Unit IV MARKET AND DEMAND ANALYSES Meaning,Forms And the Characteristics of Market
There are five forms of market structure and they are as follows.
1. Perfect Competition or Ideal Rivalry market
A perfectly competitive market is one in which the number of buyers and sellers is very large, all engorged in buying and selling a standardised product without any unnatural precincts and possessing perfect knowledge of market at a time. In the words of Koulsayaiannis, “Perfect competition is a market structure characterised by a complete absence of rivalry among the individual are price takers and in which there is freedom of entry into and exit from industry.”
Characteristics of Perfect Competition
1. Large Number of Buyers and Sellers – The first stipulation is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole. The demand of individual buyer relative to the total demand is so small that he cannot influence the price of the product by his individual action.
2. Freedom of Entry or Exit of Firms – The next situation is that the firms must be at liberty to enter or leave the industry. It entails that whenever the industry is earning huge profits, fascinated by these profits some new firms enter the industry. In case of loss being sustained by the industry, some firms leave it.
3. Standardised Products – Each firm producers and sells a standardised commodity so that no buyer has any preference for the product of any individual seller over others. This is feasible if units of the same commodity manufactured by diverse sellers and ideal surrogates.
4. Absence of Artificial Restrictions – The consequent stipulation is that there is entire directness in buying and selling of commodities. Sellers and buyers are at liberty to buy and sell.
5. Perfect Mobility of Commodities – Another requirement of perfect rivalry is the perfect mobility of commodities and factors amidst
industries. Commodities are at liberty to shift to those areas where they can bring the highest price.
6. Perfect knowledge of Market Conditions – This condition implies a close contact amidst buyers and sellers. Traders possess absolute knowledge about the prices at which commodities are being purchased and sold and the prices at which others are prepared to purchase and sell.
2. Monopoly Market
Monopoly is defined by Salvatore as “Monopoly is the form of market organisation in which there is a single firm selling a commodity for which there are no close substitutes.”
There are some characteristics of monopoly such as 1. There is only one seller
2. Entire control on the supply of the product is in the hands of monopolist
3. Under monopoly, a firm itself is an industry; it can be a sole proprietorship, partnership, JSCs etc.
4. There is no close surrogate of a monopolist’s product. The event of cross elasticity of demand is least possible.
5. There are restrictions on the entry of the other firms in the area of monopoly product.
3. Duopoly
Duopoly is a special case of the theory of oligopoly in which there are only two sellers and they are absolutely independent and no conflicts arise amongst them. A variation in price and productivity of one will affect the
other and hence the other bearing loss has to match up with the price of the competitor.
4. Oligopoly
Oligopoly is a market stipulation in which there are a few firms selling standardised or varied commodities. It is complex to point out the number of firms in competition among the few. With only a few concerns in the market, the action of one firm is tending to afflict the others. An oligopoly industry produces either a standardised product or assorted products. The former is called pure and perfect oligopoly and the latter is called imperfect or discriminated oligopoly.
There are some characteristics of Oligopoly.
1. Interdependence among the sellers in the oligopolistic market. Each oligopolistic firm knows that changes in its price, advertising, product characteristics etc. may lead to counter-moves by competition.
2. Advertisement outlay is more in the case of oligopolists and consumer services.
3. Lack of consistency in the size of firms is another feature. Some may be small, others very large. Such a situation is asymmetrical.
4. Demand Curve is not easy to be traced out in an oligopolistic market.
5. Monopolistic Competition
Monopolistic competition denotes to a market condition on where there are many firms selling a varied product. “There is competition which is keen, though not perfect, among many firms making very similar products.”
No firm can have any perceptible influence on the price output policies of the other sellers nor can it be influenced much by their actions. Thus monopolistic competition denotes to competition among a large number of seller producing close but not perfect substitutes for each other.
Its features
There are a number of features. They are as follows. Large number of sellers, Product differentiation, Freedom of Entry and Exit of Firms, Nature of Demand Curve, Independent Behaviour, Product Groups, Selling Costs and non-price competition.
Conclusion
Monopoly competition has many significant features. However it is not always feasible to become a monopoly competitor. Thus monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes for each other.
Equilibrium price is the price where the demand for a product or a service is equal to the supply of the product or service. At equilibrium, both consumers and producers are satisfied, thereby keeping the price of the product or the service stable.
The Price at which Quantity Demanded equals to the quantity Supplied What Does Equilibrium Price Mean?
