Market generally means a place or a geographical area, where buyers with money and sellers with their goods meet to exchange goods for money. In Economics market refers to a group of buyers and sellers who involve in the transaction of commodities and services.
1. Existence of buyers and sellers of the commodity.
2. The establishment of contact between the buyers and sellers. Distance is of no consideration if buyers and sellers could contact each other through the available communication system like telephone, agents, letter correspondence and Internet.
3. Buyers and sellers deal with the same commodity or variety. Since the market in economics is identified on the basis of the commodity, similarity of the product is very essential.
4. There should be a price for the commodity bought and sold in the market.
Based on the extent of the market for any product, markets can be classified into local regional, national and international markets.
A local market for a product exists when buyers and sellers of commodity carry on business in a particular locality or village or area where the demand and supply conditions are influenced by local conditions only. E.g. Perishable goods like milk and vegetables and bulky articles like bricks and stones.
When commodities are demanded and supplied throughout the country, there is national market e.g. wheat, rice or cotton
Commodities that are demanded and supplied over a region have regional market.
When demand and supply conditions are influenced at the global level, we have international market. e.g. gold, silver, cell phone etc.
On the basis of demand and supply, this geographical classification is made. With improved transport facilities and communications, even goods of local markets can become international goods.
Marshall classified market based on the time element. In economics 'time' does not mean clock time. It means only the division of time based on extent of adjustability of supply of a commodity for a given change in its demand. The major divisions are very short period, short period and long period.
Very short period refers to the type of competitive market in which the supply of commodities cannot be changed at all. So in a very short period, the market supply is perfectly inelastic. The price of the commodity depends on the demand for the product alone. The perishable commodities like flowers are the best example.
Short period refers to that period in which supply can be adjusted to a limited extent by varying the variable factors alone. The short period supply curve is relatively elastic. The short period price is determined by the interaction of the short-run supply and demand curves.
Long period is the time period during which the supply conditions are fully able to meet the new demand conditions. In the long run, all (both fixed as well as variable) factors are variable. Thus the supply curve in the long run is perfectly elastic. Therefore, it is the demand that influences price in the long period.
These markets are classified according to the number of sellers in the market and the nature of the commodity. The classification of market according to competition is as follows.
Perfect competition is a market situation where there are infinite number of sellers that no one is big enough to have any appreciable influence over market price.
1. Large number of buyers and sellers
There are a large number of buyers and sellers in a perfect competitive market that neither a single buyer nor a single seller can influence the price. The price is determined by market forces namely the demand for and the supply of the product. There will be uniform price in the market. Sellers accept this price and adjust the quantity produced to maximise their profit. Thus the sellers inthe perfect competitive market are price- takers and quantity adjusters.
1. Homogeneous Product
The products produced by all the firms in the perfectly competitive market must be homogeneous and identical in all respects i.e. the products in the market are the same in quantity, size, taste, etc. The products of different firms are perfect substitutes and the cross-elasticity is infinite.
2. Perfect knowledge about market conditions
Both buyers and sellers are fully aware of the current price in the market. Therefore the buyer will not offer high price and the sellers will not accept a price less than the one prevailing in the market.
3. Free entry and Free exit
There must be complete freedom for the entry of new firms or the exit of the existing firms from the industry. When the existing firms are earning super-normal profits, new firms enter into the market. When there is loss in the industry, some firms leave the industry. The free entry and free exit are possible only in the long run. That is because the size of the plant cannot be changed in the short run.
4. Perfect mobility of factors of production
The factors of productions should be free to move from one use to another or from one industry to another easily to get better
remuneration. The assumption of perfect mobility of factors is essential to fulfil the first condition namely large number of producers in the market.
5. Absence of transport cost
In a perfectly competitive market, it is assumed that there are no transport costs. Under perfect competition, a commodity is sold at uniform price throughout the market. If transport cost is incurred, the firms nearer to the market will charge a low price than the firms far away. Hence it is assumed that there is no transport cost.
6. Absence of Government or artificial restrictions or collusions
There are no government controls or restrictions on supply, pricing etc. There is also no collusion among buyers or sellers. The price in the perfectly competitive market is free to change in response to changes in demand and supply conditions.
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