MARKETS

MARKET:
Edwards defineds “Market , as a mechanism by which buyers and sellers are brought together”. Hence
market means where selling and buying transactions are take place. The classification of markets is’
based on three factors.

1. On the basis of area

2. On the basis of time

3. On the basis of competition.

I. On the basis of area : According to the area, markets can be of three types.

1. Local market : When a commodity is sold at particular locality. It is called a local market. Ex
: Vegetables, flowers, fruits etc.

2. National market : When a commodity is demanded and supplied throughout the country is
called national market. Ex : Wheat, rice etc.

3. International market: When a commodity is demanded and supplied all over the world is
called international market. Ex : Gold, silver etc.-

II. On the basis of time : It can be further classified into three types.

1. Market period or very short period : In this period where producer cannot make any changes
in supply of a commodity. Here supply remains constant. Ex : Perishable goods.

2. Short period : In this period supply can be change to some extent by changing the variable
factors of production.

3. Long period : In this period-supply can be adjusted in according change in demand. In long
run all factors will become variable.

III. On the basis of competition : This can be classified into two types.

1. Perfect competition market: A perfect competition market is one in which the number of
buyers and sellers is very large, all engaged in buying and selling a homogeneous products
without any restrictions.

2. Imperfect market: In this market, competition is imperfect among the buyers and sellers.
These markets are divided into

1. Monopoly

2. Duopoly

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 3. Oligopoly

4. Monopolistic competition.

Perfect Competition Market:

Perfect competitive market is one in which the number of buyers and sellers is very large, all engaged
in buying and selling a homogeneous products without any restrictions.
The following are the features of perfect competition :

1) Large number of buyers and sellers : Under perfect competition the number of buyers and sellers
are large. The share of each seller and buyer in total supply or total demand is small. So no buyer and
seller cannot influence the price. The price is determine only demand and supply. Thus the firm is
price taker.

2) Homogeneous product: The commodities produced by all the firm of an industry are homogeneous
or identical. The cross elasticity of products of sellers is infinite. As a result, single price will rule in
the industry.

3) Free entry and exit: In this competition there is a freedom of free entry and exit. If existing firms
are getting profits. New firms enter into the market. But when a firm getting losses, it would leave to
the market.

4) Perfect mobility of factors of production : Under perfect competition the factors of production are
freely mobile between the firms. This is useful for free entry and exits of firms.

5) Absence of transport cost: There are no transport cost. Due to this, price of the commodity will be
the same throughout the market.

6) Perfect knowledge of the economy: All the buyers and sellers have full information regarding the
prevailing and future prices and availability of the commodity. Information regarding market
conditions is availability of commodity.

Price Determination under Perfect Competition

Perfect competition is a competition in which the number of buyers and sellers is very large. All
engaged in buying and selling a homogeneous without any restrictions.

Under this competition there are large no. of by buyers and sellers no buyer is. A seller can’t influence
market price all products are homogeneous there is a freedom of free entry and exit. There is a perfect
mobility of factors are production. There is no transport cost these are the main features are perfect
competition.

PRICE DETERMINATION:
Under perfect competition sellers and buyers can’t decide the price industry decides the price of the
good in the supply and demand determined the price these can shown in the following table.
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In this competition where demand supply both are equal at that point price and output determine the
table changes in price always lead to a change in supply and demand as price increases there is a fall in
the quantity demanded. The relation between price and demand is negative. The relation between price
and supply is positive. It can be observe the table price 1 ₹ market demand 60 and supply is 20. When
price increases 5 ₹ supply increases’ 60 and demand decreases 20. When the price is 3 ₹ the demand
supply are equal that is 40 these price called equilibrium price. This process is explain with help of the
diagram.

In the diagram ‘OX’ axis shown demand and supply OY’ axis represented price. DD demand curve,
‘SS’ is supply curve. In the diagram the demand curve and supply curve intersect at point E. Where the
price is ‘OP’ and output is ‘OQ’.

