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Managerial economics Study material - Unit 3
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KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATOREClass: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit III Semester: I Year: 2021-23Batch
UNIT-III – Pricing under different markets
SYLLABUS
Unit – III : Main Forms of Market : Basis of Classification - Perfect Competition – Features – Short run
Equilibrium and Long run Equilibrium – Price Determination – Monopoly Market – Features – Short
run Equilibrium and Long run Equilibrium – Price Discrimination – Degrees of Price Discrimination.
Oligopoly Market Competition – Features – Price Leadership – Price Rigidity – Cartel – Collusive and
Non-Collusive – Oligopsony – Features – Monopolistic Competition – Features – Product
Differentiation – Selling Cost – Short run Equilibrium and Long run Equilibrium – Monopsony and
Duopoly Market Equilibrium
Meaning of Market and Market Structure
Market in economics does not refer to a place or places but to a commodity and also to buyers and
sellers of that commodity who are in competition with one another According to Pappas and Hirschey,
“Market structure refers to the number and size distribution of buyers and sellers in the market for a good
or service”.
It indicates a set of market characteristics that determine the nature of market in which a firm
operates. Different market structures affect the behavior of sellers and buyers in different manners.
The term market hence implies:
i. Existence of a commodity to be traded.
ii. Existence of sellers and buyers.
iii. Establishment of contact between the sellers and buyers.
iv. Willingness and ability to buy and sell a commodity and
v. Existence of a price at which the given commodity is to be bought and sold.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 1/50
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit III Semester: I Year: 2021-23Batch
Among the different market situations, perfect competition and monopoly form the two extremes. In
between these two market situations we come across a number of market situations which may be
collectively termed as imperfect markets. In these imperfect markets, we notice the elements of
competition as well as monopoly. They are bi-lateral monopoly, monopsony (one buyer), duopoly (two
sellers) duopsony (two buyers), oligopoly (few sellers), oligopsony (few buyers) and monopolistic
competition (many sellers). This can be better understood by the following chart.
CLASSIFICATION OF MARKET
Market may be classified into different types:
On the basis of area
Markets may be classified on the basis of area into local, national and international markets.
If the buyers and sellers are located in a particular locality, it is called as a local market, e.g. fruits,
vegetables etc. These goods are perishable; they cannot be stored for a long time; they cannot be
taken to distant places. When a commodity is demanded and supplied all over the country, national
market is said to exist. When a commodity commands international market or buyers and sellers all over
the world, it is called international market.
Whether a market will be local, national or international in character will depend upon the following
factors: (a) nature of commodity; (b) taste and preference of the people; (c) availability of storage; (d)
method of business; (e) political stability at home and abroad; if) portability of the commodity.
On the basis of time
Time element has been used by Marshall for classifying the market. On the basis of time, market has been
classified into very short period, short period, long period and very long period. Very short period market
refers to the market in which commodities that are fixed in supply or are perishable are transacted. Since
supply is fixed, only the changes in demand influence the price. The short period markets are those where
supply can be increased but only to a limited extent. Long period market refers to a market where adequate
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 2/50
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit III Semester: I Year: 2021-23Batch
time is available for changing the supply by changing the fixed factors of production. The supply of
commodities may be increased by installing a new plant or machinery and the output can be changed
accordingly. Very long period or secular period is one in which changes take place in factors like
population, supply of capital and raw material etc.
On the basis of nature of transactions
Markets are classified on the basis of nature of transactions into two broad categories viz., Spot
market and future market. When goods are physically transacted on the spot, the market is called as
spot market. In case the transactions involve the agreements of future exchange of goods, such
markets are known as future markets.
On the basis of volume of business
Based on the volume of business, markets are broadly classified into wholesale and retail markets. In the
wholesale markets, goods are transacted in large quantities. Wholesale markets are in fact, a link between
the producer and the retailer while the retailer is a link between the wholesaler and the consumer.
On the basis of status of sellers
During the process of marketing, a commodity passes through a chain of sellers and middlemen. Markets
can be classified into primary, secondary and terminal markets. The primary market consists of
manufacturers who produce and sell the product to the wholesalers. The wholesalers who are an
international link between the manufacturers and retailers constitute secondary markets while the retailers
who sell it to the ultimate consumer constitute the terminal market.
On the basis of regulation
On this basis, market is classified into regulated and unregulated markets. For some goods and services, the
government stipulates certain conditions and regulations for their transactions. Market of goods and
services is called regulated market. On the other hand, goods and services whose transactions are left
to the market forces belong to unregulated market. Regulations of market by the government become
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 3/50
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit III Semester: I Year: 2021-23Batch
essential for those goods whose supply or price can be manipulated against the interests of the general
public.
On the basis of competition
Markets are classified on the basis of nature of competition into perfect competition and imperfect
competition.
Kinds of Markets
Perfect Competition
Perfect competition is a comprehensive term which includes pure competition also. Before we discuss the
details of perfect competition, it is necessary to have a clear idea regarding the nature and characteristics of
pure competition.
Pure Competition is a part of perfect competition. Competition in the market is said to be pure when the
following conditions are satisfied:
1. Prevalence of a large number of buyers and sellers.
2. The commodity supplied by each firm is homogeneous.
3. Free entry and exit of firms.
4. Absence of any kind of monopoly element.
Under these conditions no individual producer is in a position to influence the market price of the product.
According to Prof. E.H. Chamberlin - “Under Pure Competition, the individual sellers market being
completely merged with the general one, he can sell as much as he please at the going price”.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 4/50
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