UNIT III - Product and Factor Market

UNIT III Product and Factor
Market
- Perfect and imperfect market

-Supply market efficiency and Equilibrium
-Determinants of factor price
-General equilibrium
-Efficiency of competitive markets
Product Market
A Market used to exchange a final good or service
Components of Product Market:
1. Gross production
Total market value of all final goods and services
2. Buyers and sellers
conveniently categorised by the macroeconomic sector.
3. Household consumption
Undertakes consumption expenditure for consumer
goods.
4. Business investment
Makes investment expenditure on capital goods.
5. Government purchase
Government purchases of goods used to pursue.
6. Foreign exports
Foreign sector purchases exports through the product
markets.
7. Domestic business production
Combines the four factors of production
8. Foreign imports
Contributes goods and services to product markets.
Circular flow of money in product market
Determinants of Market Structures
Number and nature of sellers
Number and nature of sellers in the market.
Number and nature of buyers
Number and nature of buyers in the market.
Nature of product
Nature of the product that determines the market structure.
Entry and exit conditions
Conditions for entry and exit of firms depends upon
profitability.
Economies of scale
Few firms are left to compete with each other.
Different Market Structures
Perfect Market
Characterized by many sellers selling identical products to
many buyers.
Imperfect market
Monopoly
One seller and many buyers
Monopolistic competition
Many sellers offering differentiated products to many buyers
Oligopoly
Few sellers selling competing products to buyers
Duopoly
Only 2 firms in the market producing homogenous good.
Perfect Market
A perfectly competitive market is one in
which the number of buyers and sellers is very
large, all engaged in buying and selling a
homogenous product
Features of Perfect Competition
Large numbers of buyers and sellers
No single producer will able to influence the price.
Homogenous product
Articles produced by all firms should be
standardized.
Free entry and exit
All firms in the industry will be earning normal
profit.
Perfect knowledge
Full aware of prices and features of product
offered.
Absence of transport costs
Cost of transport may determine the change in prices.
Perfect mobility of the factors of production
Enable the firms to adjust the supply to demand.
Absence of artificial restrictions
Complete openness in buying and selling of goods.
Absence of selling costs
Cost do not arise because all firms produce a
homogenous product.
Equilibrium for Perfect competition
Imperfect Market
A market structure that does not meet the
conditions of perfect competition.
- Monopoly
- Monopolistic
- Oligopoly
- Duopoly
Features of Monopoly Market
One seller and large number of buyers
Monopoly is also an industry
Restrictions on the entry of the new firms
No close substitutes
Price maker
Price discrimination
Absence of supply curve
Monopoly Graph
Classification of Monopoly
Natural Monopoly
Regulated Monopoly
Unregulated monopoly
Sources of Monopoly Power
Natural source
Monopolistic position which are described as
natural monopolies
Exclusive possession of technical knowledge
Knowledge of techniques of prroduction
Exclusive ownership of raw materials
Monopoly is acquired thro sole ownership
Legal sources
Bestow monopoly on the domestic producers
Economies of large scale
Enjoy economies of large scale on technological grounds.
Business reputation
Business reputation of long standing firms posess a degree of
monopoly power.
Business combines
Business combinations are made to eliminate competition.
Creation of artificial barriers to new competition
Existing firm may resort to tactics like limit pricing policy
Monopolistic
Refers to a market situation where there are
many firms selling a differentiated product.
Features of Monopolistic Competition
Large number of sellers
Large number of sellers who individually have a small
share
Product differentiation
Products of different sellers are differentiated on the
basis of brands.
Freedom of entry or exit
New firms are free to enter the market.
Independent behavior
Every firm has independent policy.
Product groups
Group of firms producing similar products
Selling costs
Selling cost is essential to push up the sales.
Non price competition
A firm increases sales and profits of his product without
the cut in the price.
Monopolistic Graphical
SHORT RUN OUTCOME LONG RUN OUTCOME

Oligopoly
Competition among a few
Characteristics of Oligopoly
Interdependence
Any change in the price and output will have direct
effect on the future
Importance of advertising and selling cost
Various firms have to employ various aggressive
and defensive marketing.
Group behavior
Theory of group behavior not of mass or
individuals behavior
Indeterminate demand curve
Inability of a particular firm to predict the behavior of other
firms.
Few sellers
Every firm produces the significant fraction of the total
output.
Aggressive and defensive marketing methods
Aggressive or defensive marketing strategies to increase the
share of the market
Competition and combination
Competition is not perfect.
Kinked Demand Curve under Oligopoly
Difference b/w Monopolistic and Oligopoly
Basis Monopolistic Oligopoly

