UNIVERSITY OF LUCKNOW

FACULTY OF COMMERCE

BUSINESS ECONOMICS
[BCH 306]
TOPIC:- TYPES OF MARKET AND BREAK-EVEN ANALYSIS

SUBMITTED BY:-SAURABH KUMAR SUBMITTED TO:-DR. RAVI KUMAR TOLANI

COURSE:-B.COM(HONS.)
SECTION:-C
SEMESTER:-3rd SEM
ROLL NO:-200012025149
MEaNINg OF MaRKET
The word "market" is always used in our everyday conversation. However, in
order to comprehend where commodities are brought and sold in
economics, we must first understand the term market, which has several
diverse meanings. In economics, a market is a gathering of buyers and sellers
who participate in the trade of goods. The buyer and seller may be
separated by country or by continent, but they must maintain contact.
DEFINITION OF MaRKET
Cournot’s definition – the French economist Cournot defined a market thus
“Economists understand by the ‘Market’ not any particular market place in
which things are bought and sold but the whole of any region in which
buyers and sellers are in such free intercourse with one another that the
prices of the same goods tend to equality, easily and quickly.”
According to Chapman, "the term market refers not to a place but a
commodity or commodities and buyers and sellers who are in different
competition with one another.“
MODERN DEFINITION
The today's market viewpoint is largely recognised. "It (market) indicates the
whole territory across which buyers and sellers are in such close contact
with one another, directly or through middlemen, that the price of the
commodity in one portion impacts it in other parts of it.“
CLaSSIFICaTION OF MaRKET
1. On the basis of area
a) Local market: A local market is one that takes place in a specific village
or neighbourhood. Local markets are common for perishable items.
b) Regional market:A regional market is one that covers a certain geographic area.
Bulky items, such as bricks and stones, typically have regional markets.
c) National market:It refers to a market that covers the entirety of the
country. Generally commodities like wheat, rice etc. have a nationwide
market.
d) International market: An international market is defined as one that
is distributed around the globe. In general, precious metals that is
distributed around the globe. In general, precious metals such as gold,
silver, and platinum have a global market.
2. On the basis of time
 Very short period market:A very short period is defined as one in which
supply cannot be raised or reduced to meet demand. Vegetables, fruits,
and other produce are examples of relatively short-term markets.
 Short period:Short period market refers to a period of time in which
the rate of production is variable.
 Long period: A long period is a period of time in which the supply of a
commodity can be adjusted in response to demand conditions. Long
period involves many years.
3. Classification on the basis of competition
a) Perfect market: A perfect market is where there is perfect
competition.
b) Imperfect market: A market is imperfectly competitive if the action of
one or more buyers and sellers have a perceptible influence on price.