PRICE OUTPUT DETERMINATION INCASE OF PERFECT COMPETITION

SHORT RUN:

The price and output of the firm are determined, under perfect competition, based on the industry price
and its own costs. The industry price has greater say in this process because the firm own sales are
very small and insignificant. The process of price output determination in case of perfect competition.

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The firm demand curve is horizontal at the price determined in the industry (MR = AR = price). This
demand curve is also known as average revenue curve. This is because if all the units are sold at the
same price, on an average , the revenue to the firm equal its price.

LONG RUN UNDER PERFECT COMPETITION

Having been attracted by supernormal profits, more and more firms enter the industry. With the result,
there will be a scramble for scarce inputs among the competing firms pushing the input prices. Hence,
the average cost increases. The entry of more and more firms will expand the supply pulling down the
market price. The entry of the firms into the industry continues till the supernormal profit is
completely eroded. In the long run, the firms will be in the position to enjoy only normal profits but
not supernormal profit. Normal profits are the profit that is just sufficient for the firms to stay in the
business.

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MONOPOLY

Monopoly is one of the market in the imperfect competition. The word Mono’ means single and Poly
means seller. Thus monopoly means single seller market.
In the words of Bilas “Monopoly is represented by a market situation in which there is a single seller
of a product for which there are no close substitutes, this single seller is unaffected by and does not
affect, the prices and outputs of other products sold in the economy”. Monopoly exists under the
following conditions.

1. There is a single seller of product.

2. There are no close substitutes.

3. Strong barriers to entry into the industry exist.

Features of monopoly :

1. There is no single seller in the market.

2. No close substitutes.

3. There is no difference between firm and industry.

4. The monopolist either fix the price or output.

PRICE OUT PUT DETERMINATION IN MONOPOLY

Under monopoly the average revenue curve for a firm is a downward sloping one. It is because, of the
monopolist reduces the price of his product, the quantity demanded increase and vice versa. In
monopoly, marginal revenue is less than the average revenue.

The monopolist always wants to maximize his profits. To achieve maximum profits, it is necessary
that the marginal revenue should be more than the marginal cost.

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‘OLIGOPOLY’

The term ‘Oligopoly’ is derived from two Greek word “Oligoi” meaning a few and “Pollein” means to
sell. Oligopoly refers to a market situation in which the number of sellers dealing in a homogeneous or
differentiated product is small. It is called competition among the few. The main features of oligopoly
are the following.

1. Few sellers of the product.

2. There is interdependence in the determination of price.

3. Presence of monopoly power.

4. There is existence of price rigidity.

5. There is excessive selling cost or advertisement cost.

MONOPOLISTIC COMPETITION.

It is a market with many sellers for a product but the products are different in certain respects. It is mid
way of monopoly and perfect competition. Prof. E.H. Chamberlin and Mrs. Joan Robinson pioneered
this market analysis.
Characteristics of Monopolistic competition :

1. Relatively small number of firms : The number of firms in this market are less than that of
perfect competition. No one should not control the output in the market as a result of high
competition.

2. Product differentiation : One of the features of monopolistic competition is product

differentiation. It take the form of brand names, trade marks etc. It cross elasticity of demand is
very high.

3. Entry and exit: Entry into the industry is unrestricted. New firms are able to commence
production of very close substitutes for the existing brands of the product.

4. Selling cost: Advertisement or sales promotion technique is the important feature of

Monopolitic competition. Such costs are called selling costs.

5. More Elastic Demand : Under this competition the demand curve slopes downwards from left
to the right. It is highly elastic.

Duopoly

When there are only two sellers of a product, there exist -duopoly. Each seller under duopoly must
consider the other firms reactions to any changes that he make in price or output. They make
decisions either independently or together.

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PRICING METHODS

Price

Price denotes the exchange value of a unit of good expressed in terms of money.

