1. MANAGERIAL ECONOMICS
MARKETS

2. MEANING OF MARKET
• A market is a place where commodities are bought and
sold at retail or wholesale prices
• In economics, however, the term “market” does not
refer to a particular place as such but it refers to a
market for a commodity or commodities
• The market is an arrangement whereby buyers and
sellers come in close contact with each other directly
or indirectly to sell and buy goods is described as
market
• It does not refer only to a fixed location. It refers to the
whole area of operation of demand and supply
• Markets may be physically identifiable

3. PRODUCTS AND FACTOR MARKETS
PRODUCT MARKET
• A product market or commodity market refers to
an arrangement in effecting buying and selling of
commodities i.e. cotton market, wheat market,
rice market, bullion market, etc.
• The households or the consumers are the buyers
in the product market
• Their demand is the direct demand for
consumption goods

4. FACTOR MARKET
• Factor markets are markets in which factors of
production such as land, labor and capital are
transacted. They are called: Land market,
labor market and capital market
• The firms or the producers are the buyers in
the factor markets
• Their demand for productive resources or
factors of production is a derived demand

5. CLASSIFICATION OF MARKET
STRUCTURES
Markets may be divided on the basis
of different criteria such as
• Geographical area
• Time element
• Nature of competition

6. CLASSIFICATION BASED ON
GEORGRAPHICAL AREA
• Local Markets
• Regional Markets
e.g. Films produced in local languages
• National Markets
• World Markets
e.g. exports and imports

7. CLASSIFICATION BASED ON TIME
ELEMENT
• Very short period markets
Not possible to change the stock of commodity
• Short period markets
Output could be expanded by altering variable factors
• Long period markets
Permits changes in scale of production by changing plant size
• Very long period markets
This period runs over a series of decades

8. CLASSIFICATION BASED ON NATURE OF
COMPETITION
• Perfect competition
Many sellers and many buyers
• Monopoly
Only one seller
• Duopoly
Two monopolists
• Monopsony
Only one buyer
• Monopolistic competition
Product differentiated only by branding
• Oligopoly
More than two in a monopolistic position

9. PRICING
• DETERMINANTS OF PRICE
• Demand
• Cost of production
• Objectives of the firm
• Government policy
• Nature of competition

10. ENTRY BARRIERS
• Entry barriers are certain structural features of
a market that enable existing companies to
raise the prices of their products persistently
above costs without attracting new entrants
• Companies are able to retain their market
share in spite of increasing their profit margins

11. VARIOUS CAUSES OF ENTRY BARRIERS
• Product differentiation/Strong brands e.g.
Fevicol, Prestige pressure cooker, Maggie
• Switching costs e.g. Microsoft
• Distribution network e.g. Maruti, Parachute of
Marico

12. VARIOUS CAUSES OF ENTRY BARRIERS
Contd…
• Absolute cost advantage e.g. privileged access
to scarce resources, research and
development, government tariffs, subsidies,
trade quotas,
• Lowest cost producer/Economies of scale e.g.
Hindustant Zinc, Wall Mart
• Unique business model e.g. South West
Airlines, Shriram Transport Finance

13. PERFECT COMPETITION
• Single market price prevails for the commodity
• Price is determined by demand and supply
• Every participant (whether seller or buyer) is a
price-taker
• No one is in a position to influence the price

14. CHARACTERISTICS OF PERFECT
COMPETITION
• Large number of buyers
• Large number of sellers
• Homogeneous product
• No entry and exit barriers
• Perfect knowledge of market conditions such as
the demand, cost, price and quality is available
freely to all participants
• Non-intervention by the Government
• Absence of transport cost element

15. PRICE AND OUTPUT DETERMINATION
UNDER PERFECT COMPETION
• Price is market determined
• Firm cannot influence the price by its own
action
• Average Revenue Curve and Marginal Revenue
Curve must coincide with each other
• MC = MR = Price

16. EQUILIBRIUM IN THE SHORT RUN
• Short run is a period during which output can
be adjusted by altering variable inputs but
fixed factors of production remain constant

17. POSSIBILITIES OF ABSOLUTE PROFIT
OR LOSS POSITION
• Firm makes supernormal profits
• Firm makes only normal profits
• Firm incurs losses
• Shut down point

18. EQUILIBRIUM IN THE LONG RUN
• Long run is a period during which all factors of
production viz. variable and fixed can be changed
• In the long run, old plants can be replaced with
new plants, new plants can be added
• New firms also can enter the industry
• Existing firm can exit
• Firm to be in equilibrium in the long run, in
addition to Marginal Cost being equal to price,
price must be equal to average cost

19. SUPER NORMAL PROFIT
• If the price is greater than the average cost,
the firm will be making super normal profit
• New firms will enter until price is depressed
down to average cost and all firms can make
only normal profits

20. LOSSES
• If price happens to be below average cost,
firms will be incurring losses
• Then some of the firms will quit the industry
• As a result, output of the industry will
decrease and the price will rise to equal the
average cost and firms can make only normal
profits

21. MONOPOLY
• MAIN FEATURES:
• Only one seller of a particular good or service
• Rivalry from producers of substitutes
insignificant
• Monopolist is in a position to set the price

22. CONDITIONS TO MAKE A
MONOPOLIST STRONG
• A gap in the chain of substitutes
• Possibility of securing control over all the cost
substitutes

23. CAUSES OF MONOPOLY
• Government license to any particular operator
of public utilities like a gas company or an
electricity undertaking
• Possession of certain scarce raw materials,
patent rights, secret methods of production or
specialized skill
• Necessity for large resources
• Ignorance, laziness and prejudice of the
buyers in favor of a particular producer

