Markets and monopolies. Markets. Competition. Monopoly.
In a market economy the actions of buyers and sellers set the prices of goods and services. There are two sides of the market. The supply, the quantity of a product which can be provided is the seller’s side of a market transaction. And the demand the quantity of a product consumers want, is the buyer’s side of a market.
In a perfect market there can be only one price for a given commodity: the lowest price which sellers will accept and the highest which consumers will pay.
Although in a perfect market competition is unrestricted and free but in real market may be only one seller, such situation is called a monopoly.
There are different kinds of monopolies. State planning and central control of the economy mean that a state government has the monopoly of important goods and services.
Natural monopoly arises when a country has control over major natural resources. Legal monopolies occur when the law of a country permits certain producers a full monopoly over the sale of their own products.
The sole trading opportunities or “cornering the market” is a situation when certain companies obtain complete control over particular commodities. It is illegal in many countries.
In the market systems, competition answers the basic questions of what, how, for whom and how much. Producers compete for the highest profit; consumers compete for the best goods and services at the lowest prices.
In a market economy three basic resources – land, labour and capital – are bought and sold for the best price. Producers are in competition with one another to hire the best workers for the lower wages. Workers compete with one another to get the best jobs at the highest wages.
Workers need to be able to learn new skills to remain competitive in the market.
Pricing policies.
Market prices are determined by the interaction of supply and demand. Companies’ pricing decisions depend on one or more of three basic factors: production and distribution costs, the level of demand, and the prices of current and potential competitors.
Pricing strategy must also consider market positioning: quality products generally require “prestige pricing” and will probably not sell if their price is thought to be too low.
Firms with excess production capacity, a large stock, or a falling market share, tend to cut prices. While firms experiencing cost inflation, or in urgent need of cash, tend to raise prices.
Demand is said to be elastic if sales respond directly to price variations. When sales remain stable after a change in price, demand is inelastic. Although it is an elementary law of economics that the lower the price, the greater the sales, there are numerous exceptions.
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A potential customer seeing a price of $499 will register the $400 price range rather than the $500. This is a psychological effect known as “odd pricing”.
The “total cost” of a product can include operating and servicing costs, and so on. Since price is only one element of the marketing mix, a company can respond to a competitor’s price cut by modifying other elements: improving its product, service, communications, etc.
A products selling price generally represents its total cost (unit per cost plus overheads) plus profit or “risk reward”. Overheads are the various expenses of operating a plant that cannot be charged to any one product, process or department, which have to be added to prime cost or direct cost which covers material and labour.
Microeconomists argue that in a fully competitive industry, price equals minimum average cost equals break-even point.
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