PERFECT COMPETITION
A perfectly competitive market is one in which there are a large number of
buyers and sellers, all of whom are engaged in buying and selling a
homogeneous commodity without any artificial constraints and who have
perfect knowledge of the market at the same time. According to R.G. Lipsey,
“Perfect competition is a market structure in which all firms in an industry
are price- takers and in which there is freedom of entry into, and exit from,
industry.”
In other word a market in which there are a high number of buyers and
sellers of a commodity is known as perfect competition. The price of a
homogeneous commodity is determined by the forces of supply and
demand. Price is beyond the influence of an individual buyer or vendor.
FEATURES OF PERFECT COMPETITION
• Large number of sellers:In a perfect competition, there are a huge
number of sellers. Because the number of sellers is so huge, each one
sells so little, none of them has any impact over the market price.
• Large number of buyers: Similarly, there are a great number of buyers.
Each buyer buys so little that none of them has any impact over the
market price. When there are millions of buyers on the market, it's only
reasonable that none of them can have enough clout to influence the
 price in his favour.
• Homogeneous Product: The commodities sold by a large number of
sellers must be identical or homogeneous in the view of the purchasers,
which is a crucial aspect of a perfect competitive market. In this case,
homogeneity does not imply that items are identical in every way. They
are exact duplicates of one another. To put it another way, the price of
one has a significant impact on the price of the other. As a result, the
product is homogeneous, and no vendor can charge a price that is even
marginally higher than the current market price. If the seller lowers the
price, he will lose all of his customers. Although there are multiple
companies functioning in the market, no single company has the ability
to influence the pricing.
• Free entry and free exit for firms: In perfect competition there
should be a complete freedom for firms to enter or exit the industry at
their choice. Similarly, if certain businesses are losing money, they can
leave the industry. Enterprises that can supply at the prevailing price
enter the industry, whereas inefficient firms that can't supply at the
prevailing price suffer losses. They have the option to leave the market.
• Perfect knowledge of the market :There is perfect understanding of
market conditions on the part of buyers and sellers in a perfect
competition. Due to perfect knowledge, there is no need for any
expenditure or advertising in a perfect competition. The sellers, too,
have complete knowledge of prospective sales at various price points. In
other words, both buyers and sellers are fully aware of the price. Entire
demand equals total supply at this 'price,' which is known as the
‘market-clearing price.’
• Perfect Mobility of factors of production: Perfect mobility of production
variables is required for the seamless operation of perfect competition.
Factors of production should be allowed to work in any industry that
they deem profitable. Ideal factor mobility is required to meet the first
requirement of perfect competition, which is a high number of sellers in
the market.
• No transport cost : Transport expenses are assumed to be non-existent
in a completely competitive market. The assumption is based on the
logic that the numerous enterprises are so close to one another that
transportation costs are negligible.
• Independent Decision-making and Freedom from Checks: The sellers
haven't reached an agreement on production, quantity, or price. There.
 are also no restrictions on the selling or acquisition of any commodity.
 Shape of Demand Curve:The demand curve for the firm is horizontal
and perfectly elastic in perfect competition. It indicates that the
company can sell any amount of the goods at the industry price, but it
cannot change the price.

