CA Foundation Business Economics Study Material – Meaning and Types of Markets

CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Meaning and Types of Markets

MEANING OF MARKET

• In ordinary language, a market refers to a place where the buyers and sellers of a commodity gather and strike bargains.
• In economics, however, the term “Market” refers to a market for a commodity. E.g. Cloth market; furniture market; etc.
  According to Chapman, “the term market refers not necessarily to a place and always to a commodity and buyers and sellers who are in direct competition with one another”.
• According to the French economist Cournot, “Market is not any particular place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with each other that the prices of the same goods tend to equality easily and quickly”,

The above mentioned definitions reveals the following features of a market:

1. A region. A market does not refer to a fixed place. It covers a region, which may be a town, state, country or even world.
2. Existence of buyers and sellers. Market refers to the network of potential buyers and sellers who may be at different places.
3. Existence of commodity or service. The exchange transactions between the buyers and sellers can take place only when there is a commodity or service to buy and sell.
4. Bargaining for a price between potential buyers and sellers.
5. Knowledge about market conditions. Buyers and sellers are aware of the prices offered or accepted by other buyers and sellers through any means of communication.
6. One price for a commodity or service at a given time.

Classification of Market:

Markets may be classified on the basis of different criteria. In Economics, generally the classification is made as pointed out in the following chart—

TYPES OF MARKET STRUCTURES

Market can be classified on the basis of area, volume of business, time, status of sellers, regulation and control.
The main types of markets can be summed up as follows:

1. Perfect Competition:
   • Perfect competition market is one where there are many sellers selling identical products to many buyers at a uniform.
2. Monopoly:
   • Monopoly market structure is a market situation in which there is a single seller of a commodity selling to many buyers.
   • The commodity has no close substitutes available.
   • A monopolist therefore, has a considerable influence on the price and supply of his commodity.
3. Monopolistic Competition:
   • Monopolistic competition is a market situation in which there are many sellers selling differentiated goods to many buyers.
4. Oligopoly:
   Oligopoly is a market situation in which there are few sellers selling either homogeneous or differentiated goods.

Table: Features of major types of markets

Points	Market Types
	Perfect Competition	Monopoly	Monopolistic Competition	Oligopoly
i. Number of sellers	Many	One	Many	Few
ii. Product	Homogeneous	Unique having no substitutes	Differentiated	Homogeneous or Differentiated
iii. Selling Cost	No	Negligible	High	High
iv. Degree of control over price	No Control. Price taker.	Full control. Price maker	Limited due to product differentiation.	Limited
v. Demand (or AR) Curve	Horizontal straight line parallel to x-axis	Downward sloping	Downward sloping	Indeterminate
vi. Price elasticity of demand	Infinite P = MC	Small P > MC	Large P > MC	Small

CONCEPTS OF TOTAL REVENUE, AVERAGE REVENUE AND MARGINAL REVENUE

Total Revenue: (TR)

• Total revenue may be defined as the total amount of money received by the firm by selling a certain units of a commodity.
• It is obtained by multiplying the price per unit of a commodity with the total number of units sold.
• Total Revenue = Price per unit X Total No. of units sold
  TR = P X Q
• E.g. A firm sells 100 units of a commodity @ ₹ 15 each, then its total revenue is ₹ 15 X 100 units = ₹ 1,500

Average Revenue: (AR)

• Average revenue is the revenue per unit of the commodity sold.
• It is simply the total revenue divided by the number of units of output sold.
  
• E.g. A firm earns total revenue of ₹ 2,000 by the sale of 100 units of a commodity, then its average revenue is ₹ 20 (₹ 2000 -MOO units)
• By definition average revenue is the price per unit of output. To prove it
  

Marginal Revenue (MR):

• Marginal revenue refers to the addition to total revenue by selling one more unit of a commodity.
• Marginal revenue may also be defined as the change in total revenue resulting from the sale of one more unit of a commodity
• E.g. If a firm sells 100 units of a commodity @ ₹ 15 each, its TR is ₹ 1,500. Now, if it increases the sale by ten units i.e. it sells 110 units @ ₹ 14 each, its TR is ₹ 1,540. Thus,
  
  Where
  ∆TR is the change in total revenue
  ∆Q is the change in the quantity sold
• For one unit change – MR_n = TR_n – TR_n-1
  Where
  MR_n = Marginal Revenue from ‘n’ units
  TR_n = Total Revenue of ‘n’ units
  TR_n-1 = Total Revenue from ‘n-1’ units
  n = any give number

MARGINAL REVENUE, AVERAGE REVENUE, TOTAL REVENUE AND ELASTICITY OF DEMAND

The relationship between AR, MR and price elasticity of demand can be examined with the formula —


Figure: The relationship between AR, MR, TR & elasticity of demand.

The above figure reveals the following on a straight line demand curve (or AR curve):

1. When e > 1, marginal revenue is positive and therefore total revenue is rising,
2. When e = l, marginal revenue is zero and therefore total revenue is maximum, and
3. When e < l, marginal revenue is negative and therefore total revenue is falling.

BEHAVIOURAL PRINCIPLES

Principle 1: A firm should not produce at all if its total revenue is either equal to or less than its total variable cost.
Principle 2: It will be profitable for the firm to expand output so long as marginal revenue is more than marginal cost till the point where marginal revenue equals marginal cost.
Also the marginal cost curve should cut its marginal revenue curve from below.