At EQ, there is no shortage or surplus unless a determinant of demand or
a determinant of supply changes. If a change in the price of a good or a service creates a shortage, it means that consumers want to buy a higher quantity than the one offered by producers. In this case, demand exceeds supply and consumers are not satisfied. In contrast, if a change in the price of a product or a service creates a surplus, it means that consumers want to buy less quantity than the one offered by producers. In this case, supply exceeds demand and producers need to lower the price of the product or the service to avoid excessive inventory.
Let’s look at an example.
Example
In the table above, the quantity demanded is equal to the quantity supplied at the price level of $60. Therefore, the price of $60 is the equilibrium price. At any other price level, there is either surplus or shortage. Specifically, for any price that is lower than
$60, the quantity supplied is greater than the quantity demanded, thereby creating a surplus. For any price that is higher than $60, the quantity demanded is greater than the quantity supplied, thereby creating a shortage.
The equilibrium price can change in case of a technological advancement or lower production costs that will increase the supply of the product at any price level, thereby lowering the EQ. Similarly, an increase in the production costs will decrease supply at any price level, thereby increasing the EQ.
Effects of Changes in Demand on Equilibrium Market:
We know that if the price rises, other things remaining the same, people buy less of that commodity and if price falls, people buy more of that commodity. Let us now discuss the effects of changes in demand on equilibrium price.
A change to demand can take place independently of change in price, i.e., price remaining the same, people may purchase more or less of the commodity. When larger quantity is
demanded at the same old price or the same old quantity is demanded at a higher price we say, the demand has risen. In such a case, the whole of demand curve rises above the original demand curve. In case of a fall in demand, the whole of the demand curve falls below the original demand curve.
In order to study the effect of the changes in demand on equilibrium price, let us assume that no change takes place in the supply schedule, i.e., it remains fixed. If demand rises, more quantity will be purchased at a higher price. On the other hand, if demand falls, less commodity will be purchased at a lower price. This can also be illustrated in the following diagram.
Diagram/Figure:
In the figure (8.2) DD/ is the original demand curve. PM is the equilibrium price and OM the equilibrium amount. When demand rises, supply remaining the same, the equilibrium amount increases from OM to OG and the equilibrium price rises from PM to FG. In case of fall of in demand, which is indicated by D2D2curve, the quantity demanded decreases from OM to OK and the equilibrium price falls from PM to LK.
Now a question can be asked that when the demand rises, does it affect more on the price or on the quantity of the commodity to be sold? The answer to this simple question, is that if the supply is perfectly elastic, a rise in demand will increase the quantity but will not affect the price. If the supply is perfectly inelastic, then a rise in demand will affect the price but not the quantity. This can be shown with the help of the diagram. In case of perfect elastic supply, (Fig.
8.3) when demand rises, the supply increases from OK to OI with further rise in demand D2D2 the supply increases from OI to ON.
Affects of changes in supply on Equilibrium Price
In the above case, we see an increase or upward shift in the supply curve from S1 to S2. This increase can occur because of a number of factors. The result of this increase in supply while
demand remains constant is that the Supply and Demand equilibrium shifts from price P1 to P2, and quantity demanded and supplied increases from Q1 to Q2.
In the above case, we see an decrease or downward shift in the supply curve from S1 to s2. This decrease can be because of a number of factors that affect supply. The result of this decrease in supply while demand remains constant is that the Supply and Demand equilibrium falls from price P1 to P2, and quantity demanded and supplied decreases from Q1 to Q2.
Concept of Demand
Demand refers to the quantity of a commodity or a service that people are willing to buy at a certain price during a certain time interval. It can be termed as a desire with the ‘willingness’ and ‘ability’ to pay for a commodity.
An increase in the price of the commodity decrease the demand for that commodity, while the decrease in price increases its demand. The phenomena is termed as law of demand.
Determinants of Demand 1.Price of the given commodity
Other things remaining constant, the rise in price of the commodity, the demand for the commodity contracts, and with the fall in price, its demand increases.
2.Price of related goods
Demand for the given commodity is affected by price of the related goods, which is called cross price demand.
3.Income of the individual consumer
Change in consumer’s level of income also influences their demand for different commodities. Normally, the demand for certain goods increase with the increasing level of income and vice versa.
4.Tastes and preferences
The taste and preferences of individuals also determine the demand made for certain goods and services. Factors such as climate, fashion, advertisement, innovation, etc.
affect the taste and preference of the consumers.
5.Expectation of change in price in the future
If the price of the commodity is expected to rise in the future, the consumer will be willing to purchase more of the commodity at the existing price. However, if the future price is expected to fall, the demand for that commodity decreases at present.