MONOPOLY
Monopoly is a market structure in which there is only one seller, there are
no close substitutes for the firm's goods, and entry is difficult. Consider the
Indian Railways, which is run by the Indian government.
The word monopoly is made up of two syllables ‘mono’ and 'poly'. 'Poly'
denotes selling, while 'mono' means single. As a result, monopoly implies
that there is only one vendor of a commodity on the market. In fact, a
monopoly is defined as a market scenario in which only one seller exists (or
producer). He has complete control over a single commodity's supply. It is a
single commodity since there are no close substitutes. In this sense, a
monopoly refers to a single seller of a product on the market.
FEATURE OF MONOPOLY
 Single Seller: In a monopoly, a product is produced by only one
company. This one company is responsible for the entire industry. As a
result, there is no distinction between firm and industry when there is a
monopoly. Because it is the only company, it has great control over
supply and price. As a result of the monopoly, buyers are unable to
purchase the commodity from any other vendor. They can either buy
the product from the company or they can go without it. The
monopolist gains enormous market control as a result of this
circumstance.
 No Close Substitute: There are no close substitutes for the
monopolist firm's products. If there are close substitutes for the product
on the market, there is more than one firm present, and hence there is
no monopoly. It is considered that there are no close substitutes for the
 product in order for the monopolist firm to have complete market
power.
 No Free Entry: The fact that a monopolist is the single seller with no
near substitutes means that there are legal, technical, economic, or
natural barriers preventing enterprises from freely entering the
market.
 Price Maker: Because the monopolist is the only vendor of the
goods, he or she has complete control over its pricing. When there are
a big number of buyers in the market, however, no single buyer has a
substantial influence on price determination. As a result, it's a buyer's
market. As a result, a monopoly firm is a price setter.
 Average Revenue or Demand Curve : A monopoly firm which is
also identical to industry, faces a downward sloping demand curve for
its product. In other words, it can sell more at lesser price and less at
higher price.
 Price Discrimination:The monopolist can control price
discrimination because he has significant market control as a single
seller with no competition. This means that the monopolist can sell
different quantities of the same product to different consumers at
different prices, or the same quantity to different consumers at
different prices, depending on the consumer's standard of living.
 Shape of Demand Curve: Because a monopolist has complete
control over the price, he may sell more by lowering it. As a result, the
demand curve slopes downward. The demand curve is inelastic since
there is no firm rivalry in the market.
MONOPOLISTIC COMPETITION
Monopolistic competition is a market structure in which there are a high
number of sellers in a commodities market, but each seller's product differs
in some way from the other sellers' goods. As a result, the cornerstone of
Monopolistic Competition is product differentiation. Monopolistic
competition is like an amalgam of monopoly and perfect competition, and
hence the name Monopolistic Competition. According to J.S. Bains,
“Monopolistic Competition is a market structure where there is a large
number of sellers, selling differentiated but close substitute products.”
Examples of monopolistic competition are the restaurant business, Hotels
and pubs ,etc .
Features of Monopolistic Competition
 Large number of firms: A significant number of enterprises selling
closely similar items compete in monopolistic competition. As a result,
when compared to monopoly, a firm's control is somewhat diminished.
Each company controls a small percentage of the entire market output.
Its actions will have little or no impact on other businesses.
 Product Differentiation: Monopolistic competition is characterised by
product differentiation. This disparity could be based on quality,
packaging, colour, and other factors, or it could just be a question of
perspective. For example, several companies in India create cosmetics,
yet each product differs from its competitors in one or more ways, such
as distinct face powders from Lakme, Revelon, and Himalaya etc.
 Free entry: Under monopolistic competition, it is easy for a new
company to merge with an established one or to exit the industry. There
are a lot of little businesses, which makes it easier to get into and out of
the market. Because the production procedures are simple and the
capital required is modest, new businesses can easily enter the market.
 Selling Costs: Firms that compete in a monopolistic market spend a lot
of money on advertising their products in order to attract clients and sell
them. Every company seeks to sell its product through advertising, which
incurs additional costs above and beyond the cost of production. This is
referred to as the selling cost.
 Non-Price Competition: Monopolistic competition occurs when
businesses compete with one another without adjusting their prices.
They might initiate numerous promotion plans, gift schemes, or
advertising competitions, for example.As a result, businesses compete in
every manner possible to attract customers and achieve the largest
 potential market share.
 Nature of Demand Curve: Monopolistic Competition, like monopoly,
has a downward sloping demand curve. Due to the presence of
competitors in the market, the degree of steepness of the curve is slightly
less than that of a monopoly, suggesting greater price elasticity of
demand and less firm control.