24. REVENUES AND COSTS OF
MONOPOLISTS
• If prices are reduced more quantity can be
sold and vice versa
• Monopoly may get profit, incur loss or face
neither profit nor loss in the short run
• But, in the long run, a monopoly will get only
profit otherwise will not continue in the
business

25. DISADVANTAGE OF MONOPOLY
• Supply will be restricted and monopolist will become
richer at the expense of consumer
• Consumers’ choice is restricted
• Due to absence of competition, wasteful costs may not
be curtailed reflecting in higher prices
• Society’s resources will get misallocated. When
monopolist restricts output, resources may go into
production of goods with low consumer preferences
• Will result in severe setback to economy when a
monopolist in strategic sector slows down or stops
production

26. MONOPSONY
• Only one buyer
• Buyer in a position to determine the price

27. PRICE DISCRIMINATION
• A practice of charging different prices to same buyer or to different
buyers
• Also known as differential pricing
FIRST DEGREE DISCRIMINATION
• Seller charges same buyer different prices for each unit bought
• e.g. quantity discounts
SECOND DEGREE DISCRIMINATION
• Seller segregates buyers according to income, geographical location,
individual tastes, kinds of uses for the product and charges different
prices to each group or market despite equivalent costs in serving
them

28. OBJECTIVES OF PRICE
DISCRIMINATION
• To appropriate the consumer’s surplus so that it
accrues to the producer rather than to the consumer
• To dispose of occasional surplus
• To develop new market
• To make the maximum use of unutilized capacity
• To earn monopoly profits
• To enter into or retain export markets
• To destroy or forestall competition
• To increase future sales. Lower price is quoted to
enable buyers to develop a taste for the allied products
produced by the same manufacturer

29. MONOPOLISTIC COMPETITION
• Refers to a market situation in which there are
many producers producing goods which are
close substitutes of one another
DISTINGUISHING FEATURES
• Produce differentiation
• Existence of many firms supplying the market
• Goods made by them are close substitutes

30. OLIGOPOLY
• More than two or a few sellers found in
monopolistic position is called Oligopoly
• IMPORTANT CHARACTERISTICS
• Every seller can exercise an important influence
on the price-output policies of his rivals
• Every seller is so influential that his rivals cannot
ignore the likely adverse effect on them of given
change in the price-output policy of any single
manufacturer

31. DUOPOLY
• Situation in which there are two monopolists instead of
one who share the monopoly power is called Duopoly
DUOPOLY WITHOUT PRODUCT DIFFERENTIATION
• Selling identical commodity without product
differentiation
• There will be collusion between the two
• They may agree on a price, assign quotas and divide
the territory in which each is to market his products
• In case, there is no agreement between the two, a
constant price war will be the probable consequent

32. DUOPOLY Contd…
• DUOPOLY WITH PRODUCT DIFFERENTIATION
• No fears of immediate retaliatory measures by
the rivals
• If one changes price-output policy, there is
less danger of price war
• The firm with better products can earn
supernormal profits

33. PRICE LEADERSHIP UNDER OLIGOPOLY
• In an oligopolistic situation, there are more than two or a
few sellers who are able to exercise monopolistic influence
• In such a situation, we generally find ‘price leadership’
• Under price leadership, one firm assumes the role of a
price leader and fixes the price of the product for the entire
industry
• The other firms simply follow the price leader and accept
the price fixed by him and adjust their output to this price
• The price leader is generally a very large or a dominant firm
• It often happens, price leadership is established as a result
of price war in which one firm emerges as the winner

34. TYPES OF PRICE LEADERSHIP
• Dominant Price Leadership
• Barometric Price Leadership
• Exploitative or Aggressive Price Leadership

35. PRICE LEADERSHIP OF A DOMINANT
FIRM
• One firm produces the bulk of the product of
the industry
• It is able to dominate the entire market
• Other firms unable to exercise any influence
on the market price
• So, the dominant firm fixes a price so as to
maximize its profits
• Other firms have to adjust their output to the
price so fixed by the dominant firm

36. BAROMETRIC PRICE LEADERSHIP
• An old, experienced and the largest firm
assumes the role of a leader
• It protects the interests of all firms instead of
merely promoting its own interest
• It fixes a price which is found to be suitable for
all the firms in the industry

37. EXPLOITATIVE OR AGGRESSIVE PRICE
LEADERSHIP
• One big firm establishes its supremacy by
following aggressive price policies
• It compels other firms to accept the price
fixed
• If other firms show any independence, this
firm threatens them and coerces them to
follow its leadership
• Ultimately, the price fixed by this firm comes
to be accepted

38. WAGES
• ‘Wages ‘ means payments made for the
services of labor
• It may be under contract

39. NOMINAL WAGES
• The money wage is known as nominal wage.
Nominal wages are wages paid in terms of
money
• According to Keynes, workers act irrationally
and generally bargained for money wages
• They sharply react to any cut in money wages
• A rise in prices does not offend labor as such
as a cut in money wages

40. REAL WAGES
• According to the classical wage theory, labor
supply was considered a function of real
wages
• After deflating nominal wages with the help
of price index, we obtain real wages

41. MAIN FACTORS INFLUENCING REAL
WAGES
• Purchasing power of money
• Subsidiary earnings
• Extra work without extra payment
• Regularity or irregularity of employment
• Conditions of work
• Future prospects

42. WAGE DIFFERENTIALS – CAUSES
• Difference in efficiency
• Immobility of labor
• Difficulty in learning a trade
• Future prospects
• Hazardous and dangerous occupations
• Regularity or irregularity of employment
• Collective bargaining