Managerial

Economics
Unit - 2
By - Anand Kumar

Unit - 2
Product Markets Market Structure,
Competitive
market,
Imperfect
competition and barriers to entry,
Pricing in different markets Recourse
Markets Pricing and Employment of
inputs
under
different
market
structures,
Wages
and
wage
differentials.

Market
The term market has come to signify a
public place in which goods and
services are bought and sold. It is the
act or technique of buying and selling.
Market defines, any area over which
buyers and sellers are in such close
touch with one another, either directly
or through dealers, that the prices
obtainable in one part of the market
affect the prices paid in other parts.

Market
Therefore, market in economic sense
implies:
1. Presence of buyers and sellers
(Producers) of the commodity
2. Establishment of contract between
the buyers and sellers
3. Similarity of the product
4. Exchange of commodity for a price

Classification of
Markets
1. Markets on the basis of Area
2. Markets on the basis of Time
3. Markets on the basis of Nature of
Transactions
4. Markets on the basis of Regulation
5. Markets on the basis of Volume of
Business
6. Market on the basis of Position of Sellers
7. Market on the basis of type of
Competition

1. Markets on the
of Area
On basis
the basis
of geographical

area
covered, markets are classified into (a)
Local Markets, (b) Regional Markets, (c)
National Markets, and (d) International
Markets. A local market for a product
exists when buyers and sellers carry on
business in a particular locality or village
or area where demand and supply
conditions are influenced by local
condition only.

2. Markets on the
basis
of Time
Alfred
Marshall
conceived

the Time
element in marketing and this is
classified into (a) Very short-period
market; (b) Short-period market; (c)
Long-period market; and (d) Very longperiod or Secular market.

3. Markets on the basis of

Nature of Transactions

On the basis of nature of transactions,

markets are classified into (a) Spot
market; and (b) Future market. Spot
transaction or spot markets refer to
those
markets
where
goods
are
physically transacted on the spot,
whereas Future markets related to those
transactions which involve contracts of
the future date.

4. Markets on the basis of

Regulation

On the basis
of regulation, markets are
classified into (a) Regulated market; and (b)
Unregulated market. In the former type of
markets transactions are statutorily regulated
so as to put an end to unfair practices. Such
markets may be established for specific
products or a group of products. Produce and
stock exchanges are suitable examples of the
regulated markets. Unregulated markets or
free markets are those where there are no
restrictions in the transactions.

5. Markets on the basis of

Volume of Business

Based on the volume of business transacted,

markets are classified into Wholesale market
and Retail market. The wholesale market
comes into existence when the commodities
are bought and sold in bulk or large
quantities. The dealers in this market are
known as the wholesalers. The wholesaler
acts as an intermediary between the
producer and the retailer. Retail market, on
the other hand exists when the commodities
are bought and sold in small quantities. This
is the market for ultimate consumers.

6. Market on the basis of

Position of Sellers

On the basis of the position of the sellers in

the chain of marketing, markets are divided
into Primary market, Secondary market and
the Terminal market.
Manufacturers of
commodities constitute the primary market
who sell the products to the wholesalers.
The
secondary
market
consists
of
wholesalers who sell the products in bulk to
the retailers. Retailers along constitute the
terminal markets who sell the products to
the ultimate consumers.

7. Markets on the basis of type

of Competition

Based on the type of competition,

markets are classified into (a) Perfectly
Competitive market; and (b) Imperfect
market. The broad classification is Perfect
Competition and Imperfect Competition.
The opposite type of perfect market is
Monopoly. Under imperfect markets,
there are many types, viz., oligopoly,
Duopoly, Monopolistic competitions, etc.
We shall study about the types of
competition in greater detail.

Competitions
Competition in business connotes the
presence of more than one seller and
one buyer in a particular market. In
competitive
markets
sellers
act
independently of other buyers. It is
incompatible with those conditions of
market where there is only one seller or
one buyer. So, the presence of more
than one buyer and one seller is a
necessary
pre-condition
for
the
existence of competitions.

Types of Competition
1. Perfect Competition and Pure
Competition
2. Imperfect Competition
a. Monopolistic Competition
b. Oligopoly Competition
3. Monopoly Competition

Competition

Perfect Competition
Large number of
small firms

Oligopoly
A few large firms
dominate the
industry

Monopoly
One firm comprises
the whole industry

1. Perfect Competition
A perfectly competitive market is
one in which economic forces operate
unimpeded.

Perfect Competition
Perfect competition is a firm behavior
that occurs when many firms produce
identical products and entry is easy.
Characteristics of perfect competition:
There are many sellers.
The products sold by the firms in the
industry are identical.
Entry into and exit from the market are
easy, and there are many potential entrants.
Buyers (consumers) and sellers (firms) have
perfect information.

