Market, Privatisation and Globalisation

7/28/2019 Market, Privatisation and Globalisation

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MAIN FORMS OF MARKET,

PRIVATISATION &

GLOBALISATION

ENGINEERING

ECONOMICS


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ENGINEERING ECONOMICS

MAIN FORMS OF MARKET,PRIVATISATION &GLOBALISATION

2What is Market?

In Economics, the term market is used in a special sense. In the Ordinary language the term

market means a particular place where buyers and sellers meet each other and buy and sell the

commodities.

Definitions

(1) In the words of Cournot, Economics understand by the term market not any particularmarket place in which things are bought and sold but the whole of any region in which

buyers and sellers are in such free intercourse with each other that the price of same good

tends to equality easily and quickly.

(2) In the words of Prof. Chapman, The term market refers not necessarily to a place butalways to a commodity and the buyers and the sellers who are in direct competition with

one another.

(3)According to Prof. J.C.Edwards, A market is that mechanism by which buyers and sellersare brought together. It is not necessarily a fixed price.

Main Features of Market

The above definitions underline the following features of the market.

(1)Area: Market in economics does not mean any particular place where buyers and sellersmeet; rather it means the entire area over which buyers and sellers are spread and have

close contact with one another.

(2)Buyers and Sellers: Both buyers and sellers are needed in the market. If one of the twodoes not exist in any region, it will not be called a market. It is not necessary that buyers

and sellers be physically present to bargain or transact business.

(3)One Commodity: In Economics, every commodity has its own market, e.g., wheatmarket, sugar market etc. As many commodities, so many markets.

(4)Free Competition: There should be free competition between buyers and sellers. Insuch a market, buyers try to buy at the cheapest rate and the sellers try to sell at the

highest area. As a result of it there will be one price for one commodity throughout the

market.


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3Main Forms of Market

Markets have generally been classified into three types

(I) Perfect Competition (II) Monopoly (III) Imperfect Competition,Which includes monopolistic competition, oligopoly and duopoly

Meaning of Perfect Competition

Perfect Competition refers to a market situation where there is a large number of buyers and

sellers. The sellers sell homogeneous product at a uniform price and enjoy freedom of enterprise.

The price is determined not by the firm but by the industry. It may be noted here that the wordcompetition is used in economics in a different sense than it is being used in common parlance.

Definitions

(1)According to Prof. Leftwitch, Perfect Competition is a market in which there are manyfirms selling identical products with no firm large enough relative to the entire market to be

able to influence market price.

(2) In the words of Bilas, The Perfect competition is characterized by the presence of manyfirms. They all sell identical products. The Seller is a price taker, not price maker.

(3)According to Lim Chong Yah, Perfect Competition is a market situation where there is alarge number of sellers and buyers, a homogenous product, free entry of firms into the

industry, perfect knowledge among buyers and sellers of existing market conditions and

free mobility of factors of production among alternative uses.

Characteristics or Features of Perfect Competition

1. Large Number of Buyers and Sellers2. Homogenous Products3. Independent Decision Making4. Free Entry and Exit of Firms5. Perfect Knowledge6. Perfect Mobility7. Absence of Transport Costs or Transaction are Costless8. Lack of Selling Costs


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4Monopoly

The term monopoly is derived from the Greek world monopolion which means exclusive sale. Thus

pure monopoly is market structure in which a single firm is the sole producer of a product for

which there are no close substitutes. Since the monopoly is the only seller in the market, it has

neither rivals nor Board; you travel by railway train owned and run by government of India. All

these are examples of monopoly.

Definitions

(1)According to Kuotsoyiannis, Monopoly is a market situation in which there is a singleseller, there are no close substitutes for commodity it produces, and there are barriers to

entry.

(2) In the words ofBaumol, A pure monopoly is defined as the firm that is also an industry. Itis the only supplier of some particular commodity for which there exist no close substitutes.

Main Features or Main Characteristics of Monopoly

1. One Seller and Large Number of Buyers2. Monopoly is also an Industry3. Restrictions on the Entry of the New Firms.4. No Close Substitutes5. Price Maker6. Price Determination7. Absence of Supply Curve8. Different Average and Marginal Revenue Curves

Imperfect Competitive Market

In the words ofFairchild, If a market is not organized, if contact between the buyers and sellers is

established with great difficulty and they are not in a position to compare the goods and prices

paid, then we face a situation of imperfect Competition.

Thus, Imperfect Competition is a wide term that includes, the following situations of market

(1)Monopolistic Competition, wherein the number of sellers is quite large.(2)Oligopoly, wherein the sellers are few in numbers.(3)Duopoly, where there are only two sellers.


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5Monopolistic Competition

(1)According to J.S.Bains, Monopolistic competition is joined in the industry where there is alarge number of small sellers, selling differentiated but close substitute products.

(2) In the words ofLeftwitch, Monopolistic competition is a market situation in which thereare many sellers of a particular product, but the product of each seller is in some way

differentiated in the minds of consumers from the product of every other seller.

(3) According to Lim Chong Yah, Monopolistic Competition is a market situation where thereare many producers but each offers a slightly differentiated product.

Main Features or Main Characteristics of Monopolistic Competition

1. Large Number of Firms and Buyers2. Product Differentiation3. Freedom of Entry and Exit of Firms4. Selling Costs5. Price Policy6. Less Mobility7. Imperfect Knowledge8. Non-price Competition9. AR and MR Curves

Oligopoly

An oligopoly is a market in which there are few producers of a product. For instance, there are

only five firms in India, manufacturing Cars. Hence, car-market will be called oligopoly. In this case,

also each firm has to take into account the price being charged by the other. To that extent, firms

are inter-dependent. If they enter into some sort of agreement they can change price. If they do

not conclude any agreement among themselves, they can suffer loses.

