Wednesday, July 20, 2016

Oligopsony

Oligosony is a Market Form in which the number of buyers is small while number of sellers in theory could be large. This typically happens in a market where numerous suppliers are competing to sell their product to a small number of (often large & powerful) buyers. This allows buyers to exert a great deal of control over the sellers and can effectively drive down prices.
An Oligopsony is a form of imperfect competition. It contrasts with Oligopoly, where there are many buyers but few sellers. However, Oligopsony tends to be just as prevalent in the real world.
In fact, the firms operating as Oligopoly in an output market, also often operate as Oligopsony in an input market. Most of the standard analysis that applies to the Oligopoly also applies to the Oligopsony. When a small number of relatively large buyers dominate an industry , they tend to dominate most facets of the industry.
The reason that the term Oligopsony is seldom used is that term Oligopoly usually covers the entire range of output selling and input buying activities. For example, if few firms dominate the output market for computers as Oligopoly sellers, than they are also likely to dominate the input market for computer components, such as silicon chips, hard disc drives, and programmers, as Oligopsony buyers. If a few firms are Oligopoly sellers of gasoline, then they are also likely to be Oligopsony buyers of petroleum.

Key Characteristics of Oligopsony Competition


Small Number of Large Buyers

An Oligopsony market is dominated by a small number of large buyers, each of which is relatively large compared to the overall size of the market. This generates substantial market control depending on the number and the size of the buyers.
For example only a three American firms (Cargill, Archer Daniels Midland & Barry Callebaut) buy the vast majority of world's cocoa bean production, mostly from small farmers.

Interdependence

Each Oligopsonistic buyer keeps a close eye on the activities of other buyers in the industry. Decisions made by one buyer invariably affect others. They anticipate the moves of other buyers in the industry to woo the sellers, and try to reciprocate with their own strategies.

Rigid Prices

Many Oligopsonistic industries tend to keep their prices they pay to sellers relatively constant, preferring to compete in ways that do not involve changing the price. The reason for this that the competitors are likely to match price increases, but not price decreases, which may result in loss of the market share to that buyer, as the sellers will sell the raw materials to highest bidder only.

Non Price Competition

Because Oligopsonistic buyers have little to gain through price competition, they generally rely on non price methods of competition. Oligopsonistic  employers for example are likely to compete through working conditions, fringe benefits and assorted non wage amenities.

Mergers

Like their Oligopoly counterparts, Oligopsonistic buyers perpetually balance competition against cooperation. They often pursue cooperation through mergers, legally combining two separate buyers into a single buyer. Because Oligopsonistic industries have a small number of buyers, the incentive to merge is quite high. Doing so gives the resulting buyer greater market control.

Collusion

Another common method of cooperation is through collusion, two or more buyers secretly agree to control prices, purchasing, or other aspects of the market. By colluding they can behave as a Monopsony. As such they can set Monopsony prices & conditions.

Barriers to Entry

Firms in a Oligopsony market attain & retain market control through barriers to entry. Natural barriers to entry includes, patents, resource ownership, government franchises, start up costs, brand name recognition. Artificial barriers to entry include decreasing average costs by collusion or mergers. Each of this make it extremely difficult for potential competitors to enter the market.

Monday, July 18, 2016

Monopoly

A Monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service, or is the sole provider of a good or service in an industry. This potentially allows that company to become powerful enough to prevent competitors from entering the marketplace, leading to Limited Consumer Choice, Higher Prices and Limited Response to Customer Concerns.
Many times when a Government determines that an unfair monopoly is in place, it can step in enforce Anti-Trust laws, which can penalise companies monetarily or even force the break up of the company.
Monopolies can form for a variety of reasons, as following
If a firm has exclusive ownership of a scarce resource.
Governments may grant a firm monopoly status for some period of time. The reasoning behind such Monopolies is to give innovators some time to recoup, what are often large Research & Development costs.
Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names giving them exclusive rights to sell the good or service.
Monopolies are thus characterised by a Lack of Economic Competition to produce goods or service, a Lack of Viable Substitute Goods, and the possibility of High Monopoly Price well above the firm's marginal cost that leads to High Monopoly Profit.

Key Characteristics of Monopoly Market Structure


Lack of Competition

A Monopoly is a single seller of a good or service for which substitutes are not readily available. Hence it faces little or no competition in it's industry.

Monopoly Firm as the Price Maker

As the Monopoly firm has full control of the market, it is able to set the price and supply and the terms of exchange of it's goods independently without any interference. This characteristics makes it Price Maker.