Price concepts

Price of a well-defined product varies over the types of the buyers, place it is received, credit sale or
cash sale, time taken between final production and sale, etc.

Cost Based Pricing

There are three versions of the cost – based pricing. Full – cost or break even pricing, cost plus pricing
and the marginal cost pricing. Under the first version, price just equals the average (total) cost. In
the second version, some mark-up is added to the average cost in arriving at the price. In the last
version, price is set equal to the marginal cost. While all these methods appear to be easy and
straight forward, they are in fact associated with a number of difficulties. Even through difficulties
are there, the cost- oriented pricing is quite popular today.

The cost – based pricing has several strengths as well as limitations. The advantages are its simplicity,
acceptability and consistency with the target rate of return on investment and the price stability in
general. The limitations are difficulties in getting accurate estimates of cost (particularly of the
future cost rather than the historic cost) Volatile nature of the variable cost and its ignoring of the
demand side of the market etc.

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Competition based pricing

Some commodities are priced according to the competition in their markets. Thus we have the going
rate method of price and the sealed bid pricing technique. Under the former a firm prices its new
product according to the prevailing prices of comparable products in the market.

Demand Based Pricing

The demand – based pricing and strategy – based pricing are quite related. The seller knows rather
well that the demand for its product is a decreasing function of the price its sets for product. Thus if
seller wishes to sell more he must reduce the price of his product, and if he wants a good price for
his product, he could sell only a limited quantity of his good. Demand oriented pricing rules imply
establishment of prices in accordance with consumer preference and perceptions and the intensity
of demand.

Two general types demand oriented pricing rules can be identified.

i. Perceived value pricing and

ii. Differential pricing

Perceived value pricing considers the buyer’s perception of the value of the product as the basis of
pricing. Here the pricing rule is that the firm must develop procedures for measuring the relative
value of the product as perceived by consumers. Differential pricing is nothing but price
discrimination. In involves selling a product or service for different prices in different market
segments. Price differentiation depends on geographical location of the consumers, type of
consumer, purchasing quantity, season, time of the service etc. E.g. Telephone charges, APSRTC
charges.

Strategy based pricing (new product pricing)

A firm which products a new product, if it is also new to industry, can earn very good profits it if
handles marketing carefully, because of the uniqueness of the product. The price fixed for the new
product must keep the competitors away. Earn good profits for the firm over the life of the product
and must help to get the product accepted. The company can select either skimming pricing or
penetration pricing.

Average cost pricing meaning

Average cost pricing is a pricing strategy in which a company sets the price of its product or service
based on the average cost of producing and distributing it, along with a desired profit margin.

Limit pricing
Limit pricing is a pricing strategy used by a dominant firm in a market to deter entry of new
competitors by setting a low price that makes it unprofitable for new firms to enter the market. The

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idea is that by setting a low price, the dominant firm can discourage potential entrants from entering
the market and thus maintain its market power.

Priority pricing can be a way for companies to increase revenue by charging customers who value
time and convenience more, while still offering a lower-priced option for those who are more price-
sensitive or willing to wait longer. However, it can also be controversial if customers perceive it as
unfair or discriminatory.

Market Skimming Pricing.

Market skimming pricing is a pricing strategy in which a company sets a high price for its product or
service when it is first introduced to the market. The goal of market skimming is to maximize profits
from the most eager buyers in the market, typically those who are willing to pay a premium for new
and innovative products.

Internet pricing meaning

Internet pricing refers to the various pricing strategies used by companies that sell products or services
online. The pricing strategies used on the internet can vary widely, and they often depend on the nature
of the product or service being sold, as well as the target market.

Flat rate pricing meaning with example

Flat rate pricing refers to a pricing strategy in which a single fixed price is charged for a particular
product or service, regardless of the quantity purchased or the length of time it is used. This type of
pricing can be attractive to customers because it provides a clear and predictable cost for a product or
service, without any surprises or fluctuations.