OLIgOPOLY
Oligopoly is one of the most common types of imperfect competition. Since
'oligo’ means few and 'poly’ means seller, oligopoly refers to the market
structure involving only few sellers or firms. In India, the car business is
oligopolistic, with only a few companies producing and supplying vehicles. In
fact, the oligopolistic market structure is based on rivalry among a few
enterprises. Oligopoly is simply described as competition between a small
number of enterprises. These companies' products could be close
substitutes or homogeneous.
Example: Mobile service providers, car industry, airlines etc.
Features of Oligopoly
 Interdependence: Interdependence is a key characteristic of oligopoly.
When the number of enterprises is limited, the success of any strategy
including changes in pricing, output, or product quality is contingent on
the reaction of competitors. As a result, the success of a company's price-
cutting policy (say, Pepsi) will be determined by how its competitors react
(say, Coke). For example, if Pepsi reduces the price per bottle from Rs 10
to Rs 8, the impact on demand for Pepsi will be determined by Coke's
counter-strategy. If Coke decides to go with a price war plan and cuts the
price from Rs 10 per bottle to Rs 7, demand for
 Pepsi could fall even lower than it was before.
 Indeterminate Demand Curve: The demand curve depicts varying
quantities of a product demanded at different prices. However, only
when rivals' counter tactics can be foreseen with accuracy can demand
for a product at different prices be determined. In the situation of
oligopoly, we cannot construct the standard demand curve for the firm's
product because this is not possible.
 Selling Costs: Oligopoly firms bear selling cost such as advertisement,
sales promotion etc. to sale the product.
 Group Behaviour: Because there are only a few enterprises in an
oligopoly, they have a tendency to band together to prevent competition.
They may meet in private to discuss market price and quantity. In the
same way that a monopolist does, the goal is to maximise profit. When
they join together, it appears as if all of the enterprises have merged into
a single entity, similar to a monopolist. However, such groupism is carried
out in secret because the government may take action if it learns of this
form of group behaviour in which corporations aim to minimise
competition among themselves. It's important to note that collusive
oligopoly refers to when enterprises create a group in secret to share
profit or quantity, among other things. Non-collusive oligopoly occurs
when businesses operate independently and compete with one another.
 Price Rigidity: Once the price of a product is set by the firms in an
oligopoly market, it is usually not changeable. As a result, the price is
fixed. The reason for this is that businesses deal with a variety of
consumers with varying demand elasticities. As a result, the response of
one firm to a change in price may differ from another, producing
uncertainty about future sales. As a result of this concern, these
companies do not adjust their prices after they have been set.
Types of Oligopoly
Oligopoly may further be classified into collusive oligopoly and non-collusive
oligopoly.
 Collusive oligopoly: Firms in an oligopoly may decide to work together
and develop policies that apply to all of them. As a result, enterprises
may band together to develop common pricing strategies and make
shared output decisions. In such a situation, the group of companies can
act like a monopoly and reap extraordinary profits. The term 'cartel'
refers to a collection of collaborating businesses. The Organization of
Petroleum Exporting Countries (PEC) is a well-known example of a cartel.
 Non-collusive oligopoly: Non-collusive oligopoly refers to a market in
which firms do not cooperate with one another and compete fiercely
with one another. Firms drive price levels and profit levels down to the
level of normal profit only in such an environment, as they compete with
one another.
 Perfect and Imperfect Oligopoly: If oligopoly firm are producing
homogeneous products , it is called perfect oligopoly . On the other hand,
if oligopoly firm are producing differentiated products, it is called
imperfect oligopoly.
DUOPOLY
There are only two vendors in a duopoly, which is a specific instance of
oligopoly theory. There is no agreement between the two sellers, as they are
fully separate. Despite their independence, a change in one's price or output
will have an impact on the other, perhaps triggering a cascade of events.
However, a seller may believe that his competitor is unaffected by what he
does, in which case he will only have direct impact over the price.
EXAMPLE: Android and iOS, Airbus and Boeing and Pepsi and Coca Cola etc.
Features of duopoly
A market structure similar to an oligopoly is a duopoly. It does, however,
have certain distinguishing characteristics. The fact that only two enterprises
share the market is the first distinguishing feature of this market structure.
Second, in a duopoly, the two enterprises are mutually dependent.
Companies frequently adopt intentional steps, such as price reductions, to
attract customers' attention. If one company lowers the price of its product,
the other will follow suit. This is important in order to attract customers and
persuade them to make a purchase.

