Consider the following situation: You go to the local market to buy a shirt. You enter one shop which sells shirt. The shirt which you like are priced at Rs. 400. But you think that are not worth more than Rs. 300. You offer Rs. 300 for the shirt. But the shopkeeper is not ready to give them at less than Rs. 350. You finally buy the shirt for Rs. 350.
This is an example of a local market. In this market some are byuers and some are sellers. The market fixes the price at which those who want something can obtain it from those who have it to sell.
Note that it is only exchange value which is significant here. The shopkeeper selling the shirt may have felt that the shirt ought to have made more than Rs. 350. Considerations such as ‘sentimental value’ mean little in the market economy.
Most goods such as foodstuffs, clothing and household, utensils etc., are given a definite price by the shopkeeper. But buyers will still influence this price. If it is too high, the market will not be cleared. if it is low, the shopkeeper’s stock will run-out.
A market need not be formal or held in a particular place. Second-hand computers are often bought and sold through newspaper advertisements. Second-hand cars may be disposed of by a card in the local shop window.
However, in studying the market economy it is essential to understand how price is determined. Since this is done in the market, we can define the market simply as all those buyers and sellers of a good of service who influence the price.
The elements of a market are:
Buyers and sellers
A product or service
Bargaining for a price
Knowledge about market conditions
One price for a product or service at a given time
Extent of the Market
A market may be local, confined to a village, or it can cover a whole state, a country or even the world. If buyers and sellers of a given product are scattered throughout the world, there will be world market e.g. for gold, wheat, jute, oil etc. There are many factors which contribute towards the extension of a market. These are:
Nature of the Commodity: A commodity which is durable can have a wider market. Much would depend on the facilities of transporation. Some years ago, we could not think of world wide markets in perishable goods like fruits, etc. but there is now a worldwide market for such products also.
Size of production: For a world-wide market, production must be in huge quantity to meet demand for the product. Large scale production has contributed towards the widening of the market; markets have expanded after the industrial revolution.
Extent of Demand: A commodity which is in universal demand is likely to have a wider market. For example, diamonds has a world-wide market.
Means of Communication and Transport: With the availability of quick means of transporation there are better prospects for expansion of markets. For example, steamships in the past and cargo aircraft now contributed to expansion of markets.
Peace and Security: World peace and security provide a better climate for expansion of world markets.
Currency and Credit System: In the absence of a world currency, international liquidity based on the availability of gold or other reserve currencies helps in the expansion of trade. A well developed credit system serves the same purpose. We find that after the establishment of IMF and World Bank and other international financial institutions, world trade has expanded.
Trade Policies of the Countries: No doubt restrictive trade policies have been followed by countries to direct economic growth into the desired channels but international trade has expanded in general. It is also true that trade between the advanced and the less advanced countries would have expanded more if the advanced countries had admitted more liberally manufactured goods from the developing countries.
Value and Price
Suppose a person possessing boots, desires to have a coat. He puts a certain estimate, which has come to be known as value, upon each. The boots he assesses in accordance with the labour which they cost him and the assesses the coat in accordance with the services which he expects it to render. A second person, with a coat to spare, desires boots, and he makes similar estimates. In effecting the exchange the varying estimates of those concerned come into touch with each other and by the higgling of the market a common value is fixed. This will vary from time to time, but will tend to be the same at a given time and place for all who are engaged in identical exchanges.
This direct exchange, however, involving a double identity of wants, is highly inconvenient, for each traders must not only desire what the other has to sell, but must desire exactly the correct quantities. Thus, before long it is necessary to find some common substance for the purpose of effecting exchanges.
Here we have three fundamental ideas of value, price and money. Value in the economic sense, is a relative term. It means the quantity of other things for which a commodity is exchanged. In other words, it is the economic worth of a commodity expressed in relation to another commodity. It is the general power of a thing to obtain other things, or its purchasing power. But while it is easy to conceive of such a general power, it is practically impossible to express it, since even for a single commodity an infinite number of separate exchanges is possible. Hence some common commodity or substance must be found to act as a measure, or common denominator of values. The particular values of any two commodities can then be stated as the amount of this third commodity, which is money, and these amounts, or prices, are easily compared. Value is thus the general purchasing power of a good over other goods; money is the means whereby the values of different goods are compared and the goods themselves are exchanged; and price is the value of a good estimated in money.
Types of Market Structures
For a consumer, a market consists of those firms from which he can buy a well-defined product; for a producer, a market consists of those buyers to whom he can sell a single well-defined product. If a producing unit knows precisely the demand curve it face, it would know its potential revenue. If it also know its cost, it can readily discover the profit that would be associated with different level of output and can choose the rate the maximises the output. But suppose the firm knows its costs and the market demand curve for the product but does not know its own demand curve. In other words, it does not know its own total sales. In order to find this curve, the firm needs to answer the following questions. How many competitors are there in the market selling similar products? If one firm changes its price, will its market share change? If it reduces its price, will other firms follow it or not? There are so many other related questions which will need answer.
Answers to questions of this type will be different in different circumstances. For example, if there is only one firm in market, the whole of the market demand will be satisfied by the particular firm. But if there are two large firms in the industry they will share the market demand in some proportion. They will have to be very cautious of the reactions of other firms to every decision they make. But if there are say more than 1,000 small firms in an industry, each firm commands only a small proportion of the market. Thus, we find that the market behaviour is greatly affected by market structure. We can conceive of more than thousand types of market structures but we focus on a few theoretical market types which mostly cover a high proportion of cases actually encountered in marketing world. These are:
Perfect Competition: Perfect competition is characterized by many sellers selling identical products to many buyers.
Monopolistic Competition: It differs in only one respect, namely, there are many sellers offering differentiated product to many buyers.
Monopoly: Is a situation of a single seller producing for many buyers. Its products necessarily extremely differentiated since there are no competing sellers producing near substitute products.
In Oligopoly: There are a few sellers selling competing products for many buyers.
In short we can say that the term market is a place where buyers and sellers bargain over a commodity for a price. There are many factors which contribute towards the extension of a market like nature of the commodity, size of production, extent of demand and so on.
Prices of goods and services express their exchange value. A change in price indicates (i) a change in relative exchange value of commodities or services expressed in terms of money, and (ii) a change in the value of money.
Markets can be classified on the basis of area, volume of business, time, status of sellers, regulation and competition. On the basis of competition a market is classified into perfect competition, monopoly, imperfect competition and oligopoly.
A knowledge of average and marginal cost and revenues is important in the theory of price determination. Average revenue is the revenue per unit of output sold. Marginal revenue is the revenue resulting from the sale of an additional unit of the product. Average cost is the cost per unit of output and marginal cost is the additional cost of producing an additional unit of output.
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