Types of Market and Resource allocation

Types of Market & Resource allocation

"The Earth has enough resources for our needs, but not for our greed"

Mahatma Gandhi

Types of Competition/Market 

1. Perfect competition
2. Monopoly
3. Imperfect/Monopolised competition
4. Oligopoly

1.  Perfect Competition 

• Number of firms - too many firms dealing with too many items
• Nature of product - Homogeneous products (for example - wheat)
• Price determination - Market is the price maker (on the basis of demand & supply)
• Status of firms - Firm is price taker not the price determinant
• Scope of exploitation - Practically, no scope of exploitation
• Entry and Exit of firm - Free

It's an ideal type of market.

2.  Monopoly 

• Number of firms - Single firm dealing with single item
• Nature of product - Unique product (for example - Railway)
• Price determination - Firm has considerable control over price and market (as the supply is controlled by the firm)
• Status of firm - Firm is price maker
• Scope of exploitation - 
• If it is natural monopoly, the scope of exploitation is less or no exploitation at all.
• But if it is private monopoly, the scope of exploitation is very high.
• Entry and Exit of firm - Prohibited/Restricted (by licensing or patent)

3.  Imperfect Competition 

• Number of firms - Large number of firms
• Nature of products - Somewhat differentiative products (for example - Toothpaste, Soaps, etc.)
• Price determination - Firm has little control over the price (as competition is there)
• Scope of exploitation - There is a very less scope of exploitation
• Entry and Exit of firm - Free 

4.  Oligopoly 

• Number of firms - Few firms (firms are inter-dependent)
• Nature of products - Homogeneous and differentiative (for example - Petrol which is homogeneous and Car which is differentiative)
• Price determination - Firms have not much control over the price determination
• Scope of exploitation - Scope of exploitation is either more (due to cartel) or none.
• Entry and Exit of firm - difficult

Resource allocation (i.e., what to produce & in what quantity) -

The resource allocation usually is done by -

1. Government
2. Market mechanism

Resource allocation by the Government 

• It is done by Economic planning.
• Means of resource allocation -
1. Subsidies (to promote production)
2. Taxes (to discourage production)
3. Licensing
4. Incentives
5. MSP (Minimum Support Price), etc.
• Objective - Social welfare

Resource allocation by Market mechanism 

• It is done on the basis of demand and supply in the market.
• Advantage -
1. Optimal resource allocation - Resources are allocated as per the collective wishes of the society.
2. Efficiency in resource use - Market operates under competitive conditions which compels firms to improve efficiency. Economic activities which are undertaken by the private sectors is motivated by self-interest, i.e., production is profit induced.
• Disadvantage -
1. Market can't ensure social welfare, i.e., poverty alleviation, employment generation, inequalities, etc.
2. Market can't resolve macro-economics problems like poverty alleviation, price stabilisation, sustainable development, environmental conservation, long term economic growth, etc.
3. Markets have a very narrow perspective, i.e., they can cater only the short-term needs of well of section in relatively developed areas (leaving the underdeveloped areas).
4. Markets failed to allocate resources optimally in certain cases like externalities, natural monopoly, information asymmetry, etc.
5. Market operated efficiently only under competitive condition which can seldom achieved without government intervention.

Terms related to the Market

Externalities - It is the impact of one economic activity over other activity. It can be positive or negative or both.

Positive impact includes improvement in infrastructure whereas negative impact includes increase in pollution, toxic beverages, cigarettes, etc.

For example - 

• Positive impact

• Negative impact

Natural monopoly - It is a type of market in which only a single firm can maximise economic efficiency, i.e., competition is undesirable.

For example - Airports, Railways, Highways, etc.

In India this was usually taken care by the government.

Information asymmetry - Providing less information (or providing information in morphed way).

Cartel - It refers to an agreement among few firms to jointly determine their output and prices of products to maximise their collective profit.

It eliminated competition.

It is undesirable for the market.

It has negative impact on the economy.

For example - OPEC (Organisation for petroleum exporting countries)

Monopsony - It is a type of market in which there is a single buyer but many seller/producer of a commodity.

For example - Defence machines/equipments

Bi-lateral monopoly - It is a type of market in which there is a single buyer and only one producer of a commodity.

Utility - It is the psychological satisfaction derived from the consumption of a commodity.

Marginal Utility (MU) - It is the satisfaction derived from consumption of an additional unit of a commodity.

Total Utility (TU) - It is the satisfaction derived from the consumption of given units of a commodity.

UTILS - It is the unit of satisfaction (utility).

For example - 

Note - Marginal Utility is zero when the consumption of an extra unit keeps the Total Utility the same. And it becomes negative when the consumption of an extra unit will decrease the Total Utility.

Law of diminishing Marginal Utility - Marginal Utility has a tendency to fall.

• ↑ Units →  Marginal Utility ↓

Consumer's equilibrium - It is the situation in which a consumer spends his given income on various commodities in such a way which provides him the maximum possible satisfaction.

Producer's equilibrium - It is the situation in which a firm produces that level of output which maximises its profit.

Opportunity Cost or The value of next best alternative 

For example - 

• A doctor can earn a monthly income of ₹2 Lakh through his private clinic. He got offer from government hospital, private hospital and from a medical college offering ₹1.2 Lakh per month, ₹1.5 Lakh per month and ₹1 Lakh per month respectively. 
• Here in this situation, the next best alternative is the offer from the private hospital offering ₹1.5 Lakh per month.
• So, the opportunity cost is ₹1.5 Lakh.

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Note - This is my Vision IAS Notes (Vision IAS Class Notes) and Ashutosh Pandey Sir's Public Administration Class notes. I've also added some of the information on my own. 

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