Number of Large Few sellers
sellers
Demand Downward Kinked
curve slopping curve demand curve
Price Price can be Price is
determination fixed influenced
Relation of Independent Inter
firms dependent
Product Found May or may
differentiation not be found
Economic Costs for Imperfect
Competition
Cost inflated prices

Imperfect competitors reduce output raise price.
Companies can hold prices above the marginal
cost.
Measuring the waste from imperfect
competition
Market Efficiency
Benevolent Social Planner
Total surplus = value to buyers cost to sellers
Efficiency Pinnacle
Demand price
Supply Price
Evaluating the market equilibrium
Quantity demanded and quantity supplied are
equal
Demand price and supply price are equal
Market Failures
Market failures are often associated with non
competitive markets, externalities or public
goods.
Market failures can occur due to,
Public goods
Market control
Externalities
Imperfect Information
Factors Price
Production requires the use of certain
resources.
Land
Labour
Capital
Entrepreneur
Characteristics of Land
Free gift of nature
Primary factor of production
Perfectly inelastic supply
Gradability
Passive factor
Diminishing returns
Derived demand
Characteristics of Land
No social cost
Indestructible factor
Perfectly immobile
Site or location value
Rent as a reward for its use
Characteristics of Labor
Highly perishable
Highly inseparable
Skilled, semi skilled and unskilled labor
All efforts are not sure to produce
Week bargaining power
Labor and wage directly related
Characteristics of Capital
Capital is productive
Capital is prospective
Capital is the result of labor
Capital is the result of savings
Capital is non permanant
Characteristics of an Entrepreneur
Inner drive to succeed
Independence
Risk bearing
Locus of control
Hope of success
Flexibility
Analytical ability of mind
Confronting uncertainty
Characteristics of an Entrepreneur
Stress takers
Innovators
Ability to mobilize resources
Self confidence
Creative
Openness to change
Competitive by nature
Highly motivated and energetic
Functions of an Entrepreneur
Idea generation
Determination of objectives
Fund raising
Procurement of raw materials
Procurement of machinery
Market research
Determination of form of enterprise
Recruitment of manpower
Implementation of project
Determination of Factor Price
Factor price determination = Theories of
distribution.
Determinants of demand for factors of
production:
Price of the factor
Marginal physical product of the factor
Price of the commodity produced
Amount of the collaborating factors
Prices of the collaborating factors
Technological process
Determinants of Supply
Price of the factor
Tastes of the labor factor
Size of the population
Labor force participation rate
Occupational distribution of labor force
Geographical distribution of labor force
Educational distribution of labor force
Demand of Factors
Derived Demand
Derived from the demand for the commodity
which the factor helps to produce
Production depends on what they produce i.e.,
productivity.
Demand for factors of production is
necessarily a joint demand
Inter relations among factors is strong
Supply of Factor
It has a quantifiable meaning
Based on three factors namely Labor, Land
and Capital respectively.
Very few inputs are used in their natural state
Capital is the only thing that is taken to be
produced.
Interaction of product and factor markets
Goods and services must be allocated between

firms and households.
Factor market is cyclic, firms to households
and households to firms
Labor is the best example of factor market.
Product and factor markets are within firm
growth
Factor and product markets and resource
reallocation.
Explained with an Example
General Equilibrium
Links together the supplies and demands of a
vast number of factors and products.
Profit maximizing homes and utility
maximizing households.
Equilibrium of supply and demand determines
the price and quantity of the item.
General equilibrium also represents the whole
economy.
General Equilibrium
Methods of improving efficiency of
competitive markets
Utility possibility frontier
Allocative efficiency
Well informed producers and consumers
No external effects
Uj
Utility Possibility Frontier

Utility of Satisfaction A
(Jones)
B C
Utility of Satisfaction
Us
(Smith)
competitive markets
Production Possibility Frontier
Method to improve the efficiency of competitive
market
B X
A
C
competitive markets
Production Possibility Frontier
Method to improve the efficiency of competitive
market

UNIT III - Product and Factor Market

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UNIT III - Product and Factor Market

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UNIT III Product and Factor

- Perfect and imperfect market

SHORT RUN OUTCOME LONG RUN OUTCOME

Basis Monopolistic Oligopoly

Cost inflated prices

Goods and services must be allocated between

Utility Possibility Frontier

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