Usage sensitive pricing

Usage-sensitive pricing is a pricing strategy in which the price of a product or service is based on the
amount or frequency of its usage. This approach can help to ensure that customers only pay for what
they actually use, and can be particularly attractive to customers who have varying levels of usage or
who are looking for more flexible pricing options.

Factors affecting the choice of form of business organization

Before we choose a particular form of business organization, let us study what factors affect such a
choice? The following are the factors affecting the choice of a business organization:

1. Easy to start and easy to close: The form of business organization should be such that it
should be easy to close. There should not be hassles or long procedures in the process of
setting up business or closing the same.

2. Division of labour: There should be possibility to divide the work among the available
owners.

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3. Large amount of resources: Large volume of business requires large volume of resources.
Some forms of business organization do not permit to raise larger resources. Select the one
which permits to mobilize the large resources.

4. Liability: The liability of the owners should be limited to the extent of money invested in
business. It is better if their personal properties are not brought into business to make up the
losses of the business.

5. Secrecy: The form of business organization you select should be such that it should permit
to take care of the business secrets. We know that century old business units are still
surviving only because they could successfully guard their business secrets.

6. Transfer of ownership: There should be simple procedures to transfer the ownership to

the next legal heir.

7. Ownership, Management and control: If ownership, management and control are in the
hands of one or a small group of persons, communication will be effective and coordination
will be easier. Where ownership, management and control are widely distributed, it calls for
a high degree of professional’s skills to monitor the performance of the business.

8. Continuity: The business should continue forever and ever irrespective of the uncertainties
in future.

9. uick decision-making: Select such a form of business organization, which permits you to
take decisions quickly and promptly. Delay in decisions may invalidate the relevance of the
decisions.

10. Personal contact with customer: Most of the times, customers give us clues to improve
business. So choose such a form, which keeps you close to the customers.

11. Flexibility: In times of rough weather, there should be enough flexibility to shift from one
business to the other. The lesser the funds committed in a particular business, the better it
is.

12. Taxation: More profit means more tax. Choose such a form, which permits to pay low tax.

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TYPES OF BUSINESS ORGANIZATIONS
SOLE TRADER

The sole trader is the simplest, oldest and natural form of business organization. It is also called
sole proprietorship. ‘Sole’ means one. ‘Sole trader’ implies that there is only one trader who
is the owner of the business.

This form of organization is popular all over the world. Restaurants, Supermarkets, pan shops,
medical shops, hosiery shops etc.

Features
 It is easy to start a business under this form and also easy to close.
 He introduces his own capital. Sometimes, he may borrow, if necessary
 He enjoys all the profits and in case of loss, he lone suffers.
 He has unlimited liability which implies that his liability extends to his personal
properties in case of loss.
 He has a high degree of flexibility to shift from one business to the other.
 Business secretes can be guarded well
 There is no continuity. The business comes to a close with the death, illness or
insanity of the sole trader. Unless, the legal heirs show interest to continue the
business, the business cannot be restored.
 He has total operational freedom. He is the owner, manager and controller.
 He can be directly in touch with the customers.
 He can take decisions very fast and implement them promptly.
 Rates of tax, for example, income tax and so on are comparatively very low.

Advantages

The following are the advantages of the sole trader from of business organization:

1. Easy to start and easy to close

2. Personal contact with customers directly.
3. Prompt decision-making
4. High degree of flexibility.
5. Secrecy
6. Low rate of taxation
7. Direct motivation
8. Total Control

Disadvantages

The following are the disadvantages of sole trader form:

1. Unlimited liability
2. Limited amounts of capital
3. No division of labour
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 4. Uncertainty
5. Inadequate for growth and expansion
6. Lack of specialization
7. More competition

PARTNERSHIP

Partnership is an improved from of sole trader in certain respects. Where there are like-minded
persons with resources, they can come together to do the business and share the profits/losses
of the business in an agreed ratio. Persons who have entered into such an agreement are
individually called ‘partners’ and collectively called ‘firm’. The relationship among partners
is called a partnership.