Profit Maximizer

A Monopoly has full control both over the quantity produced and the price charged, hence it acts as a Profit Maximizer and is able to change the supply and price of a good or service to generate profits. It can find the level of output that maximises it's profit by determining the point at which it's marginal revenue equals to it's marginal cost.

Super Normal Profits in the Long Run

Monopolies can make Super Normal Profits in the long run. In general, the level of profits depends upon the degree of competition in the market, which for a pure Monopoly is zero. With no close substitutes, the Monopoly can derive Super Normal Profits.

High Barriers to Entry & Exit

Legal rights, Intellectual property rights, patents and copyrights give Monopolies exclusive control of the production and selling of certain goods.

Oligopoly

An Oligopoly is a market structure in which few large firms dominate the market. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few large firms dominate, it is possible that many smaller firms also operate in the market.
Oligopolists may have considerable power to fix prices and output. Oligopolies can result from various forms of collusion between the market participants, which reduce competition and lead to higher prices for consumers. Power is concentrated only in the hands of a few firms, who can dominate the market to gain excessive super normal profits.
Oligopolies may be identified using the Concentration Ratios, which measure the proportion of total market share controlled by a given number of firms. When there is high concentration ratio in an industry, economists tend to identify the industry as an Oligopoly.
With few sellers, each Oligopolist is likely to be aware of the actions of the others. And the decisions taken by one firm therefore can influence the others.
Oligopolistic Competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (Collusion, Market Sharing etc.) to raise prices and restrict production in much the same way as Monopoly. Where there is a formal agreement of such a collusion, this is known as Cartel. A primary example of such a Cartel is OPEC which has a profound influence on the international price of Oil.
Examples of Oligopoly Industries are Airlines, Fuel Retailing, Banking, Supermarkets, Cinema Chains, Cellular Network Companies.

Key Characteristics of Oligopoly Market Structure


Interdependence

The distinctive feature of an Oligopoly is Interdependence. Oligopolies are typically composed of a few firms, and each firm is so large that it's actions can affect the market conditions. Therefore the competing firms have to aware of each firm's market actions and respond appropriately. This means that while contemplating a market action, a firm must also take into consideration the possible reactions of all competing firms or the counter moves of other incumbent firms. it is very much like a game of Chess, in which a player must anticipate the whole sequence of moves and counter moves in order to determine his or her objectives, this is called Game Theory. For example if an Oligopoly considering a price reduction to increase it's market share, it also has to take in account the likelihood of price reduction by other competing firms in retaliation or possibly trigger a ruinous price war. Or if the firm is considering price increase, it may want to know whether other firms will also increase the prices or hold existing prices constant.

Strategy

Strategy is extremely important to the firms that are interdependent. As firms in an Oligopolistic Market cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or non price activity. In other words, they need to plan and work out a range of possible options on how they think the rivals might react.
The critical decisions that Oligopolists have to make are.
  • Whether to compete with the rivals or collude with them.
  • Whether to raise or lower price, or keep prices constant.
  • Whether to be the first to implement a new strategy, or wether to wait and see what rivals do. The advantages of going first or going second is respectively called 1st and 2nd Mover Advantage. Sometimes it pays to go first because a firm can generate head start profits. 2nd Mover Advantage occurs when it pays to wait and see what new strategies are launched by rivals, and then try to improve on them or find ways to undermine them.

Collusion

Another key feature of the Oligopolistic Market is that the firms may attempt to Collude, rather than compete. Colluding partners act like a monopoly and can enjoy the benefits of higher profits over a long term. Types of Collusion
  • Overt Collusion, is a formal collusion (agreement) among competing firms in an industry intending to raise the market price and act like a monopoly.  Overt Collusion occurs when there is no attempt to hide the agreements, such as when firms form trade associations like the Association of Petroleum Retailers (OPEC).
  • Covert Collusion, occurs when firms try to hide the results of their collusion to avoid detection by the regulators, such as when fixing price.
  • Tacit Collusion, arises when firms act together, called acting in concert, but where there is no formal or informal agreement. For example, it may be accepted that a particular firm is price leader in an industry, and other firms simply have to follow the lead of this firm. all firms may understand this, but there is no formal agreement or record to prove this. If firms Collude their behaviour can be can be checked to prove the reduced competition and they are likely to subject to regulation. In most cases the Tacit Collusion is impossible to prove.