Features of Perfect
Competition
1. Large number of buyers and Sellers
2. Homogeneous Products
3. Free entry and exit conditions
4. Perfect knowledge on the part of
buyers and sellers
5. Perfect mobility of factors of
production
6. Absence of transport cost
7. Absence of Government or artificial
restrictions

Imperfect Competition
Number of
firms

Monopolistic
Competition

Oligopoly

Monopoly

Many, but
not too
many
Few

One

Ability to
affect
price

Entry
barriers

Example

Small

None

Corner
Shop

Medium

Some

Large

Huge

Cars

Post Office

Imperfect Competition
Imperfectly Competitive Firms
Have some control over price
Price may be greater than the cost of
production
Long-run economic profits are possible

Monopoly
Monopoly
is
the
form
of
market
organization in which there is a single firm
selling a commodity for which no close
substitutes. - D. Salvatore
The price is under the full control of the
monopolist but not the demand is
determined by purchasers.

Characteristics of
Only one seller in market and large number
Monopoly
of

buyers.
No Close Substitutes
Product totally differentiated
No free entry or exit/ Barriers to Entry.
Full Control over price
Price discrimination (different price to different

Consumer)

Imperfect information
Where a perfectly competitive firm is a
price taker, the monopolist is a price searcher.

Monopolistic Competition

Monopolistic competition refers to market situation

where there are many firms selling a differentiated
products. There is
competition which is keen,
through not perfect, among many firms making very
similar products
Monopolistic competition is a market structure where
there is large number of small sellers, selling
differentiated but close substitute products - J.S
Bains
The term monopolistic completion refers to the
market structure in which the sellers do have a
monopoly (they are the only sellers) of their own
product, but they are also subjects to substantial
competitive pressures from sellers of substitute
products. - Baumol

Features of Monsopolistic
1. Existence of large number (but not too
many large) of firms
2. Product Differentiation
3. Selling Cost
4. Freedom of entry and exit of firms

Oligopoly
A market with a few sellers./A few large
firms
The essence of an oligopolistic industry
is the need for each firm to consider how
its own actions affect the decisions of its
relatively few competitors.
A few large firms
Products standardized or differentiated
Difficult entry
Knowledge not available to all firms

Price Policy
Formulating price policies and setting the
price are the most important aspects of
managerial decision-making. Price, infact, is
the source of revenue which the firms seeks
to maximise. Again, it is the most important
device a firm can use to expand its market.
If the price is set too high, a seller may price
himself out of the market. If it is too low, his
income may not cover costs, or at best, fall
short of what it could be. However, setting
prices is a complex problem and there is no
cut and dried formula for doing so.

Factors influence Price of a

Commodity
1.
2.
3.
4.
5.

The demand for a commodity

Cost of production
Objectives of the firm
Competition and
Governments policy

Objectives of Price of a
firm
1. Achieving a target rate of return
2.
3.
4.
5.
6.

on

investment
Accomplishing the target rate of growth
Maintaining and improving the market
share
Maintaining the prestige of the firm
Enhancing the goodwill of the company
Stabilising the prices

Price & Output

Determination
under
In perfect competition, there are large
of
buyers andCompetition
sellers and, we have
Perfect

number
studied
already that the actions of individual buyers and
sellers cannot influence the market price. The
prevailing price of the product in the market is
taken for granted.
The buyers have to make the outlay guided by
the price. Similarly the producers have to supply
guided by the price. But, how the price in the
market has been arrived at? Price under perfect
competition is determined by the interaction of
two faces, viz., demand and supply.

Price & Output

Determination under
Though individuals cannot change
Perfect
Competition
price, the aggregate force of demand

the
and
supply can change the price. The demand
side is governed by the law of demand
based on marginal utility of the commodity
to the buyers. The supply side is governed
by the cost of the production. The law of
supply operates.
The interaction of
demand and supply determines the price of
the commodity.

Price & Output

Determination under
We have studied earlier that Monopoly is a
Monopoly
market structure where there is only one seller
and there is no threat of competition and as such
the monopoly producer is a price-maker. He can
exercise sufficient control over price or output in
order to earn maximum net monopoly revenue.
Under monopoly, there is no distinction between
the firm and industry. The firm and industry
coincide by definition. The monopoly firm partakes
all the characteristics of an industry. Therefore,
the output of the monopoly firm is compared with
that of the industry under pure competition.

