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.

 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.