High Barriers to Entry & Exit

Barriers to entry are high, the most important barriers are government licences, economies of scale, patents, access to expensive and complex technology and strategic actions by incumbent firms to discourage or destroy nascent firms. Following are few main barriers to entry that can be faced by the new entrants.
  • Incumbent firms must have already exploited the Economies Of Scale in the market, so new firms deter to enter the market.
  • Owning scarce resources or raw materials that incumbent firms have already access to in large numbers also creates a potential barrier to entry.
  • High Set Up Costs also deter initial market entry, because they increase the Break Even output, and delay the possibility of making profits. Many of these are sunk costs that cannot be recovered when a firm leaves a market including the marketing and advertising costs and other fixed costs.
  • Spending money on Research and Development (R&D) is often a signal to potential entrants that a firm has large financial reserves. New entrants have to match, or exceed this level of spending in order to compete the existing firms in the market. This widely found in Oligopolistic markets such as pharmaceuticals and the chemical industry.
  • Predatory Pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market.
  • Limit Pricing means the incumbent firm sets a low price, and a high output, so that new entrants cannot make profits at that price. This is achieved by selling at a price just below the Average Total Cost (ATC) of potential entrants. This signals the potential entrants that profits are impossible to make.
  • An incumbent overtime may have built up a superior level of knowledge of the market, it's customers, and it's production costs or processes. This also deters new entrants into the market.
  • Predatory Acquisition, involves taking over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy out.
  • Advertising is another Sunk Cost that incumbent firms can spend on heavily to increase their market share, this also deters the new entrants.
  • A Strong Brand name that has been there for quite some time, wins the trust, creates loyalty and locks in existing customers, which also deters new entrants.

Non Price Competition

When competing, Oligopolists prefer Non Price Competition in order to avoid price wars. Though a price reduction may achieve strategic benefits, such as gaining market share, but the danger is that rivals will simply reduce their prices in response. This leads to little or no gain, but can lead to falling revenues and profits. Hence, a far more beneficial strategy is to undertake Non price Competition. Non Price Strategies include.
  • Improving quality or After Sales Services, such as offering Extended Warranties.
  • Spending on Advertising or Sponsorship.
  • Sales promotions, such as giving gifts or Buy One Get One Free.
  • Loyalty Schemes.
These strategies can be evaluated in terms of 
  • How successful it is likely to be ?
  • Will rivals be able to copy the strategy ?
  • Will the firm get a 1st Mover Advantage ?
  • How expensive is it to introduce the strategy ? If the cost of implementation is greater than the pay off, clearly it will be rejected.
  • How long will it take to work ? A strategy that take a long time to generate pay offs may be rejected in favour of a strategy with a quicker pay offs.

Price Stickiness

Oligopolists mostly stick to a price once it has been determined. This is largely because firms cannot pursue independent strategies. For example if an Oligopoly raises the price of it's products, it is unlikely that rivals will follow suit, as it is to their competitive advantage to keep their prices as they are, the firm will start loosing market share to others and will loose revenue. However if a firm lowers it's price, rivals will be forced to follow suit to remain competitive in the market and drop down their prices in response. Again the firm will loose sales revenue and market share.

Monopolistic Competition

The model of Monopolistic Competition describes a market structure where a large number of independent firms sell many similar products with slightly different characteristics.
Products are differentiated from each other by the means of design, distribution, quality, colour, packaging, customer service or branding etc. and hence they are not perfect substitutes of each other.
In Monopolistic Competition, a firm takes the price charged by its rivals as given and ignores the impact of it's own price on the prices of the other firms.
Mainly small businesses operate under the Monopolistic Competition, including independently owned and operated high street stores, restaurants, retailers etc. Each one offers similar products but possesses an element of uniqueness, and are essentially competing for the same customers.

Key Characteristics of a Monopolistic Competitive Market


Large Number of Participants

There are many producers / sellers and consumers in the market, and no business has total control over the market or the market price.

Law Barriers to Entry & Exit

There is freedom to enter or leave the market, as there are no major barriers to entry or exit.

Widespread Knowledge About the Products

Knowledge is widely spread between the market participants, but it is unlikely to be perfect. Customers choices may be influenced by the product differentiation, like packaging or other promotional features.

Individual Firm as Price Maker

Unlike Perfect Competition, in Monopolistic Competition each individual firms is Price Maker for it's own product, as there are no perfect substitute for that product. The market price may only acts as a guideline. Each firm produces unique products, and can charge a higher of lower price than it's rivals.

