KINDS OF MARKETS ACCORDING TO COMPETITION

KINDS OF MARKETS ACCORDING TO COMPETITION

      (A) PERFECT COMPETITION

      (B) IMPERFECT COMPETITION

(A) PERFECT COMPETITION

     In order for Perfect competition to prevail in the market, the following six pre-conditions have to be satisfied.

1.      Homogeneous products: This means that the products are to be perfectly identical substitutes for one another. Under price competition the consumers accept the product being produced by numerous firm as to be the same. Being perfect substitutes for one another, it results in cross elasticity being identify. This also means that their prices are practically equal. Therefore, if a seller raises the price of his product even by Re. 1, he will lose all his customers.

2.      Large number of buyers and sellers: Another characteristic of pure/perfect competition is the existence of a large number of buyers and sellers in the market. This means no individual buyer or seller will be able to curtail the market price, due to the fact that the output of a single firm is only a small proportion of the total output and total demand. “thus, the market price is a parameter to be acted to and not a variable to be determined.”

3.      Free exit or entry of firms in the industry: If this condition was to be met, all firms in the industry would be earning normal profits. If suddenly the profit becomes more than normal, it will result in new firms joining in and thus extra profit will diminish. Then again, if profit were to decline, it would result in the exit of a few firms and thus the remaining firms will benefit from this in the sense that profit returns to its normal situation. However, if there were to be restrictions on entry of new firms, existing firms will obtain enormous profit.

4.      Perfect knowledge of the market: buyers as well as sellers must have perfect knowledge of the market. Both must take into account the prevailing price in the market. Ignorance of this fact will lead to buyers paying unnecessarily and demanding unusual amounts of a product and the seller will tend to charge high prices and giving less than the usual amount necessitated.

5.      Free mobility of factors of production: the producer must always maintain an equilibrium position in production. forces of demand and supply determine this factor, e.g., if supply exceeds demand, a few factors have to reduce their output and if it were to be vice-versa, then additional factors would have to be brought in to compensate for the declining ones

6.      Free operation of demand and supply: The forces, demand and supply, cannot and must not be restricted, e.g., in the case of demand for a product, a consumer must not restrict himself to a typical product. Just for the sake of patriotic influence etc. A consumer must not be restricted or even overloaded as the price of a product depends on it and a product cannot simply become expensive due to the fact the producer suspends further supply.