6.Size and composition of population
The market demand for a commodity increases with the increase in the size and composition of the total population. For instance, with the increase in total population size, there is an increase in the number of buyers. Likewise, with an increase in the male composition of the population, the demand for goods meant for male increases.
7.Season and weather
The market demand for a certain commodity is also affected by the current weather conditions. For instance, the demand for cold beverages increase during summer season.
8.Distribution of income
In case of equal distribution of income in the economy, the market demand for a commodity remains less. With an increase in the unequal distribution of income, the demand for certain goods increase as most people will have the ability to buy certain goods and commodities, especially luxury goods.
Definition of 'Law Of Demand'
Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.
Description: Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.
The above diagram shows the demand curve which is downward sloping.
Clearly when the price of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3 to Q2 and then to Q3 and vice versa.
{The law of demand states that all other things being equal, the quantity bought of a good or service is a function of price. As long as nothing else changes, people will buy less of something when its price rises. They'll buy more when its price falls.}
The demand schedule tells you the exact quantity that will be purchased at any given price. A real-life example of how this works in the demand
schedule for beef in 2014.
The demand curve plots those numbers on a chart. The quantity is on the horizontal or x-axis, and the price is on the vertical or y-axis.
Elasticity of Demand:-In economics, the elasticity of demand refers to how sensitive the demand for a good is to changes in other economic variables, such as prices and quantity demanded. Elasticity means the responsiveness of change in the demand with the change in the price of the commodity.
As the Law of demand explains that “there is an inverse relation ship between the price of the commodity and quantity demanded”this attribute of demand as it stretches or contract with the change in the price of the commodity is known as Elasticity of demand.
Elasticity of demand is calculated as the percent change in the quantity demanded divided by a percent change in another economic variable or price of the commodity. A higher demand elasticity for an economic variable means that consumers are more responsive to changes in this variable.
Determinants of Elasticity of Demand
A good with more close substitutes will likely have a higher elasticity. The higher the percentage of a consumer’s income used to pay for the product, the higher the elasticity tends to be. For non-durable goods, the longer a price change holds, the higher the elasticity is likely to be.
The elasticity of demand of any commodity is determined by a number of factors which are explained below:
1.Nature of commodity
The elasticity demand for any commodity depends upon the nature of the commodity, i.e., whether it is a necessity, comfort or luxury. The elasticity of demand for any commodity depends upon the nature of the commodity i.e. whether it is a necessity, comfort, or luxury. The demand for comfort products have neither very elastic nor very inelastic because with the rise or fall in their prices, the demand for them decrease or increase moderately. On the other hand, the demand for luxuries goods is more elastic, because, with a small change in their prices, there is a large change in the demand.
2.Substitutes
Commodities having substitutes have more elastic demand because with the change in the price of one commodity, the demand for its substitute is immediately affected. For example, if the price of coffee rises, the demand for coffee decreases and the demand for tea increases and vice-versa.
3.Goods having several uses
If a commodity has several uses, it has an elastic demand. For example, electricity has several uses. It is used for lighting, room heating, cooking, etc. if the tariffs of electricity increase, its uses will be restricted to important uses. If the tariffs of
electricity increases, its uses will be restricted to important uses. On the other hand, it will be withdrawn for less important uses.
4.Joint demand
The elasticity of demand also depends on the complementary goods, the goods which are used jointly. Such as car and petrol, pen and ink, etc. Here the elasticity of demand of secondary (supporting) commodity depends on the elasticity of demand of the major commodity. On the other hand, if the demand for bread is elastic, the demand for jam will also be elastic.
5.Postpone of the consumption
Those commodities whose consumption can be postponed will be elastic. For example, demand for constructing a house can be postponed. As a result, demand for bricks, cement, sand etc will be elastic. On the other hand, goods whose demand cannot be postponed, their demand will be inelastic.
6.Habits
People who are habituated to the consumption of a particular commodity like coffee, tea, cigarette of a particular brand, the demand for it will be inelastic.
7.Income of the consumer
The elasticity of demand also depends on income of the consumer. If the income of consumers is high, the elasticity of demand is less elastic. It is because change in the price will not affect the quantity demanded by a greater proportion. But in low income groups, the elasticity of demand is elastic. Because a rise or fall in the price of commodities will reduce or increase the demand. But this does not apply in the case of necessities.