Freedom To Make Decisions

Each firm makes independent decisions about the terms of exchange of it's products or price or output of it's product, based on its costs of production and it's profit making appetite. The firm gives no consideration to, any effect it's decision will have on the competitors.

Increased Risk

The entrepreneur has a more significant role than in a perfectly competitive market, because of the increased risk associated with decision making.

Advertising / Branding

Firms operating under Monopolistic Competition usually have to engage in advertising, to let the customers know about their product's differences.

Product Differentiation

The central feature of the Monopolistic Competitive Market is that the products are differentiated. There are four main types of differentiation.
  • Physical Distribution, where firms use size, design, colour, shape, performance or features to make their products different.
  • Marketing Differentiation, where firms try to differentiate their products by distinctive packaging or other promotional techniques.
  • Differentiation through Distribution, firms try to differentiate via ease of deliveries, like through Online Shopping, Phone Order Bookings, Delivery at costumer door step, COD etc.
  • Human Capital Differentiation, where the firm creates differences through the skills of it's employees, through the customer support services that they provide. The level training given to the staff or distinctive uniforms etc.

Super Normal Profits in Short Run

In short run, firms can make excess economic profits or super normal profits. However because the barriers of entry are low, other firms has incentive to enter the market, increasing the competition, and driving down the prices, until all super normal profits are eroded away.

Innovation

As the product variety in the market increases with the entrance of new members, the product demand of the existing firms become more elastic, and starts depreciating, at this point the existing firms have reached their long run equilibrium. Firms benefit most when they are in their short run and hence try to remain in the short run by innovating and further product differentiation.

Perfect Competition

A perfectly competitive market is a hypothetical market where competition is at it's greatest possible level. Economists argue that perfect competition would produce the best possible outcomes for consumers and society.

Key Characteristics of a Perfectly Competitive Market


Perfect Knowledge About the Product

There is perfect knowledge, with no information failure or time lags in the flow of information. Knowledge about all products is freely available to all market participants, which means the risk taking is minimal and the role of any single firm is limited.
Given that the producers and consumers have perfect knowledge, it is assumed that they make rational decisions to maximise their self interest. Consumers look to maximise their utility, and producers look to maximise their profits.

No Barriers to Entry & Exit

There are no barriers to entry or exit into the market.

Homogeneous Products

Firms produce homogeneous or identical units of output that are not branded. Each unit of input, used by the firm to produce the product such as units of labour or raw materials are also homogeneous.

Firms Cannot Influence Market Price to Increase Their Profits

No single firm can influence the market price, or market conditions, given that there are a lot of sellers or producers and homogeneous products in the market, which a result of having no barriers of entry and exit.

Absence of Regulators

There is no need for government regulations, except to make the market more competitive.

No Involvement Of Third Party

There are no externalities, that is no external costs or benefits goes any third party not involved in the transaction.

No Branding or Advertising

There is no need to spend money on advertising, because there is perfect knowledge about the products. Selling unbranded goods makes it hard to construct an effective advertising campaign. So no single firm can influence or bend the market sentiments towards itself by promotional methods. All firms face a perfect competition in this way.

Industry as the Price Maker

A single firm takes its price from the industry which is a Price Maker, and consequently referred to as a Price Taker. The industry is composed of many firms and the Market Price is where the Market Demand is equal to the Market Supply. Each single firm must only charge this price and cannot diverge from it.

Normal Profits in Long Run

Firms can only make normal profits in the long run, that is they can only cover their opportunity cost.  Although sometimes they can make abnormal (super normal) profits or losses in the short run. If the incumbent firms are making super normal profits, new firms will be attracted to the industry and the market as there are no barriers to entry. The effect of this entry into the industry is that the supply of the product will increase which drives down the price until the point where all super normal profits are exhausted.
The super normal profit made by some firms in the short run acts as an incentive for new firms to enter the market, which increases the industry supply and market price falls for all firms until only normal profit is made. If the firms are making losses, they will leave the market, as there are no exit barriers, and this will decrease the industry supply, which raises prices and enables those left in the market to derive normal profits.

