MARKET SFI.pdf

1. MARKET SUCCESS FINDER INSTITUTE MARKET SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET 1. Define market? What are its function and its characteristics? Answer: In economics a market refers to a social relation or social institution between buyers and sell...

1. MARKET SUCCESS FINDER INSTITUTE MARKET SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET 1. Define market? What are its function and its characteristics? Answer: In economics a market refers to a social relation or social institution between buyers and sellers. The main feature of a market is that there are two parties. One party likes to sell and other party likes to purchase. The market has two main functions: i. Firstly the market acts as a bridge between buyers and sellers and thereby narrows the gap between production and consumption ii. Secondly the market determines the price. The price of the commodity is determined by the interaction of demand and supply. Market also helps transaction of the good or service against price. From the above analysis it is seen that markets have several characteristics. i. In economics we have a market for each product and each factor of production ii. In a market there must be buyers and sellers. iii. The commodity or the factor of production which is bought and sold must have price in which it is bought and sold. iv. There is a relation between buyers and sellers in the market. The relation is called the market relation or the price relation. The relation is an economic relation or more generally a social relation. 2. What are different types of Market? Describe them? Answer: Classification of Market Markets can be classified according to different criteria. Here we consider some of these classifications. i. According to the geographical According to the geographical extent of the market we can distinguish between the three types of market: local market, national market, & International market a. Local Market When the commodity is sold near its place of production, it is called a local market. For example green vegetables, perishable products like fish, egg, milk etc. are sold in an area which is near their places of production. These markets may be called local markets. b. National Market On the other hand those commodities which are sold in the whole country more or less at the same price are said to have a national market. For example factory produced consumer goods are durable and can be sold throughout the country. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET c. International MarketOn the other hand those commodities which are sold not only in the domestic market but are also exported to other countries of the world are said to have international market. Markets can be classified according to the type of the commodity being sold in the market. In economics we get one market for one commodity. We can also classify markets according to the time period. Prof. Marshall classified markets in four categories according to time period they are:-1) Very short period market 2) short period market 3) long period market and 4) very long period market. In the very short period market supply is assumed to be constant. In such market price fluctuates with demand. In the short period market firms cannot change their fixed factor of production; they can only change their variable factors of production. On the other hand in the long period market new techniques of production can be introduced. Technology change also occurs in the very long term market. On the basis of competition market divided into four parts 1) perfect competition market 2) monopoly market 3) monopolistic market 4) oligopoly market. In any market there are two sides’ buyers and sellers & the demand or supply differs according to the numbers of buyers and sellers i. Bilateral monopolythe market in which one buyer faces one seller is called a bilateral monopoly. In such a market both the buyers and sellers have some bargaining capacity and the price is determined by the relative bargaining strengths of the two parties. ii. Monophony this form of market is the complementary form of monopoly. In a monopoly market there is only one seller and large numbers of sellers. Other conditions are the same as in the monopoly market. 3. What is meant by market price? Answer: Market price is that price which determines through market demand and market supply curve. At this price, the amount being offered for sale is exactly equal to the amount consumer is prepared to purchase. That is why it is called Market Clearing Price or Equilibrium Price. 4. What is the difference between Market price and Normal Price? Answer: Main difference between Market Price are and Normal Price are:- i. Market price is the short period price or temporary price but Normal price is the long run price or permanent price ii. Market price changes quickly and it is influenced by demand. Normal price remains constant and it is influenced by more by supply. 5. What is meant by shutdown point? SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET Answer: Minimum price of the AVC is called the Shutdown Point [Condition is AVC=PTC] 8. Write a note on demand curve facing a firm under a perfect condition? Answer: in perfect competition price is fixed and the firm can sell any amount of output at this price. So in perfect competition demand curve is parallel to the horizontal axis. 9. What is meant by breakeven point? Answer: Minimum Point of the AC curve is called The Break Even Point or the point of no profit no loss [Condition is P=AC]. At this point firm get only normal profit. 