It's worth noting that players can work together to set a price or output, or
to keep a competitive climate alive in order to make substantial gains. It's
difficult for new firms to break into a duopoly because companies employ
various approaches to building brand loyalty and implementing low-price
strategies. As a result, because there is just one competition and the hurdles
to entrance are high, sales volume and revenues are adequate.
BREaK-EVEN aNaLYSIS
A break-even analysis is an economic method for determining a company's
cost structure or the number of units that must be sold to pay costs. Break-
even refers to a situation in which a corporation does not generate a profit or
a loss, but instead recovers all of the money spent.
The break-even analysis is used to investigate the relationship between fixed,
variable, and revenue costs. A company with a low fixed cost will usually
have a low break-even point of sale.
In traditional theory of firm, the basic objective of firm is to maximize the
profit . Maximum profit does not necessarily coincide with the minimum
cost, as far as the traditional theory of firm is concerned . Beside, profit is
maximum at a specific level of output which is difficult to know before hand.
In real life, firm begin their activity even at a loss, in anticipation of profit in
the future. However, the firm can play their production better if they know
the level of production where cost and revenue break-even i.e., the
profitable and non-profitable range of production. Break-even analysis or
what is also know as profit contribution analysis is an important analytical
technique used to study the relationship between the total costs, total costs,
total revenue and total profit or losses over the whole range of stipulated
output. The break-even analysis is a technique of having a preview of profit
prospects and and a tool of profits planning. It integrates the cost and
revenue estimates to ascertain the profit and losses associated with different
levels of output.
Importance of Break-Even Analysis
• Manages the size of units to be sold: The company or the owner can
determine how many units must be sold to cover the costs using break-
even analysis. The break-even analysis requires the variable cost and
selling price of each individual product, as well as the total cost.
• Budgeting and setting targets: Because the company or the owner
understands when a business can break even, it is simple for them to
create a goal and a budget for the business. This research can also be
used to determine a company's realistic aim.
• Manage the margin of safety: When a company's financial situation
deteriorates, its sales tend to decline. The break-even analysis assists the
company in determining the minimum amount of sales required to break
even. The management can make a high-level business judgement based
on the margin of safety reports.
• Monitors and controls cost: Fixed and variable costs can have an
impact on a company's profit margin. As a result, management can use
break-even analysis to see if any effects are changing the cost.
• Helps to design pricing strategy: Any change in a product's pricing
can have an impact on the break-even point. If the selling price is
increased, the amount of the product that must be sold to break even is
reduced. Similarly, if a company's selling price is cut, it must sell more to
break even.
Components of Break-Even Analysis
 Fixed costs: Overhead costs are another name for fixed costs. These
expenses are directly tied to the level of production, but not the quantity
of production, and they occur after the decision to start an economic
activity is made. Interest, taxes, salaries, rent, depreciation expenses,
labour costs, and energy costs are examples of fixed costs. These costs
are constant regardless of production. Costs must be incurred even if
there is no production.
 Variable costs: Variable costs are those that rise or fall in direct
proportion to the volume of output. These expenses include the cost of
raw materials, packaging, fuel, and other production-related expenses.

This break Even Analysis can be done in two ways:

1. Graphical method
2. Algebraic method

gRaPhICaL METhOD
The BE chart, also known as the CVP chart or graph, is used to
graphically describe the BE analysis. It is a very effective tool for presenting
information to management on the effects of changes in expenses and
revenues on profits at various levels of output. It's a simple profit graph that
everybody can understand. Thousands of words can be explained extremely
well with the help of a graph.
The generated picture or diagram is called a break even chart when the
relationship between cost, volume of output, and profit is represented
graphically. The graph not only depicts the point at which total expenses and
total revenues break even or equalise, but it also depicts the behaviour of
costs, revenues, and profits at various levels of output. In other words, a BE
chart is a pictorial representation of the relationship between a firm's costs,.
volume, selling price, and profits that visually depicts the impact of changes
in any of these variables on the firm's profitability.
Break Even Analysis and Break-even charts are important tools for profit
planning. There are three ways to improve profits, namely
• Increasing the volume of sales i.e. revenue by increase in output or
increase in selling price.
• Reducing the variable expenses
• Reducing the fixed expenses.
Break Even Analysis can also be done using Graphical Charts. A Break Even
Chart shows the approximate profit or loss at various levels of sales volume
within a specific range. The break-even charts display fixed and variable costs
as well as sales income, allowing for the determination of profit or loss at any
given level of production or sales.
Steps involved in construction of a break-even chart are :
1. Select a scale of/for sale (units) on horizontal axis.
2. Select a scale for costs and revenues on vertical axis.
3. Draw a straight line parallel to the horizontal axis for the fixed cost line.
4. For the fixed cost line, draw a straight line parallel to the horizontal axis.
5. Draw a sale line from the point of origin (zero) to the maximum sales
point.
6. At the point where total cost equals total revenues, the sales line will cut
the total cost line.
7. The point where two lines intersect is known as the break-even point, or
the point where there is no profit and no loss.
8. The sales value and number of units produced at break-even point are
determined by the lines drawn from intersection to horizontal and
vertical axes.
9. If the production is less than the break-even point, a loss is shown, and if
the production is more than the break-even point, a profit is shown.
10. The difference between total sales and break-even sales is known as
Margin of Safety
aLgEBRaIC METhOD
Graphical methods of determining break-even analysis is useful way of
illustrating cost output, revenue, output and profit output relationship. But
algebraic method is a helpful in decision making problems by firm. It is also
known as equation method of calculating the breakeven point of sales which
is represented by an equation that is based on formula for cost volume
profit.
Profit is he difference between the total revenue and total cost.
Profit =TR – TC
Total revenue is equal to the price per unit of the commodity times the
quantity of output sold.
TR=PQ -----(1)
The total is equal to total variable cost plus total fixed cost i.e., (TVC+TFC)
and total variable cost is the variable cost per unit multiplied by the output
produced and sold (TVC=AVC/2)
TC=TVC=TFC
TC=(AVC*Q)+TFC -------(2)
At that level where the total revenue is equal to total cost break-even
quantity of output produced and sold occurs.
Break-even quantity, from ---------(1) and (2)
TR = TC
Q (P) =TFC+ Q (AVC)
Q (P) - Q (AVC) =TFC
(P-AVC) =FC
Q= TFC/P-AVC