Market Structure

The interconnected characteristics of a market, such as the number and relative strength of the buyers and sellers, degree of collusion among them, level and forms of competition, extent of product differentiation and ease of entry and exit in the market describes the Market Structure.
The structure of the market refers to the number of firms in the market, their market shares, and other features which affect the level of competition. Market Structures are distinguished mainly by the level of competition that exists between the firms operating in the market. Hence Market Structures are classified in terms of presence or absence of competition. When competition is absent the market is said to be concentrated.
In Economics, Markets are classified according to the structure of the industry serving the market. Industry structure is categorised on the basis of Market Structure Variables which is believed to determine the extent and characteristics of competition
Those variables which have received the most attention are, number of buyers and sellers, extent of product substituatability, costs, ease of entry & exit, and the extent of mutual interdependence.
In the traditional framework, these structural variables are distilled into the following taxonomy of Market Structures.
Perfect Competition, in which the market consists of a very large number of firms producing homogeneous products.
Monopolistic Competition, also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share.
Oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share.
Monopoly, where there is only one provider of a product or service.
Oligopsony, a market dominated by many sellers and few buyers.
Monopsony, When there is only one buyer in the market.
The main criteria by which one can distinguish between different market structures are the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.
Market Structure is important as it affects the market outcomes through it's impact on the motivations, opportunities and decisions of economic actors participating in the market.
The goal of economic market structure analysis is to isolate & study each of this effect in an attempt to explain and predict market outcomes.

Wednesday, July 13, 2016

Classification of Markets

In Economics, market is defined as a set of buyers and sellers who are geographically separated from each other, but are still able to communicate to finalise the transaction of a product.The market for a product can be local, regional, national or international.
A market can have a number of interconnected characteristics, including level of competition, number of sellers and buyers, types of products, and barriers to entry and exit. This interlinked characteristics are combined to form a market structure.
Markets can be classified on many different ways like, area, time, transactions, regulations, volume of business, nature of goods, nature of competition, demand and supply conditions.

Classification on the basis of Area

Using area, we can categorise markets into local markets, regional markets, national markets or international markets.
Local Markets
Local markets confine to locality mostly dealing in perishable and semi perishable goods like fish, flowers, vegetables, eggs, milk and consumer products.
Regional Markets
Regional markets covers a wider area, May be a district, a state or inter state dealing in both durable and non durable and industrial products and agricultural produce, like spices, live stock, textile or electronics etc.
National Markets
In case of national markets the area covered are national boundaries dealing in durable and non durable consumer goods, industrial goods, metals, forest products, agricultural produce.
International Markets
In case of international markets, the movement of goods is widespread throughout the world, making it a single market. Goods like Minerals, Ores, Coal, Oil, Spices, Industrial Machinery or Equipment are transported around the whole world today. With the advancement of technologies in transport, storage and packaging, it has become possible to transport even the most perishable good all around the world, not only durable products.

Classification on the basis of Time

On the basis of time markets can be classified into four different types.
Very Short Term Markets
The markets where goods of daily requirements are exchanged, mostly highly perishable goods like vegetables, meat, fruits, milk etc. are called Very Short Term Markets. The prices of the Short term goods are determined by the pressures of demand, as supply can not be increased instantly.
Short Term Markets
In these markets, commodities are perishable but can be traded for a much longer period than Very Short Term Markets. The commodities are like food grains and oil seeds etc.
Long Term Markets
In long term markets, adequate time can be found for supply of products according to demand. New machines and equipment can be installed for additional production to meet demand. Supply can be increased or decreased according to demand situation. These markets can be for machinery or manufactured products.
Very Long Term Markets
In such types of markets, products can get adequate time to use new technology in production process and bring new changes in the products. In such types of markets they are able to produce goods according to changing needs, interest, fashion etc. of customers.

Classification on the basis of Transaction / Delivery

On the basis of the nature of transaction, markets can be classified as Spot Market & Future Market.
Spot Market
The market where delivery or handing of goods are made immediately after the sales is called a Spot Market. In such markets, price of product is paid immediately at the spot and ownership of the product is transferred to the buyer at the same time.
Future Market
In this type of market contract is signed for the sale of products in future between the buyer and the seller, but no delivery of the product is made. In this market, buyer and seller sign a contract for buying and selling products at a certain price or on a condition to determine the price in the future.

Classification on the basis of Volume

On basis of volume of the business, type and size, markets can be classified in Wholesale or Retail Markets
Wholesale Markets
The market, which deals with a large amount of goods is known as a Wholesale Market. This market purchases goods from the producers or manufacturers and sells them to retailers at wholesale prices. The products are not sold to the ultimate consumer. But, if consumers want to buy in large quantities, they can buy from the wholesaler.
Retail Markets
The market that sells small quantities of products directly to the ultimate consumer is called a Retail Market. The retail sellers sell the products to the consumers after adding their commission to the wholesale price of the products.

