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Engineering Economics & Financial Accounting

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• Market is defined as a place or point at which buyers and sellers negotiate for exchange of well-defined products or services. • Traditionally, market was referred to a public place in a village or town where provisions and other objects were brought for sale. • Based on location, markets are classified as rural, urban, national or world markets. • Market is said to exist wherever there is a potential for trade
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• Today with improving technology and modern facilities, the definition of market has undergone a sea change • In the modern context, market refers to a meeting point of buyer and seller, but not necessary a geographical one. • It is not necessary that the buyer must meet the seller in person. • While traditional avenues such as Value payable by Post (VPP) continue to be popular, e-commerce through internet has been the latest avenue for firms to sell larger volumes of their products and services via online negotiations where necessary.
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SIZE OF MARKET • The size of the market depends on many factors such as nature of products, nature of their demand, tastes and preferences of customers, their income level, state of technology, extent of infrastructure, including telecommunications and information technology, time factor in terms of short run or long run and so on
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• Market conduct refers to the behavioral aspects of sellers and buyers operating in a market. Market conduct consists of: • A) the business objectives of the firms such as profit maximization and sales maximization or market share. • B) customizing the products as per the specific requirements of buyers such as assembling of a personal computer as per the specifications of the buyer and making it cost effective. • C) improving the quality of the product and making it available at a lower price
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• D) marketing strategies and tactics adopted by the firms to establish competitive edge over rival firms. • These include various pricing strategies such as deliberately charging a low price in order to penetrate into the market and expand sales quickly, pricing the product deliberately as a higher level in order to make as much profits as possible in the quickest possible time. • Change in advertising and sales promotion strategies, variations in the quality and make of the products, innovative packaging techniques and design etc.,
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• When the suppliers/sellers utilize the economic resource/inputs to their maximum efficiency and to the ultimate benefit of consumers, the market is said to be effective in its performance.
• The following are the essentials of market performance:


• A)Efficiency in production: • When the process of production of goods and services is cost effective, efficiency is said to prevail in production processes. • The firm should make efforts to minimize the costs while maximizing the output. Scale economics should be fully exploited.
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• B) Efficiency in distribution: • Distribution is the process of storing and moving the products to consumers often though intermediaries such as wholesalers and retailers. • Channel of distribution is the route followed for physical distribution of a product form the manufacturer to the ultimate consumer. • The channel of distribution should be effectively manag3ed to bring down the distribution costs to the minimum and to make the product available to the ultimate customer without any sort of inconvenience.
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• C) Fixation of Prices: • The price should be fixed at reasonable level leaving reasonable profit/return to the suppliers/sellers. • D) Product performance: • The customers always look for variety, sophistication in design and quality at reasonable price. The firm should provide value-for-money. • E) Improved technology: • Innovations in technology bring down the costs of product and process manufacturing and inprove the features of the product. • The growing demands of the customers can be met better though introduction of process and product innovations. These also reduce the supply costs in real terms.
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• Market structure refers to the characteristics of a market that influence the behavior and performance of firms that sell in that market. • The structure of market is based on the following features: • 1.The degree of seller concentration: • This refers to the number of sellers and their market share for given product or service in the market
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• 2.The degree of buyer concentration: • This refers to the number of buyers and their extent of purchase of a given product or service in the market. • 3.The degree of product differentiation: • A firm may differentiate its product form that of the competitor though advertising, creating a brand image, product design, variation in quality, packagining location and so on. • This refers to the extent by which the product of each trader is differenciated from that of the other. • Product differentiation can take several forms such as varieties, brands, all of which are sufficiently similar to distinguish them, as a group, from other product
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• 4. The conditions of entry to the market: • Often, there could be certain restrictions to enter or exit from the market. The degree of ease with which one can enter the market or exit from it also determines the market structure. • In other words there could be large number of firms if there aren’t many restrictions on entering the market and vice versa
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• The lesser the power an individual firm has to influence the market in which it operates, the more competitive the market is. If a firm can influence the market by offering products and services at better or attractive terms and conditions, it is said to have grater power to influence the market.
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• The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market • Four basic types of market structure are (1) Perfect competition: many buyers and sellers, none being able to influence prices. (2) Oligopoly: several large sellers who have some control over the prices. (3) Monopoly: single seller with considerable control over supply and prices. (4) Monopsony: single buyer with considerable control over demand and prices.
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• The theoretical free-market situation in which the following conditions are met: (1) buyers and sellers are too numerous and too small to have any degree of individual control over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access toinformation regarding availability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another. Also called perfect market or pure competition.
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Features of perfect competition
• 1. Large number of buyer and sellers: • Each buyer buys a small quantity of the total amount. • Each seller is so large that no single buyer or seller can influence the price and affect the market. • Buyers and sellers are price takers in the purely competitive market. • Each seller (or firm) sells its products at the price determined by the market. • Similarly, each buyer buys the commodity at the price determined by the market.
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• 2.Free entry and exit: • Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market. However, such free entry or free exit is possible only in the long run, but not in the short-run.
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• 3.Perfect knowledge: • Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the market conditions. As a results, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has no scope.
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• 4.Perfect mobility of factors of production: • The second perfection mobility of factors of production from one use to another use. This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned. This is essential to enable the firms and industry to achieve equilibrium.
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• 5. Homogenous Product • In this case, all sellers produce homogeneous i.e. perfectly identical products. All products are perfectly same in terms of size, shape, taste, colour, ingredients, quality, trade marks etc. This ensures the existence of single price in the market.
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• 6. Each firm is a price taker: • A firm in a perfect market cannot influence the price though its own individual actions. • It has no alternative other than selling its products at the price prevailing in the market
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Total Revenue(TR), Average Revenue(AR) and Marginal Revenue(MR) • Total revenue ( TR ) is the total amount of money(or some other good) that a firm receives from the sale of its goods. It the firm practices single pricing rather than price discrimination, TR = total expenditure of the consumer = P xQ
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Total Revenue, Average Revenue and Marginal Revenue
• Average revenue ( AR ) is the total amount of money(or some other good) that a firm receives from the sale divided by the number of units of goods sold. • AR = TR/Q, since TR=P x Q, then AR = P for single pricing practice
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Total Revenue, Average Revenue and Marginal Revenue