Price & Output

Determination under
It would be a mistake to suppose that the
Monopoly
monopolist will always push up his prices
higher and higher. If he does so, he must
consider the effect of such a procedure on
demand which will shrink as prices rise. The
very important point to be borne in mind is
that unlike competitive firm, a monopolist firm
will have a sloping down demand curve and
his average revenue will dwindle, as the
output is increased, because the buyers will
take up large quantities only at a lower price.

Price & Output

Determination under
Prices once established in oligopolistic industries,
Oligopoly
often tend to remain constant not only for months,
but also for years. The quoted wholesale price of
such a commodity remains unchanged for a long
period. However it should be remembered that
the constancy of prices is different from the
rigidity of prices. The former indicates that prices
do not change with changes in demand and costs.
The latter indicates the lack of movement when
changes occur in demand or in costs or in both.
The kinky demand curve offers better explanation
of price rigidity under oligopoly.

Concept of Price
Discrimination
A monopolist is in a position to fix the price of
his product. He enjoys the control of supply of
the product. A monopolist is able to charge
different price for his products to the different
customers.
This
is
known
as
price
discrimination.
According to Mrs. John Robinson, the act of
selling the same article, produced under
single control at different prices to different
buyers is known as price discrimination. This
is also known as differential pricing

Pricing Methods
1. Cost-Plus or Full-Cost Pricing Method
2. Target Pricing or Pricing for a rate of
return
3. Marginal Cost Pricing
4. Going-Rate Pricing
5. Customary Pricing
6. Differential Pricing

1. Cost-Plus or Full-cost
The
Full-Cost Pricing method is generally
Pricing

adopted by many of the firms for simple and

easy procedure. This method is also called
Cost-plus pricing, margin pricing and Mark-up
pricing. Under this method, the price is set to
cover all costs (material, labour and overhead)
and a predetermined percentage for profit.
This means the selling price of the product is
computed by adding a certain percentage to
the average total cost of the product.

2. Target Pricing or Pricing

for a rate of return

This method of pricing is only a refinement of the

full-cost pricing. According to this method, the
manufacturer considers a pre-determined target
rate of return on capital investment. In the case
of full-cost pricing, the percentage of profit is
marked up arbitararily. In the case of rate of
return method, the companies determine the
average make-up on costs necessary to produce
a desired rate of return on the companys
investment. In this case the company estimates
future sales, future costs, and arrives at a markup that will achieve a target return on the
companys investment.

3. Marginal Cost Pricing

In the first two methods, i.e., full-cost pricing
and the rate of return pricing, prices are fixed
on the basis of total costs comprising of fixed
costs and variable costs. Under marginal pricing
method, the price of a product is determined on
the basis of the marginal or variable costs. In
this method fixed costs are totally ignored and
only variable costs are taken into account. This
is done on the assumption that fixed costs are
caused by outlays which are historical and sunk.
Their relevance to pricing decision is limited, as
pricing decision requires planning the future.

4. Going-Rate Pricing
This method of pricing conforms with the
system of pricing in oligopoly where a firm
initiates price changes and the other firms in
the industry merely follow the pattern set by
the leader. Other firms accept the leadership.
The emphasis here is on the market. Firms
make necessary price adjustment to suit the
general price structure in the industry. Hence
this going-rate pricing method is also called
Acceptance-pricing.
Normally,
under
this
method, the industry tries to determine the
lowest price that the seller can afford to accept
considering various alternatives.

5. Customary Pricing
Prices of certain goods become more or less fixed
for a considerable period of time, not by
deliberate action on the sellers part, but as a
result of their having prevailed for a considerable
period of time. Only when the costs change
significantly, the customary prices of these goods
are changed. While changing the customary
price, it is necessary to study the pricing policies
and practices adopted by the competing firms.
Another approach is to effect price change only in
a limited market segment and know the customer
reaction to decide whether any change would be
digested by the market.

6. Differential Pricing
Implementation of a marketing strategy to reach
a particular sector of the market through price
differentials.
Market differential prices help in achieving
profitable market segmentation when legal and
competitive
considerations
permit
price
discrimination
Market expansion: Differential pricing may be
designed to encourage new uses or to attract new
customers.
Competitive Adaption: Differential prices are
major device for selective adjustment to
competitive situation.

Market Structure and Pricing

Decisions
1. Price
Determination
Under
Perfect
Competition
2. Price Determination Under Pure Monopoly
3. Monopoly Pricing and Output Decision in the
Long-Run

1. Price Determination Under

Perfect
Competition
In a perfectly competitive market, commodity prices are
determined by the market forces of demand and supply. In other
words, market prices are determined by the market demand and
market supply, where the market demand refers to the industry
demand as a whole: this is the sum of quantity demanded by each
individual consumer or user of the product at different prices.
Similarly, market supply is the sum of quantity supplied by
individual firms in the industry. The market price is determined for
the industry and the individual firms and consumers take the
market price as given. This is the reason sellers under a perfectly
competitive market is referred to as price takers.
The determination of commodity as well as services price under
perfectly-competitive conditions are often analysed under three
different time periods:
(i) the market period or very short-run;
(ii) short-run; and
(iii) long-run.