Classification on the basis of Control / Regulation

On the basis of control, law, rules and regulations, market can be classified into Regulated Market and Non Regulated Market.
Regulated Market
If trade associations, municipality or government controls buying or selling price of products or if the business dealings take place as some per set of rules and regulations regarding, quality, price, sources or distribution etc. then it is called a Regulated Market. Such markets must follow the established rules, regulations, and legal process and provisions. Otherwise the businessmen are fined or punished.
Non Regulated Market
If the market is freely functioning and is not under control of any government body or any organisation, it is called a Non Regulated Market. In such markets, price is determined through interaction between buyers and sellers. This market has to follow no rules, regulations and legal provisions, even if there are any, they can be amended as per the requirements of parties of exchange.

Classification on the basis of Status / Position of Sellers

On the basis of seller's position, markets can be divided into Primary Market, Secondary Market, Terminal Market.
Primary Market
In Primary Market, producers sell primary goods such as agricultural products, food grains, livestock, raw materials etc. to wholesalers or commission agents.
Secondary Market
Secondary Market consists of the wholesalers who sell products or goods to retailers, after getting them directly from the producers or manufacturers.
Terminal Market
In this type of market retailers, sell products to the final consumers.

Classification on the basis of Product

On the basis of products or nature of products, markets can be classified in the following three categories.
Commodity Market
The market where consumers and industrial commodities like cloths, rice, machines, equipment, tea, soaps, fruits, vegetables are bought and sold is called the commodity market. Consumer goods and industrial goods are available in this type of market.
Capital / Financial Market
The markets where financial instruments are available, such as deposit of cash, provision of loans, buying and selling of shares, debentures and securities etc. is known as Capital Market. It can further be divided into "Money Market" and "Securities / Stock Market". It also provides short term and long term loans to individuals and organisations.
Services Market
If the physical goods are not transferred but services are purchased and sold, then it is known as the Services Market. Organisations like electricity boards, telecommunication companies, water supply department etc. are included in this type of market.

Classification on the basis of Competition

On the basis of the competition in production, distribution and demand and supply of the goods and products market can be divided into three different kinds.
Perfect Markets
A market, where the number of buyers and sellers are large, similar prices for same or homogeneous products is determined from free interactions between the buyers and sellers. Perfect competition takes place between sellers as well as the buyers. Free entry and exit of buyers and sellers are permitted. The maximum output which an individual firm can produce is relatively small as compared to the total demand of the product, so that a firm cannot cannot affect the price by varying it's supply output. With many firms and homogeneous products under perfect competition, no individual is in a position to influence the price of the product and therefore the demand curve facing it will be a horizontal straight line at this level of the prevailing price in the market. Perfect Markets are rarely found in practice.
Imperfect Markets
In Imperfect Markets, products can be similar but not identical. Customers may have to pay different prices for similar kinds of products, as post sale services, packaging, credit facility, discounts etc. can account for product differentiation and price discrimination. Most of the transactions take place in Imperfect Markets.
Monopoly Market
If there is full control of any producer or seller over the market, then such markets are called Monopoly Markets, the producer determines the prices of it's products in his own will. In such markets, there is no competition, the price is determined by the interest of sellers. such type of markets ca only exist in limited or small areas.

Monday, July 11, 2016

Market

A market in any one of a variety of different systems, institutions, procedures, social relations or infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy. It is an arrangement that allows buyers and sellers to exchange things.
Markets vary in size, range, geographical scale, locations, types and varieties of human communities, as well as in the types of goods and services traded.
Some Examples include, local farmer's market held in town squares, Shopping Centres or shopping malls, Financial Markets such as International currencies or commodity markets or Equity stock markets, legally centred markets such as pollution permits, and illegal markets such as black markets for illicit drugs or weapons.
In mainstream economics, the concept of market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is called a transaction.
Thus a market has four basic components - Consumers, Sellers, Commodity & Price.
The market facilitates trade and enables the distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated and priced. A market emerges more or less spontaneously or is constructed deliberately by human interactions in order to enable the exchange of rights or ownership of goods and services.
Market participants consist of all the buyers and sellers of a good who influence the price. Market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse affect on market participant's welfare and reduce he efficiency of market outcomes.
Also the level of organisation or negotiation power of buyers, markedly affects the functioning of the market.  