10. What are the conditions of Profit Maximization of firm? Answer: A firm makes his profit maximum if it satisfies following two conditions:- i. Necessary condition or first order condition MR=MC ii. Sufficient condition or second order condition MC must cut the MR from below. 11. Write a note on AR and MR curve of a firm under perfect competition? Answer: In perfect competition AR is constant and is always equal to MR.So in perfect completion AR and MR curve is parallel to the horizontal axis. 12. How is price determined in perfectly competitive market? Answer: in a perfect competitive market equations price is determined by the interaction of demand and supply. The price at which total demand is equal to Total supply in the market is called Equation price. 13. What are the conditions to be fulfilled for long run equation of the perfect competitive firm? Answer: There are two conditions which must be fulfilled by a firm to be in equations in the long run i. P=LAC (i.e. the firm earn normal profits) ii. MR=LMC and also that LMC cuts the MR curve from below. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET 14. Distinguish between Pure Competition and Perfect Competition? Answer: Perfect completion is much wider term while pure competition is a narrow one. According to Prof. Chamberlin Pure competition consists of only three characteristics:- i. Large number of buyers and sellers ii. Homogeneous product iii. Free entry and exit of the firms. If pure competition is to be converted into perfect competition which shall have to add three more character tics with the above. Which are (a) Buyers and Sellers have perfect knowledge about the market (b) Perfect mobility of the factors of the production. 15. Define Perfect Competition Market? Answer: “The perfect competition is characterized by the presence of the many firms, they all sell identically same product.The seller is the price taker” Billas. “Perfect competition prevails when the demand for the output of the each producer is perfectly elastic” Joan Robinson 16. What is the assumption or characteristics of perfect competition market? Answer: - perfectly competitive market has the following assumptions: i. Large number of buyers and Sellers There are large number of buyers and sellers in this market. Every buyer or seller purchase of sells a very small amount of total output. It means no single buyers or sellers can affect the price. A firm is therefore, a price taker than a price maker. ii. Homogeneous Product All sellers sell homogeneous and identical products. In this situation buyers have no reason to prefer the product of one seller to another. Agriculture products are such type of product. iii. Free entry or exit of the firmevery firm is free to enter or exits from the industry. In other words there are no legal or social restrictions on the firm iv. Perfect knowledge It implies that a large number of buyers and sellers in the market exactly know how much is the price of the commodity in the different part of the market. v. Perfect Mobility of factorsthere must be perfect mobility of factors of production within the country which insure uniform cost of production in the whole economy. It implies that different factors of the production are free to seek employment in any industry that they may like. vi. No Transport Cost In this market, cost of transport does not influence the price of the product. That is market price does not differ due to locations if different sells. So there is always maintaining a uniform price. vii. P = AR = MR = Demand viii.Condition of profit maximization MC = MR SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET ix. Close substitutes In perfect competition market there is the option of the close substitute x. Short Runa) Super profit or Normal Profit i.e. no profit no loss or Loss Long run- Firms always get normal profit/ Break-even point 17. Explain the term (1) Total Revenue (2) Average Revenue & (3) Marginal Revenue with the help of schedule and diagrams in perfect competition? Answer: i. Total revenue (TR) it refers to the total amount of income received by the firm from selling a given amount of its output i.e. If we sells Q units of output at the price P per unit then TR = P × Q ii. Average Revenue (AR) It refers the revenue earned per unit of the output sold.AR = TR/Q = P. iii. Marginal Revenue (MR) it refers additional total revenue which results from the sale of one additional unit of output. I.e. MR = In perfectly competitive market price or Average Revenue (AR) is constant at all levels of output. Therefore the relation between TR, AR and MR will be different under perfect competition as compared to Monopoly. This is explained numerically in the following table: Units of output(Q) Price(P) TR(P×Q) AR ( MR( ) 10 4 40 4 4 20 4 80 4 4 30 4 120 4 4 Here in the above Fig. the price is constant and the firm can sell any amount of output. At this price. Therefore TR increases proportionately with increase in units of output. Graphically TR curve is a straight line starts from the origin and its slope is constant as shown in the above Fig. price is fixed and is equal to MR i.e. AR = MR =P. Thus in this case AR or MR curve will be horizontal straight line (i.e. parallel to X-axis) as shown in graph. Since AR equals with price so the horizontal AR curve is known as “Demand Curve” in perfectly competitive market. Where price elasticity of demand is infinite (eP= ∞) 18. What do you mean by “Natural Monopoly”? Answer: Sometimes limited size of the domestic market may allow the existence of only one firm of optimal size. Because the existence of two such firms would mean a negative profit. This is called natural monopoly. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY  1. MARKET 19. What do you mean by price discrimination? Answer: Price discrimination refers to the charging of difference prices by the monopolist for the same product. According to “koutsoyannis “  “Price discrimination exist when the same product is sold at different prices to different buyers”. 20. Explain how the market price or equilibrium price is determined in perfect competition? Answer: In perfect competition, price is determined through the intersection of market demand and market supply curve. If market supply is greater than market demand then pressure of excess supply (or surplus) will push down the price level. If market supply is less than market demand then the pressure of excess demand (or deficit) will push up the price level. Ultimately, price level reaches a level where market supply equal with the market demand. We can present the above theory in the form a diagram. Here DD’ and SS’ are the market demand and Price supply curve. When price is OP0, the supply is D Surplus S’ P0 OS0 but demand is OD0. Thus there is an excess supply in the market. Therefore price would fall. PE E Similarly when price OP1 there will be an excess P1 Deficit demand in the market. The price will rise. At S equilibrium price level OPE, there is neither 0 D0 S1 QE D1 S0 Qty: excess supply nor excess supply nor excess demand and therefore the price has neither a tendency to fall nor a tendency to rise. 21. Explain the equilibrium conditions or profit maximizing condition of the perfect competitive firm? Answer: A firm is said to be in equilibrium if it satisfies two conditions as under:- i. Necessary condition or first order condition MR = MC ii. Sufficient condition or second order condition MC must cut the MR from below. To prove the first order condition graphically, we draw Total TC Revenue (TR) curve and Total Cost (TC) curve in above figure. Here the vertical distance between Total Revenue and Total Cost curve represents total profit. Total profit is maximum when firm produces OM units of output and the total profit is KL. L At profit maximum slope of TR curve = slope of TC curve TR Curve Or, = Outflow SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY  1. MARKET Or, MR = MC MC To prove second order condition graphically we draw Marginal revenue (MR) curve and Marginal R & cost (TC) curve in fig. given below. Here at OQ0 &OQ1 levels of output. Marginal Revenue is equal C with the Marginal Cost. Now if firm expand the output beyond OQ0, then marginal Revenue > Marginal Cost, which is profitable. Firm stops to produce OQ1 level of output, because after that MR Marginal Revenue < Marginal Cost, which is losable. So a firm maximize his profit at OQ1 levels of output where, MR = MC MC cuts the MR from below or slope of MC > slope of MR 0 Q0 Q1 Qty: 22. How does a competitive firm attain equilibrium in the short run? Answer: Equilibrium of a firm in short run is determined at that level of production at which both necessary and sufficient condition hold. i. Necessary condition or first order condition MR=MC. ii. Sufficient condition or second order condition  MC must cut the MR from below. The fact that a firm is in short run, does not necessarily mean that it makes always super normal profit. Whether the firm makes super normal profit or loss depends upon level of average cost at the short run. MC SAC Case 1Profit maximizing Output (P>AC) EA PA Here at point EA, firm A is in equilibrium. Since at this P=AR=MR point both necessary and sufficient condition hold, corresponding to this equilibrium point, output is OQA and Market price is OP QA MC Price SAC Revenue & Cost EB Case 2 Break Even output (P=AC) Output PB P=AR=MR Here at point EB firm B is in equilibrium. Since at this point both necessary and sufficient condition hold. Corresponding to this equilibrium point break even Price revenue output is OQB and market price is OPB & Cost QB Output EC T SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY QC 1. MARKET Case 3 Loss Minimizing Output (AVC slope of MR SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY  1. MARKET 37. What is the relation between AR, MR & price elasticity of demand (ep)? (2010,2012) Answer: Average Revenue (AR) It refers to the revenue earned per unit of output sold, therefore AR= TR/Q=P Marginal Revenue (MR) it refers the additional total revenue which results from the sale of one additional unit of output i.e. MR= We know, (1) taking derivative w.r.t “Q” we get, =P+Q. We know, ep = -dQ/dP. P/Q Or, MR = P – P/ep Or, - ep/P = dQ/dP. 1/Q Or, MR = P(1 – 1/ep) Or, MR =AR(1 – 1/ep)--------------------------------------(2) Or, -P/ep = dP/dQ.Q Here in equation (2), if we put ep = 1, then MR = 0 ep >1 If we put ep > 1, then MR > 0 If we put ep < 1, then MR < 0 ep =1 MR>0 ep 1) of his demand curve. So the index of monopoly power = 1/ ep> 0 i.e. a monopolist have some power to control over the product price. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET 39. How does a monopolist attain equilibrium in the short run? Or, explain equilibrium price & output are determined under monopoly? Answer: Equilibrium of a monopolist, in short run, is determined at that level of production at which both necessary and sufficient condition hold. i. Necessary condition or first order condition MR = MC ii. Sufficient condition or second order condition MC curve must cut the MR curve from below. A monopolist faces a negative slopping demand curve or AR curve. If he wants to sell more he must lower down the price of its product. The corresponding MR curve is also downward slopping and lies below AR curve. A monopolist in the short run can earn super normal profit as well as normal profit. They also incur loss in the short run. Case1  Super Normal Profit (P> AC) Principle revenue MC Here, at point EA, monopolist is in equilibrium. Since at cost this point both necessary and sufficient condition R PA SAC hold. Corresponding to this equilibrium point output C is OQA & product price is OPA. EA Here, total cost (TC) = OC.OQA, AR = OCMQA And, total revenue (TR) = OPA.OQA QA Qty: MR = OPARQA So, monopolist earns super normal profit = TR – TC = OPA RQA - OCMQA = CPARM And the super normal profit earning condition is , MC = MR< AR > AC Case2  Normal Profit (P=AC) Principle revenue Here, at point EB, monopolist is in equilibrium. Since at cost MC this point both necessary and sufficient condition hold. AC Corresponding to this equilibrium point output is OQ B & PB R product price is OPA. Here, total cost (TC) = OPB.OQB, AR = OPBRQB And, total revenue (TR) = OPB.OQB = OPBRQB SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET So, super normal profit s “zero” i.e. TR-TC=OPBRQB - OPBRQB=0. And monopolists earn normal profit. Since at this point TR=TC, and the normal profit earning condition is, MC=MR MR Inderminate 3.Long run Profit Normal Super-Normal Normal Inderminate 4.No of sellers Large Single Fairly large Few 5.Nature of the Homogeneous unique differentiated Homogeneous or product: differentiated 6.Entry Free Prohibited Free Controlled. possibility 7.Advertisement Doesn’t exist Doesn’t exist Exist Exist 46. Compare between Perfect Competition & Monopoly with respect to their characteristics? Answer: Subject Perfect Competition Monopoly Number of Sellers There is infinite number of sellers in There are single sellers in the the market. market. Entry & Exit A firm can freely enter into or exit There are barriers on the entry of from the market. new firms into the market. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET Nature of the Here, each firms produces and sells Here, firm produces and sells product. homogeneous product. unique product, which have no close substitutes. Nature of firms. Here, each firm is a price taker Monopoly firm is a price maker. because they sell the product at a Because he can control the market fixed price determined by the price by increasing or decreasing market forces. the total market supply. Determination of Firms can only determine the level Monopolist determines both price price and out put of output. and output. Relation of AR & AR & MR are identical in this market AR is greater than MR curve i.e. MR. i.e. AR = MR. AR> MR. Shape of TR curve TR curve is an upward slopping TR curve is an inverted “U” straight line. shaped. Long run Competitive firms earn only normal Monopoly firm earn super normal equilibrium profit in long run. profit in long run. Price In this market price discrimination Price discrimination in possible. discrimination is not possible. Nature of demand The demand curve faced by each Demand curve is negative slope. curve. firm is completely elastic i.e. horizontal. 47. How, according to the cournot model, does a firm attain equilibrium? Answer: French economist Augustian cournot showed how the sellers in a duopoly market shared the total sale among them and reach at equilibrium position. This model is based on following assumption: i. There are only two fir in the market says: Firm-A & Firm-B. ii. Two seller sale homogeneous product. iii. When a firm chooses his profit maximizing output he assumes that the output of his rival remains constant. iv. Cournot assumes that each firm produces mineral water from nature with “zero” Marginal cost. Now, we explain Cournot model with the help of following diagram: SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET Let, the Firm –A is first to start producing and selling mineral water. It will produce quality OA, at price OP. Now Firm-B assumes, that Firm –A will keep its output fixed at OA, and hence considers own demand curve as CD’. Clearly Firm-B will produce half of the quality AD’ (i.e AB), at price OP’. In the next period , according to cournot assumption, Firm-A assume , that Firm-B will keep its output fixed at AB, and Firm –A will produce half of the market, which is not supplied by Firm–B. Again Firm–B , reacts on cournot assumption & will produce half of the market, which is not supplied by Firm-A & so on………… The production of firm-A & Firm-B in successive period is as follows: Firm-A Firm-B Period-11/2 Period-21/2(1-1/2) =1/4 Period-31/2(1-1/4)=3/8=1/2-1/8 Period -41/2(1-3/8)=5/16=1/4+1/16 Period-51/2(1-5/16)=11/32=1/2-1/8-1/32 Period-61/2(1-11/32)=21/64=1/4+1/16+1/64 Period-71/2(1-21/64)=43/128=1/2-1/8-1/32-1/128 & So on........ Total production calculation by “Infinite G.P. series formula”: Sα=a/1-r [where a=1st term& r= common ratio] 1/2 - 1/8 - 1/32 – 1/128……………..α 1/4 + 1/16 + 1/64…………………….α = 1/2 - [ 1/8 + 1/32 + 1/128…………α] = 1/4 / 1- 1/4 = 1/2 - [ 1/8 / 1- 1/4] = 1/3 = 1/3 Thus in Cournot solution, each firm supply 1/3rd of the market at common price CRITICISM: Cournot model has been criticized on several grounds: i. Assumption of costless production seems to be unrealistic. ii. Cournot did not differentiate quality of goods of the two produces. iii. Here it is wrongly assume that, “when a Firm chooses his profit maximization output he assumes that the out[put of his rival remain constant”. i.e the behavioural pattern of the firm shows lack of judgment iv. In the Cournot model two firm adopt wrong methods & despite of that both of firm reach at Equilibrium point. SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET 48. How does a monopolistically competitive firm attain Equilibrium in the short run? Answer: same as monopoly market SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY 1. MARKET SUCCESS FINDER INSTITUTE PRADEEP KANT PANDEY