8.Proportion of income spent
Goods on which a consumer spends a very small proportion of his income, e.g. salt, newspaper, tooth paste etc. the demand will nor be much affected by a change in the price. Hence, it will be inelastic. On the other hand, goods on which the consumer spends a large proportion of his income e.g clothes, food etc. their demand will be elastic.
9.Price level
The price level also influences the elasticity of demand for commodities. When price level is too high or too low, the demand will be comparatively inelastic.
Degrees of Elasticity of Demand:
We have stated demand for a product is sensitive or responsive to price change. The variation in demand is, however, not uniform with a change in price. In case of some products, a small change in price leads to a relatively larger change in quantity demanded.
Elastic and Inelastic Demand:
For example, a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity. In such a case, the demand is said to elastic. There are other products where the quantity demanded is relatively unresponsive to price changes. A decline of 8% in price, for example, gives rise to 1% increase in quantity demanded. Demand here is said to be inelastic.
The terms elastic and inelastic demand do not indicate the degree of responsiveness and unresponsiveness of the quantity demanded to a change in price.
The economists therefore, group various degrees of elasticity of demand into five categories.
(1) Perfectly Elastic Demand:
A demand is perfectly elastic when a small increase in the price of a good its quantity to zero.
Perfect elasticity implies that individual producers can sell all they want at a ruling price but cannot charge a higher price. If any producer tries to charge even one penny more, no one would buy his product.
People would prefer to buy from another producer who sells the good at the prevailing market price of $4 per unit. A perfect elastic demand curve is illustrated in fig. 6.1.
Diagram:
It shows that the demand curve DD/ is a horizontal line which indicates that the quantity demanded is extremely (infinitely) response to price. Even a slight rise in price (say $4.02), drops the quantity demanded of a good to zero. The curve DD/ is infinitely elastic. This elasticity of demand as such is equal to infinity.
(2) Perfectly Inelastic Demand:
When the quantity demanded of a good dose not change at all to whatever change in price, the demand is said to be perfectly inelastic or the elasticity of demand is zero.
For example, a 30% rise or fall in price leads to no change in the quantity demanded of a good.
Ed = 0 30%
Ed = 0
In figure 6.2 a rise in price from OA to OC or fall in price from OC to OA causes no change (zero responsiveness) in the amount demanded.
Ed= 0 Δp
Ed = 0
(3) Unitary Elasticity of Demand:
When the quantity demanded of a good changes by exactly the same percentage as price, the demand is said to has a unitary elasticity.
For example, a 30% change in price leads to 30% change quantity demand = 30% / 30% = 1.
One or a one percent change in price causes a response of exactly a one percent change in the quantity demand.
In this figure (6.3) DD/ demand curve with unitary elasticity shows that as the price falls from OA to OC, the quantity demanded increases from OB to OD. On DD/ demand curve, the percentage change in price brings about an exactly equal percentage in quantity at all points a, b. The demand curve of elasticity is, therefore, a rectangular hyperbola.
Ed = %∆q %∆p
Ed = 1
(4) Elastic Demand:
If a one percent change in price causes greater than a one percent change in quantity demanded of a good, the demand is said to be elastic.
Alternatively, we can say that the elasticity of demand is greater than. For example, if price of a good change by 10% and it brings a 20% change in demand, the price elasticity is greater than one.
Ed =20%
10%
Ed = 2
In figure (6.4) DD/ curve is relatively elastic along its entire length. As the price falls from OA to OC, the demand of the good extends from OB to ON i.e., the increase in quantity demanded is more than proportionate to the fall in price.
Ed = %∆q %∆p
Ed > 1
(5) Inelastic Demand:
When a change in price causes a less than a proportionate change in quantity demand, demand is said to be inelastic.
The elasticity of a good is here less than I or less than unity. For example, a 30% change in price leads to 10% change in quantity demanded of a good, then:
Ed = 10%
30%
Ed = 1 3
Ed < 1
In figure (6.5) DD/ demand curve is relatively inelastic. As the price fall from OA to OC, the quantity demanded of the good increases from OB to ON units. The increase in the quantity demanded is here less than proportionate to the fall in price.
Note: It may here note that the slope of a demand curve is not a reliable indicator of elasticity.
A flat slope of a demand curve must not mean elastic demand. Similarly, a steep slope on demand curve must not necessarily mean inelastic demand.
The reason is that the slope is expressed in terms of units of the problem. If we change the units of problem, we can get a different slope of the demand curve. The elasticity, on the other hand, is the percentage change in quantity demanded to the corresponding percentage change in price.