Friday, July 8, 2016

Forms of Business Organisation

A business can be organised in several ways, and the form it's owners chose will affect the company's and owner's legal liability and income tax treatment.
Here are the most common options and their major defining characteristics.

Sole Proprietorship

This is generally the simplest way to set up a business. Sole Proprietorship is a businesses owned by a single person, the sole proprietor. In a sole proprietorship all profits, losses, assets, and liabilities are direct and sole responsibility of the owner. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against the business, would normally have the right against all of the owner's assets, whether business or personal. This is known as Unlimited Liability.
Sole proprietorship are not ideal for high risk businesses because they put all your personal assets at risk. If one is taking a significant amount of debt to start a business, if he has gotten into trouble with personal debt in the past or if the business involves an activity for which the owner might potentially be sued, then he should choose a legal structure that will better protect his personal assets.
Advantages of Sole Proprietorship
Easiest and least expensive form of ownership to organise.
Low Start-up costs. Minimum working capital required.
Sole Proprietors are in complete control, and within the parameters of the law can make any decision regarding the business as they feel fit.
Less administrative paperwork than some other organisational structures.
Profits and tax advantages can be availed directly by the owner.
Profits from the business flow through directly to the owner's personal tax return.
The business is easy to dissolve, if desired.
Disadvantages of Sole Proprietorship
Sole proprietors have unlimited liability, and are legally responsible for all debts  against the business. Their business and personal assets are at risk.
Difficulty in raising funds and are often limited to using funds from personal savings or consumer loans.
Difficult to continue the business in the absence of the owner.

Partnerships

A partnership is an agreement in which two or more persons combine their resources in a business with view of making profits. In a partnership, two or more persons share ownership of a single business.
In order to establish the terms of the business, and to protect partners / shareholders in the event of disagreements or dissolution of the business, a partnership / shareholders agreement should be drawn up, usually with the help of a lawyer.
The partners should have a legal agreement that sets forth how decision will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. They must also decide up front how much time and capital each will contribute, etc.

Types of Partnership


General Partnership (GP)
Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently. All partners are personally liable for business debts. Any partner can be held totally responsible for the business and any partner can make decisions that affect the whole business.
Limited Partnership (LP) 
An LP is a form of partnership that has two types of partners, general partners and limited partners. There has to be at least one general partner and at least one limited partner in every LP.
The general partner manages the operation of the LP. In addition the general partners are personally responsibly for the liabilities of the LP. They are entitled to their share of the profits, which is determined and agreed upon in the partnership agreement. Their role is the same as that of general partners in a general partnership.
Limited partners, on the other hand, only contribute to the business with their monetary investment. They are shielded from personal liabilities, but they can loose their financial investment in LP, if the business incurs losses. Limited partners have no voting powers or no control over the operation of the LP. Limited partners receive payments for their financial investment, similar to the dividend paid to the shareholders of a corporation. Limited partners can loose their status and be held responsible for business liabilities, if they are found to be actively involved in the management of the business. Limited partners don't have to pay self employment tax as general partners do. This is because they only receive dividends for their share of investment in the business and are not considered self employed as long as they stay passive in the business operations.
Limited Liability Partnership (LLP)
An LLP is a form of partnership where all the partners enjoy the limited liabilities (to the extent of their investment) as well as limited input regarding the management decision. The procedures of operation and the distribution of the profits can be spelled out in detail in the limited Liability Partnership agreement.
The partners of LLP are not liable for the negligence or malpractice claims made against other partners. Founding partners can manage the control of the business, without having to give too much say to the junior partners.
Joint Venture (JV)
Acts like general partnership, but is clearly for a limited period of time or a single project. If the partners in the joint venture repeat the activity, they will be recognised as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.
Advantages of Partnership
Partnerships are relatively easy to establish, time should be invested in developing the partnership agreement.
With more than one owner, the ability to raise funds is increased.
The profits from the business flow directly through to the partners personal tax return.
The business usually will benefit from partners who have complementary skills.
Disadvantages of Partnership
Partners are jointly or individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Unlimited liability in case of general partners.
The partnership may have a limited life, it may end up upon the withdrawal of death of the partner.