Partnership defines as the relationship between two or more persons who agree to share the
profits of the business carried on by all or any one of them acting for all.

Features
1. Relationship
2. Two or more persons. There should be a business
3. Agreement
 Carried on by all or any one of them acting for
 Unlimited liability
 Number of partners:
 10 partners is case of banking business
20 in case of non-banking business
(a) Division of labour
(b) Personal contact with customers
(c) Flexibility

KIND OF PARTNERS

1. Active Partner
2. Sleeping Partner
3. Nominal Partner
4. Partner by Estoppels
5. Partner by holding out\
6. Minor Partner

Advantages

1. Easy to form
2. Availability of larger amount of capital
3. Division of labour
4. Flexibility
5. Personal contact with customers
6. Quick decisions and prompt action
7. The positive impact of unlimited liability
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 Disadvantages:

1. Formation of partnership is difficult

2. Liability
3. Lack of harmony or cohesiveness
4. Limited growth
5. Instability
6. Lack of Public confidence

JOINT STOCK COMPANY

The joint stock company emerges from the limitations of partnership.

The word ‘ company’ has a Latin origin, com means ‘ come together’, pany means ‘ bread’, joint
stock company means, people come together to earn their livelihood by investing in the stock
of company jointly.

Features
1. Artificial person
2. Separate legal existence
3. Voluntary association of persons
4. Limited Liability
5. Capital is divided into shares
6. Transferability of shares
7. Common Seal
8. Perpetual succession
9. Ownership and Management separated
10. Winding up
11. The name of the company ends with ‘limited’

Advantages

1. Mobilization of larger resources

2. Separate legal entity
3. Limited liability
4. Transferability of shares
5. Liquidity of investments
6. Inculcates the habit of savings and investments
7. Democracy in management
8. Economics of large scale production
9. Continued existence
10. Institutional confidence
11. Professional management
12. Growth and Expansion

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 Disadvantages

1. Formation of company is a long drawn procedure

2. High degree of government interference
3. Inordinate delays in decision-making
4. Lack or initiative
5. Lack of responsibility and commitment
6. Lack of responsibility and commitment

PUBLIC ENTERPRISES
Public enterprises occupy an important position in the Indian economy. Today, public enterprises
provide the substance and heart of the economy. Its investment of over Rs.10,000 crore is in heavy and
basic industry, and infrastructure like power, transport and communications.

Features of Public Enterprises

1. Under the control of a government department : The departmental undertaking is not an

independent organization. It has no separate existence. It is designed to work under close control
of a government department. It is subject to direct ministerial control.

2. More financial freedom: The departmental undertaking can draw funds from government
account as per the needs and deposit back when convenient.

3. Like any other government department: The departmental undertaking is almost similar to
any other government department

4. Budget, accounting and audit controls: The departmental undertaking has to follow guidelines
(as applicable to the other government departments) underlying the budget preparation,
maintenance of accounts, and getting the accounts audited internally and by external auditors.

5. More a government organization, less a business organization . The set up of a departmental

undertaking is more rigid, less flexible, slow in responding to market needs.

Advantages of Public Enterprises

1. Effective control: Control is likely to be effective because it is directly under the Ministry.

2. Responsible Executives: Normally the administration is entrusted to a senior civil servant. The
administration will be organized and effective.

3. Less scope for mystification of funds : Departmental undertaking does not draw any money
more than is needed, that too subject to ministerial sanction and other controls. So chances for
mis-utilisation are low.

4. Adds to Government revenue: The revenue of the government is on the rise when the revenue
of the departmental undertaking is deposited in the government account.

