advantage. Additionally, there is no exploitation of consumers or suppliers as they are free to enter or exit the market at will.
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