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 does 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 exchange. Value in exchange or exchange value, 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. Thus, value in exchange or economic value is measured by the most 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.
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;
(iii) Bargaining for a price;
(iv) Knowledge about market conditions; and
(v) One price for a product or service at a given time.
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 allo cate 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
(c) Nature of transaction
(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.
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 outdated 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 span of time.
b. Forward or Future Market: In this market, transactions involve contracts with a promise to pay and deliver goods at some future date.
On the basis of Regulation
a. Regulated Market: In this market, transactions are statutorily regulated so as to put an end to unfair practices. Such markets may be established for specific products or for a group of products. Eg. Stock exchange
b. Unregulated Market: It is also called a free market as there are no stipulations on the transactions.
On the basis of volume of Business
a. Wholesale Market: The wholesale market is the market where the commodities are bought and sold in bulk or large quantities. Transactions generally take place between traders.
b. Retail Market: When the commodities are sold in small quantities, it is called retail market. This is the market for ultimate consumers.
On the basis of Competition Based
on the type of competition markets are classified into a) perfectly competitive market and b) imperfectly competitive market. We shall study these markets in greater detail in the following paragraphs.
TYPES OF MARKET STRUCTURES
For a consumer, a market consists of those firms from which he can buy a well-defined product; for a producer, a market consists of those buyers to whom he can sell a single well-defined product. If a firm knows precisely the demand curve it faces, it would know its potential revenue. If it also knows its costs, it can readily discover the profit that would be associated with different levels of output and therefore can choose the output level that maximizes profit. But, suppose the firm knows its costs and the market demand curve for the product but does not know its own demand curve. In other words, it does not know its own total sales. In order to find this, the firm needs to answer the following questions. How many competitors are there in the market selling similar products? If one firm changes its price, will its market share change? If it reduces its price, will other firms follow it or not? There are many other related questions that need to be answered.
Answers to questions of this type will be different in different circumstances. For example, if there is only one firm in the market, the whole of the market demand will be satised by this particular firm. But, if there are two large firms in the industry, they will share the market demand in some proportion. A firm has to be very cautious of the reactions of the other firm to every decision it makes. But if there are, say, more than 5,000 small firms in an industry, each firm will be less worried about the reactions of other firms to its decisions because each firm sells only a small proportion of the market. Thus, we find that the market behaviour is greatly affected by the structure of the market. We can conceive of more than thousand types of market structures, but we shall focus on a few theoretical market types which mostly cover a high proportion of cases actually found in the real world. These are:
Perfect Competition: Perfect competition is characterised by many sellers selling identical products to many buyers.
Monopolistic Competition: It differs in only one respect, namely, there are many sellers offering differentiated products to many buyers.
Monopoly: It is a situation where there is a single seller producing for many buyers. Its product is necessarily extremely differentiated since there are no competing sellers producing products which are close substitutes.
Oligopoly: There are a few sellers selling competing products to many buyers.
Table 1 summarises the major distinguishing characteristics of these four major market forms
Table 1 - Distinguishing Features of Major Types of Markets
Number of sellers
None to substantial
Price elasticity of demand of a firm
Degree of control over price
Before discussing each market form in greater detail, it is worthwhile to know the concepts of total, average and marginal revenue and the behavioural principles which apply to all market conditions.