2. Price Determination Under

Pure Monopoly
The term pure monopoly connotes absolute
power to produce and sell a product with no
close substitute. A monopoly market is one in
which there is only on seller of a product having
no close substitute. The cross-elasticity of
demand for a monopolists product is either zero
or negative. A monopolized industry refers to a
single-firm industry.

3. Monopoly Pricing and

Output Decision in the LongThe
Rundecision rules guiding optimal output and
pricing in the long-run is same as in the short-run.
In the long-run however, a monopolist gets an
opportunity to expand the size of its firm with the
aim of enhancing the long-run profits. Expansion
of the plant size may, however, be subject to
such conditions as:
(a) the market size;
(b) expected economic profit; and,
(c) risk of inviting .

Risk And Uncertainty

Entrepreneur is always working under uncertainty
and has to bear risks. In economic parlance profit is
considered as a reward for risk taking. Only when an
entrepreneur understands the nature of risks he can
secure himself from the risks and uncertainty.
Certainty is what is prevalent today and we can see
or realize it., But uncertainty is a situation where
one is unsure of what will happen tomorrow. For
instance even the meteorological department may
not be a able to say with any amount of certainty
when the south west monsoon, will set in and how
much rain fall it may bring. Therefore the managers
will have to safeguard institutions by making
sufficient precautions the measures.

RESOURCE MARKET
A market used to exchange the services of resources
labour, capital, and natural resources. The value of
services exchanged through resource markets each year
is measured as national income. Compare financial
market, product market.
Markets that exchange the services of the four factors of
production-labour, capital, land, and entrepreneurship.
The buyer of factor services is business sector. The seller
of these services is the household sector. The study of
macroeconomics is concerned with imbalances in the
resource markets, especially surpluses and the resulting
unemployment of resources. The resource markets, also
termed factor markets, are one of three primary sets of
macroeconomic markets. The other two are product
markets and financial markets.

WAGES
The term wages means payments made for the
services of labour. A wage may be as a sum of
money paid under contract by an employer to a
worker for services rendered.
A wage is a form of remuneration paid by an
employer to an employee calculated on some
piece or unit basis. Compensation in terms of
wages is given to workers and compensation in
terms of salary is given to employees.
Compensation is a monetary benefit given to
employees in return for the services provided by
them.

NOMINAL WAGES
The term 'nominal wage', however, simply refers
to the amount of money that a worker may be
getting. Ineconomicsanominal valueis an
economicvalueexpressed in historical nominal
monetary terms. This term is used in contrast to
nominalwages or unadjusted wages.

REAL WAGES
Real wage refers to the purchasing power or
buying capacity of money wage. It is the amount
of necessaries, comforts, and luxuries which the
worker can command in return for his
remuneration. Thus real wage is expressed in
terms of goods and services. It is the amount of
goods and services or benefits that a worker
enjoys against of his job. The real wage is said to
be high when a laborer obtains larger quantity of
goods and services with his money income.

FACTORS
INFLUENCING
REAL WAGE
1.
2.
3.
4.
5.
6.
7.
8.
9.

Purchasing Power of Money

Additional Facilities
Extra Income
Conditions of Work
Nature of Job
Future Prospects
Social Prestige
Occupational Expenses
Timely Payment

ON

WAGE DIFFERENTIALS
While analysis of the general wage level is
important for comparing different countries and
times, we often want to understand wage
differentials. In practice, wage rates differ
enormously. The average wage is as hard to
define as the average person.
There are major differences in earnings among
broad industry groups. Sectors with small firms
such as farming, retail trade, or private
households tend to pay low wages, while the
larger firms in manufacturing pay twice as much.

WAGE DIFFERENTIALS
But within major sectors there are large variations
that depend on worker skills and market
conditions-fast-food workers make much less than
doctors even though they all provide services.
There has to be a difference in the wage of
men/women in the same organization/firm based
on their work experience and rank. It is essential
to maintain a wage difference to indicate that
with more wage come more responsibility in the
organization/firm.

CAUSES
WHICH
CREATE
DIFFERENCES
IN
WAGES
IN
DIFFERENT EMPLOYMENTS
1.
2.
3.
4.
5.
6.
7.
8.

Difference in efficiency
Future Prospects
Collective Bargaining
Sex
Firm size
Occupation
Age
Education