Forms of Market and Price Determination Class 11 Notes

A market is any arrangement through which buyers and sellers of a commodity come into contact to effect transactions. The forms of market differ on four features: the number of sellers, the nature of the product, the freedom of entry and exit, and the sellers' power over price. On these features four forms are set out in the syllabus.In perfect competition no seller can influence price; in monopoly one seller controls the whole supply; in monopolistic competition many sellers differentiate their products; in oligopoly a few large sellers dominate and react to each other.

• Perfect competition: a very large number of small sellers, a homogeneous product, complete freedom of entry and exit, perfect knowledge, and AR = MR = price for the individual firm.
• Monopoly: a single seller, no close substitutes, strong barriers to entry, and maximum control over the price, though the market demand still limits the monopoly price.
• Monopolistic competition: many sellers, differentiated products, easy entry, and partial control over price through product difference and advertising.
• Oligopoly: a few large sellers, a homogeneous or differentiated product, high barriers to entry, and strategic interdependence — each firm must watch the others' prices.
• The controlling test: the number of sellers and the control over price arrange the forms from most competitive to least.

Perfect competition is the benchmark against which all other markets are compared. It rests on the four pillars of a large number of sellers and buyers, a homogeneous product, free entry and exit, and perfect knowledge. A firm in such a market takes the price as given — it is a price taker whose demand curve is a horizontal line at the market price.Because the individual firm sells an identical product at a price it cannot change, AR = MR and both equal the market price. The firm maximises profit at MR = MC, with MC rising, exactly as in the producer chapter.

• A large number of sellers and buyers: no one can affect the price.
• A homogeneous product: no one can charge a premium for a better product.
• Free entry and exit: profits attract new firms, losses drive firms out, so in the long run only normal profit survives.
• Perfect knowledge: buyers and sellers know the price, so one price rules in the market.
• Free mobility of factors: resources move to their most rewarding uses.
• No transport cost and no selling cost: the market price is uniform.
• The firm's demand curve is horizontal at the price, so AR = MR = price.

In a perfectly competitive market the equilibrium price is struck where quantity demanded equals quantity supplied. At any price above the equilibrium a surplus appears and the sellers cut the price to sell; at any price below it a shortage appears and the buyers bid the price up. The market thus converges on the price that clears it.

Once the equilibrium is struck, a change in an underlying determinant shifts one of the curves and a new equilibrium forms. The reasoning is always the same: shift the curve, find the new intersection, and read the new price and quantity. The four standard combinations are a favourite logical question.

• Demand increases, supply unchanged: the demand curve shifts right, price rises and quantity rises.
• Demand decreases, supply unchanged: the demand curve shifts left, price falls and quantity falls.
• Supply increases, demand unchanged: the supply curve shifts right, price falls and quantity rises.
• Supply decreases, demand unchanged: the supply curve shifts left, price rises and quantity falls.
• Both shift: the direction of price and quantity depends on the relative sizes of the two shifts — emphasise the indeterminate case.
• A change in a commodity's own price is a movement along the curves, never a shift; only a non-price determinant shifts a curve.

A price ceiling is a legally imposed maximum price below the equilibrium, intended to make a necessity affordable to the poor. Below the equilibrium the demand exceeds the supply, so a persistent excess demand, a shortage, develops at the ceiling price. The government then has to ration the scanty supply.Consequences: a shortage, black marketing, rationing, deterioration of quality and long queues. The intended benefit is affordability, but the side-effects follow from the gap between demand and supply.

A price floor is a legally imposed minimum price above the equilibrium, set to guarantee producers a remunerative price — the minimum support price of wheat or paddy is the classic example. Above the equilibrium the supply exceeds the demand, so a persistent excess supply, a surplus, develops at the floor price. The government then buys the surplus to support the market.Consequences: a surplus of output, the government's purchase and stock accumulation, and the burden of subsidy. The intended benefit is the protection of producer income.

The unit yields the classification questions, the equilibrium-diagram questions, the shift-logic questions and the two applied policy questions of the ceiling and the floor. Each has a fixed skeleton, and a student who has practiced the skeleton earns consistent marks.

• Define the market and the four forms of market with their distinguishing features.
• Draw and explain the equilibrium under perfect competition and read the price and quantity at the intersection.
• Trace the effect of each of the four shifts of demand and supply on price and quantity.
• Explain the price ceiling with its aim and consequences.
• Explain the price floor with its aim and consequences.
• Classify a given policy or a given market by naming its features.