• In economics, market means a social system through which the sellers and purchasers of a commodity or a service (or a group of commodities and services) can interact with each other.
• They can participate in sale and purchase.
• Market does not refer to a particular place or location.
• It refers to an institutional relationship between purchasers and sellers.
• Market is an arrangement which links buyers and sellers.
• A market can be of different types.
• The market differ from one another due to differences in the number of buyers, number of sellers, nature of the product, influence over price, availability of information, conditions of supply etc.
Economists discuss four broad categories of market structures:
v Perfect Competion
v Monopolistic Competition
A market is said to be Perfectly Competitive if it satisfies the following features:
Ø Large number of buyers and sellers: Under perfect competition, there exists a large number of sellers and the share of an individual seller is too small in the total market output. As a result a single firm cannot influence the market price so that a firm under perfect competition is a price taker and not a price maker. Similarly, there are a large number of buyers and an individual buyer buys only a small portion of the total output available.
Ø Homogenous goods: Under perfect competition all firms sell homogenous goods which are identical in quantity, shape, size, colour, packaging etc. So the products are perfect substitutes of each other.
Ø Free entry and free exit: Any firm can enter or leave the industry whenever it wishes. The condition of free entry and free exit ensures that all the firms under perfect competition will earn normal profits in the long run. If the existing firms are earning supernormal profits, new firms would be attracted to enter the industry and increases the total supply. This will reduce the market price and the supernormal profit will not sustain. On the other hand if the existing firm incur supernormal loss then firms would leave the industry, thus reducing the supply. As a result, price will again rise and the loss will be wiped out.
Ø Profit maximization: The goal of all firms is maximization of profit.
Ø No Government regulation: There is no Government intervention in the market.
Ø Perfect mobility of factors: Resources can move freely from one firm to another without any restriction. The labours are not unionized and they can move between jobs and skills.
Ø Perfect knowledge: Individual buyer and seller have perfect knowledge about market and information is given free of cost. Each firm knows the price prevailing in the market and would not sell the commodity which is higher or lower than the market price. Similarly, each buyer knows the prevailing market price and he is not allowed to pay a higher price than that. The firm also has a perfect knowledge about the techniques of productions. Each firm is able to make use of the best techniques of production.