Main Features or Main Characteristics of Oligopoly

1. Few Sellers2. Inter-dependence3. Selling Costs4. Group Behavior5. Uncertainty of Demand Curve


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6Privatisation Merits and Demerits

In the wake of disintegration of Russia and other socialistic economies at the beginning of the last

decade of the twentieth century, the tendency of Privatisation among world economies has been

gaining ground. Among the economic problems of India, Privatisation of public sector industries

has become a debatable issue today. From the beginning of the process of economic development

of India, public sector has been receiving greater attention than private sector. In 1993-94, of 246

public sector enterprises, 240 were in operation. Capital worth Rs. 1, 59,307 crore was lying

invested in these units. They provided employment to 23 lakh laborers. Of these, 120 enterprises

were earning profit. They earned profit of Rs. 4,435 crore. On the contrary, 120 enterprises were

incurring losses, aggregating to Rs. 9,951 crore. Thus net profit of all the public sector enterprise

amounted to Rs. 5,287 crore only. It works out to be 2.78 percent return on the capital invested in

the public sector. Thus, the country has been incurring hug losses on account of public sector

enterprises. New economic reforms introduced in 1991 are directed against the expansion of

public sector and in favor of private sector. Policy of Privatisation is the main plank of new

economic reforms. In simple words, Entrusting of Public Sector industries to private sector is called

Privatisation.

Meaning of Privatisation

Privatisation of industries means opening the gates of public sector to private sector. It enhances

the importance of private sector because private sector comes to play significant role in the

economic development of the country. Thus, transferring of public sector industries to private

sector is called Privatisation. It may manifest itself wholly or partially. Accordingly, the term

Privatisation is used in two senses:

1. Narrow Meaning of Privatisation: In a narrow sense, Privatisation implies the privateownership of public enterprises.

2. Broader Meaning of Privatisation: In a broad sense, Privatisation implies transferring theownership of public sector to private sector or managing and controlling of public sector by

private individuals without transferring the ownership.

Measures of Privatisation

Three measures of Privatisation are (I) Ownership Measure, (II) Organizational Measures and (III)

Operational Measures.

1) Ownership Measures: Ownership Measures of Privatisation are those measures bywhich full or partial ownership of a public enterprise is vested in private sector. It has fourforms:


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7a) Total Denationalization or Full Ownership: It implies transferring of full ownership

of a public enterprise to private sector. Thus, Private sector becomes full owner of

Public Sector.

b) Partial Ownership or Joint Venture: It implies partial ownership of or partnershipin public sector by the private sector. Both public and private sectors is jointly

owner of that enterprise. Percentage share of private sector depends upon the

policy of the government.

c) Liquidation: It implies sale of public sector assets to private sector. The latter mayutilize these assets for the same purpose or any other purpose.

d) Management Buy-Out: It implies selling of the public sector enterprise to theworkers employed in it. These workers form a co-operative society, get loan from

banks and become owners of the public enterprise.

2) Organizational Measures: By virtue of these measures government control over publicenterprises is restricted. Its different forms are as under:

a) Holding Company: Government forms a holding company. Mangers are givenfreedom to operate it. Decisions are taken by the mangers on the basis of market

conditions.

b) Leasing: Ownership of the enterprise remains vested in the government butits management is entrusted to private sector for a given period.

c) Restructuring: It implies that the management of public enterprise be conductedaccording to market disciple.

3)

Operational Measures: These measures are concerned with the improvement in theefficiency of the public enterprise. Management is allowed to have its own way. Workers

are allowed to participate in management and decision making. Any other measures likely

to increase the efficiency of enterprise are also taken in hand.

Causes of Privatisation

(1)Disintegration of Socialist Economies(2)

Inefficient Public Sector

(3)Uneconomic Price Policy(4)Burden on the Government

Objectives of Privatisation

1. To increase the efficiency and competitive power of the enterprises.2. To reduce deficit financing and public deficit.3. To strengthen industrial management.4. To earn more and more foreign currency.


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9Globalisation Merits and Demerits

The worldwide movementtowardeconomic, financial, trade, andcommunications integration.

Globalization implies the opening oflocal and nationalistic perspectives to a broader outlook of an

interconnected and interdependent world with free transfer of capital, goods, and services across

national frontiers. However, it does not include unhindered movement oflabor and, as suggested

by some economists, may hurt smaller or fragile economies if applied indiscriminately. The

features of globalisation are given below:

1. Foreign direct investment upto 51% of foreign equity is allowed.2. In respect of foreign technology agreement, automatic permission is provided to high

priority industries upto 1 crore.

3. Free flow of goods and services in any country.4. Free flow of capital and technology.5. Rupee has been made fully convertible.6. Tax and tariff duty modified.

Effects of globalization

1. Enhancement in the information flow between geographically remote locations.2. The global common market has a freedom of exchange of goods and capital.3. There is a broad access to a range of goods for consumers and companies.4. Worldwide production markets emerge.5. Free circulation of people of different nations leads to social benefits.

Merits of Globalisation

1. Flow of Foreign Control2. Entry of Multinational Corporations3. Increase in Efficiency4. Increase in Knowledge5. Availability of Modern Technology and Marketing6. Socio-Economic Transformation7. Promotes Competition8. Develops World Trade9. International Division of Labour
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10Demerits of Globalisation

1. Cut-throat Foreign Competition2. Causes Economic Inequality3. Increase in Debt Burden4. Adverse Effect on Balance of Payments5. Increased Dependence on Multinational Corporations6. Increase in Consumerism7. Element of Uncertainty8. Dubious Experiments of Policy Reforms9. Interference of International Institutions10.Depletion of Natural Resources

Market, Privatisation and Globalisation

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