• Marginal revenue ( MR ) is the change in total revenue resulting from selling an extra unit of goods. • MR = TR/Q, where TR = change in TR due to change in Q, Q = change in Q
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• Imagine that one more book is sold. Since the selling is done at a given market price of rs.10 the additional revenue (MR) by selling one more unit will be rs.10 • Consider this example. Your are selling notebooks. Each books cost rs.10 your are not going to given any discount or concession even if a buyer purchases more number of books at a time. Suppose 10m books are sold. • The total (TR) revenue is rs.100. the average revenue (AR) is rs.10 (100/10). • Suppose you are selling one more notebook. Since you are selling at the given market price of rs.10, the additional revenue (MR) by selling one more unit will be rs.10 • Thus, under perfect competition Price =Average Revenue (AR) = Marginal Revenue (MR)
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• Real world' competition that is less effective in lowering price levels nearer to the cost levels than the theoretical perfect competition. Conditions that help cause imperfect competition include (1) restricted flow of information on costs and prices, (2) near monopoly power of some suppliers, (3) collusion among sellers to keep prices high, and (4) discrimination by sellers among buyers on the basis of their buying power.
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• Market situation where one producer (or a group of producers acting in concert) controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers.
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• Most governments therefore try to control monopolies by (1) imposing price controls, (2) taking over their ownership (called 'nationalization'), or (3) by breaking them up into two or more competing firms. Sometimes governments facilitate the creation of monopolies for reasons of national security, to realize economies of scale for competing internationally, or where two or more producers would be wasteful or pointless (as in the case of utilities). Although monopolies exist in varying degrees (due to copyrights, patents, access to materials, exclusive technologies, or unfair trade practices) almost no firm has a complete monopoly in the era of globalization
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• Market situation midway between the extremes of perfect competition and monopoly, and displaying features of the both. In such situations firms are free to enter a highly competitive market where several competitors offer products that are close (but not perfect) substitutes and, therefore, prices are at the level of average costs (a feature of perfect competition). • Also, some consumers have a preference for one product over another that is strong enough to make them keep buying it even when its price increases, thus giving its producer a small amount of market power (a feature of monopoly). Monopolistic situation is a common situation in all free markets
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DUOPOLY • Market situation in which only sellers supply a particular commodity to many buyers. Either seller can exert some control over the output and prices, but must consider the reaction of its sole competitor (unless both have formed an illegal collusive duopoly).
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Example • A soft drink market with two companies such as Pepsi and Coke is called duopoly. • Basic facilities for satellite communication are presently provided by the Mahanagar Tlelphoine Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL)
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• Market situation between, and much more common than, perfect competition (having many suppliers) and monopoly (having only one supplier). In oligopolistic markets, independent suppliers (few in numbers and not necessarily acting in collusion) can effectively control the supply, and thus the price, thereby creating a seller's market. • They offer largely similar products, differentiated mainly by heavy advertising and promotional expenditure, and can anticipate the effect of one another's marketing strategies. Examples include airline, automotive, banking, and petroleum markets. Mirror image of oligopsony.
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• Car manufacturing companies (such as MarutiSuzuki, Hindustan Motors, Daewoo, Toyota etc.,) and Newspapers (such as The Hindu, Indian Express, Times of India, Economic Times, Eenadu, etc,) • In oligopoly, each individual seller or firm can affect the market price. When The Times of India slashed the price of ots daily newspaper, most other companies such as Indian Express and The Hindu followed suit. • Oligopolistic market situations are very common in sectors relating to manufacturing, transportation, communication and so on.
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MONOPSONY • A term used to describe a market where a very large buyer typically dominates the price action. In a monopsony, the large buyer is typically able to force prices to decline and this type of market contrasts with a monopoly where a large seller is able to drive up prices.
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• The Food Corporation of India is the only government organization that purchase agricultural produce such as rice and so on.
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• Market situation in which only two buyers create the entire demand for a commodity supplied by many sellers a mirror image of duopoly.
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• Market situation where presence of few buyers and many suppliers creates a buyer's market. Mirror image of oligopoly.
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Example • A few news paper publishing companies in India and all these buy newsprint from the Government of India. • A good number of computer assembly operators who buy computer components on a wholesale basis.
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Dr.K.Baranidharan Thank you