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 Disadvantages of Public Enterprises

1. Decisions delayed: Control is centralized. This results in lower degree of flexibility. Officials in
the lower levels cannot take initiative. Decisions cannot be fast and actions cannot be prompt.

2. No incentive to maximize earnings: The departmental undertaking does not retain any surplus
with it. So there is no inventive for maximizing the efficiency or earnings.

3. Slow response to market conditions: Since there is no competition, there is no profit motive;
there is no incentive to move swiftly to market needs.

4. Redtapism and bureaucracy: The departmental undertakings are in the control of a civil
servant and under the immediate supervision of a government department. Administration gets
delayed substantially.

5. Incidence of more taxes: At times, in case of losses, these are made up by the government
funds only. To make up these, there may be a need for fresh taxes, which is undesirable.
PUBLIC CORPORATION

Definition

A public corporation is defined as a „body corporate create by an Act of Parliament or Legislature

and notified by the name in the official gazette of the central or state government. It is a corporate entity
having perpetual succession, and common seal with power to acquire, hold, dispose off property, sue and be
sued by its name”.

Examples of a public corporation are Life Insurance Corporation of India, Unit Trust of India,
Industrial Finance Corporation of India,.
Features of Public Corporation

1. A body corporate: It has a separate legal existence. It is a separate company by itself. If can
raise resources, buy and sell properties, by name sue and be sued.

2. More freedom and day-to-day affairs: It is relatively free from any type of political
interference. It enjoys administrative autonomy.

3. Freedom regarding personnel: The employees of public corporation are not government civil
servants. The corporation has absolute freedom to formulate its own personnel policies and
procedures, and these are applicable to all the employees including directors.

4. Perpetual succession: A statute in parliament or state legislature creates it. It continues forever
and till a statue is passed to wind it up.

5. Financial autonomy: Through the public corporation is fully owned government organization,
and the initial finance are provided by the Government, it enjoys total financial autonomy, Its
income and expenditure are not shown in the annual budget of the government, it enjoys total
financial autonomy. Its income and expenditure are not shown in the annual budget of the
government. However, for its freedom it is restricted regarding capital expenditure beyond the
laid down limits, and raising the capital through capital market.

6. Commercial audit: Except in the case of banks and other financial institutions where chartered

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 accountants are auditors, in all corporations, the audit is entrusted to the comptroller and auditor
general of India.

7. Run on commercial principles: As far as the discharge of functions, the corporation shall act as
far as possible on sound business principles.

Advantages of Public Corporation

1. Independence, initiative and flexibility: The corporation has an autonomous set up. So it is
independent, take necessary initiative to realize its goals, and it can be flexible in its decisions as
required.

2. Scope for Redtapism and bureaucracy minimized : The Corporation has its own policies and
procedures. If necessary they can be simplified to eliminate redtapism and bureaucracy, if any.

3. Public interest protected: The corporation can protect the public interest by making its policies
more public friendly, Public interests are protected because every policy of the corporation is
subject to ministerial directives and board parliamentary control.

4. Employee friendly work environment: Corporation can design its own work culture and train
its employees accordingly. It can provide better amenities and better terms of service to the
employees and thereby secure greater productivity.

5. Competitive prices: the corporation is a government organization and hence can afford with
minimum margins of profit, It can offer its products and services at competitive prices.

6. Economics of scale: By increasing the size of its operations, it can achieve economics of large-
scale production.

7. Public accountability: It is accountable to the Parliament or legislature; it has to submit its

annual report on its working results.

Disadvantages of Public Corporation

1. Continued political interference: the autonomy is on paper only and in reality, the continued.

2. Misuse of Power: In some cases, the greater autonomy leads to misuse of power. It takes time to
unearth the impact of such misuse on the resources of the corporation. Cases of misuse of power
defeat the very purpose of the public corporation.

3. Burden for the government: Where the public corporation ignores the commercial principles
and suffers losses, it is burdensome for the government to provide subsidies to make up the
losses.

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