7/18/2019 economics Notes

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Our market structure is not perfectly competitive and there are many impurities. Prices

are determined by the market forces of demand and supply but in real life market prices

can be inuenced by each of the market force. Buyers always try to buy at lower price

and sellers always try to charge high prices. If buyers have more control over the market

then they are going to pay less. If the sellers are in control, they going to charge a higher

price.

A buyer always decides what price should be paid by looking at his desire to buy and hisability to pay. A buyer compares the price with the satisfaction he is going to derive from

the product. If price is higher than the satisfaction, he is going to buy less. If price is

lower than the satisfaction, he is going to buy more.

A seller always compares the price oered with the cost of production. If price is higher

than the cost, he is earning pro!t which is ultimate ob"ective of a seller. If price oered is

lower than the cost, producer might not be willing to supply. In some cases producer may

sell even at a price which is lower than the cost if he is e#pecting prices to fall further.

A market is considered perfectly competitive if there is large number of sellers and

buyers are operating. $o one has enough control to inuence the market trend or the

market price. %ellers are known as price takers as individual !rms can not inuence the

market price. &emand for the product is perfectly elastic because product produced is

perfect substitute of each other and consumers are indierent between dierent

products. 'here is free entry and e#it and buyers are having perfect knowledge of the

market. Perfect completion is rare in real life but agriculture sector is near to most of the

features of this market.

Perfect competition is rare in the real life and markets are imperfect. If there is only one

seller or one seller is dominating the market, this is known as monopoly. (nder thissituation seller is a price maker as buyers do not have any close substitutes so demand

for the product is price inelastic. Buyers have imperfect knowledge so they can be

e#ploited by the seller. Price charged is higher than the price charged in perfect

competition and seller earns super pro!ts. )onopoly is considered economically

ine*cient and causes dead weight loss because price charged is way higher than the

opportunity cost. +AP&A and PA -ailways are e#ample of monopoly.

 'here can be a market situation where there is only one buyer and many sellers willing

and able to supply, this is known as monopsony. $ormally this situation prevails in labour

market where in some occupations many workers are willing to provide their services butthere is only one !rm or authority of hire them. In this market structure buyer is in

control and setting the price he wants to pay so buyer is price makers and normally sets

the price which is lower than the market price. 'his system is also economically

ine*cient. $ational basket ball association and national football league are the e#amples

of monopsony.

Bilateral monopoly is a market situation where there is only one buyer and one seller. In

this situation price is not determined only by the sellers. It is determined by the skills of

negotiations, bargaining power and who has more information.

7/18/2019 economics Notes

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overnment can also inuence the market functioning and price by setting ma#imum

price, minimum price, imposing ta#es or by providing subsidies. %ellers and buyers can

also get inuenced by factors such as foreign trade, e#change rates, and current aairs,

political and economic situations. overnment also tries to encourage competition and

discourage monopolies and cartels buy /passing laws and regulations.