Corporations / Companies

A corporation is an entity organised under the law of a particular state. It is considered by the law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, it can enter into contractual agreements into it's own name. the owners of corporation are it's shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of it's own and does not dissolve when ownership changes.
A corporation is a legal entity that is separate from it's owners (the shareholders). No shareholder of a corporation is personally liable for it's debts, obligations or acts of the corporation. Directors, officers and insiders can bear some liability for their involvement with the corporation.
A company needs to be registered under the "Indian Companies Act 1956". Both articles of associations and memorandum of associations governs the working of a company.
A corporation is identified by the terms "limited" or "Ltd". Whatever the term, it must appear with the corporate name on all documents, stationary and so on, as it appears on the incorporation document. 
Advantages of Corporations
Shareholders have limited liability for the corporation's debts or judgements against the corporation.
Corporations can raise additional funds through sale of stocks.
A corporation may deduct or increase the cost of benefits it provides to it's officers and employees. 
Ownership is transferable.
The corporation has a life of it's own and continue to exist and does not dissolve when ownership changes.
Corporations can hire specialised manpower or management to look after it's operations, without any interference of the shareholders or owners. 
Disadvantages of Corporations
The process of incorporation requires more time and money than other forms of organisation.
Corporations are monitored by federal or state agencies, and as a result may have more paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to the shareholders are not deductible from business income, thus income can be taxed twice.

Limited Liability Company (LLC)

LLC is a relatively new type of hybrid business structure. It is designed to provide limited liability feature of the corporations and the tax efficiency and operational flexibility of a partnership.
LLC's can be member owned (which means the owners are passive members and hire separate salaried management) or member managed (which means the members manage the business, as well as own it). It provides all the benefits of a partnership with limited liability, taxation benefits and stock transferability. Nonresident aliens can be shareholders, and members can manage their business without risking their personal liability. But unlike the corporations, LLC shares can not be publicly traded.

Cooperatives

A cooperative is an autonomous, association of people united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled business. It is a firm owned, controlled and operated by a group of people, who make joint use of their available resources to improve their income.
Each member contributes equity / capital, and shares the control of the firm on the basis of one member, one vote principle (and not in the proportion to his / her equity contribution or the number of shares held). It has an open and voluntary membership, members earn interest on their share capital and surpluses are returned to the members according to the amount of patronage.

Advantages of Cooperatives
Can be owned as well as managed by many members.
Is democratically controlled on basis of, one member, one vote
Limited liability, members can be personally held, for the business's debts.
Profit distribution (surplus earnings) passed on to all members in proportion to their contribution to the business.
Disadvantages of Cooperatives
As a cooperative is owned and controlled by a lot of members, who have equal rights and voting power, decision making process becomes longer compared to other business models.
Requires all members to participate for the business to run successfully.
Extensive record keeping required.

Thursday, July 7, 2016

Firm

A firm is a business organisation, such as a corporation, partnership or sole proprietorship, that sells goods or services to customers to earn profit, that will increase the wealth of it's owners and grow the business.
The owners and operators of a firm have as one of their main objectives the receipt or generation of a financial return in exchange for their services.
While most firms have just one location, a single firm can consist of one or more establishments, as long as they fall under the same ownership.

Factors of Production

The factors of production are resource inputs used to produce goods and services.
It is an economic term describing the general inputs that are used in the production of goods or services in order to make economic profit.
Every business utilizes various combinations of factors of production to produce final goods or services.
Under the classical view of economics, there are four basic factors of production, which includes Land, Labour, Capital, and Entrepreneurship.
Land is the physical space on which the production takes place, as well as natural resources or the raw materials that come from the land, like Crude Oil, Water, Air, Minerals, Ores, Coal, Timber etc. 
Labour is the time human beings spend producing those goods and services, as well as the skills and abilities they use to produce the goods and services. Both the quantity and the quality of human resources and all things done either physically or intellectually to keep a business running by the human beings is included in the "Labour" factor.
Capital refers to the long lasting tools that people use to produce the goods and services. Physical Capital includes the Factory or Office Buildings, Fleet of trucks, Machinery, Equipment or Tools or Computers etc. Intellectual Capital is the technological expertise that a business acquires overtime, its trade secrets and unique business processes. Human Capital includes the skills and the training the workers possess. 
Entrepreneurship is the assembling of resources to produce new and improved products and technologies. It is the factor of production that ties the other three factors Land, Labour and Capital together. The Entrepreneur provides innovation and creativity in the use of other factors, which helps create a profitable business.
For simplicity and analytic purposes, economists and analysts usually focus attention on two main factors, Capital & Labour. The relationship of both these factors and a company's output is referred to as the Production Function