CONTRIBUTION aNaLYSIS METhOD:

The additional or incremental sales revenue, as well as the expenditures
associated with it, are analysed using this method to calculate the breakeven
point for sales. Deducting the whole variable cost of the business (in the case
of a single-product business) from the total income from the sale of the
given product yields the contribution. This may also be seen in the graph,
where the total cost line, which includes both fixed and variable costs, runs
parallel to the variable cost. At breakeven, both the total revenue and total
cost lines intersect.

Contribution Margin=Sales Revenue − Variable Costs

Margin of Safety:-The margin of Safety represents the difference between
the sales at breakeven point and the total actual sales i.e., Margin of Safety =
Actual Sales- Break Even Sales It is the limit to which the sales may fall yet
the firm may have no fear of loss. Three method of measuring of margin of
safety are as follow;
1. Margin of Safety = (Profit* sales)/ PV ratio
2. Margin of Safety = (Actual Sales- Break Even Sales)/ Actual Sales
3. Margin of Safety = Profit/ PV ratio .
The margin of safety can be increased I by raising the selling price if demand
is inelastic, (ii) by increasing production or sales up to the plant's capacity or
lowering the selling price if demand is elastic, and (iii) by lowering fixed or
variable costs or having a product mix with a higher share of one having a
higher contribution per unit or higher PV ratio if demand is elastic.
Target profit analysis:Either the equation method or the contribution
margin method can be used to find the number of units that must be sold to
attain a target profit. In the case of the contribution margin method, the
formulas are:
Unit sales to attain target profits = Fixed expenses +Target profits/Unit
contribution margin
In Rs. sales to attain target profits = Fixed expenses +Target
profits/Contribution margin ratio
Contribution margin ratio Note that these formulas are the same as the
break-even formulas if the target profit is zero.
Angle of Incidence( θ): This is the perspective from which sales revenue
reduces total costs. More profit at a greater rate is indicated by a larger. The
exceptionally beneficial business situation is marked by a greater angle of
Incidence with a high margin of safety.
Profit Volume Ratio(P/V): t measure the profitability in relation to
sales. It determines the BEP. Can be increased by increasing the
sales price and reducing the variable cost.
CONCLUSION
Break-even analysis is a good place to start when creating financial
applications for invoicing and budgeting. The major goal of this study is to
determine how much to sell in order to make a profit. Before starting a new
business (or introducing a new product), a break-even analysis is critical
because it answers critical concerns like "how sensitive is the profit of the
firm to declines in sales or increases in costs?" This study can also be applied
to early-stage companies to see how accurate the initial projections were
and whether the company is on the right track (one that leads to profits) or
not.

REFERENCES
 Introductory Microeconomics for Class XI by T.R. Jain and Dr. V.K. Ohri, VK
Global Publications Pvt. Ltd. Chapter No.12 Forms of Market, Page no
315, 316, 317, 318, 319,…….328, 329.
 Managerial economics by Dr. M.L. AHUJA from , Chapter 16, Break-even
analysis , page no. 401,402,403,404.
 Google
 Wikipedia.