ENGINEERING ECONOMICS

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What is Market?

In Economics, the term market is used in a special sense. In the Ordinary language the term market means a particular place where buyers and sellers meet each other and buy and sell the commodities.

Definitions
(1) In the words of Cournot, Economics understand by the term 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 each other that the price of same good tends to equality easily and quickly. (2) In the words of Prof. Chapman, The term market refers not necessarily to a place but always to a commodity and the buyers and the sellers who are in direct competition with one another. (3) According to Prof. J.C.Edwards, A market is that mechanism by which buyers and sellers are brought together. It is not necessarily a fixed price.

Main Features of Market

The above definitions underline the following features of the market. (1) Area: Market in economics does not mean any particular place where buyers and sellers meet; rather it means the entire area over which buyers and sellers are spread and have close contact with one another. (2) Buyers and Sellers: Both buyers and sellers are needed in the market. If one of the two does not exist in any region, it will not be called a market. It is not necessary that buyers and sellers be physically present to bargain or transact business. (3) One Commodity: In Economics, every commodity has its own market, e.g., wheat market, sugar market etc. As many commodities, so many markets. (4) Free Competition: There should be free competition between buyers and sellers. In such a market, buyers try to buy at the cheapest rate and the sellers try to sell at the highest area. As a result of it there will be one price for one commodity throughout the market.

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Main Forms of Market

Markets have generally been classified into three types (I) Perfect Competition (II) Monopoly (III) Imperfect Competition, Which includes monopolistic competition, oligopoly and duopoly

Meaning of Perfect Competition

Perfect Competition refers to a market situation where there is a large number of buyers and sellers. The sellers sell homogeneous product at a uniform price and enjoy freedom of enterprise. The price is determined not by the firm but by the industry. It may be noted here that the word competition is used in economics in a different sense than it is being used in common parlance.

Definitions

(1) According to Prof. Leftwitch, Perfect Competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price. (2) In the words of Bilas, The Perfect competition is characterized by the presence of many firms. They all sell identical products. The Seller is a price taker, not price maker. (3) According to Lim Chong Yah, Perfect Competition is a market situation where there is a large number of sellers and buyers, a homogenous product, free entry of firms into the industry, perfect knowledge among buyers and sellers of existing market conditions and free mobility of factors of production among alternative uses.

Characteristics or Features of Perfect Competition

1. 2. 3. 4. 5. 6. 7. 8.

Large Number of Buyers and Sellers Homogenous Products Independent Decision Making Free Entry and Exit of Firms Perfect Knowledge Perfect Mobility Absence of Transport Costs or Transaction are Costless Lack of Selling Costs

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Monopoly

The term monopoly is derived from the Greek world monopolion which means exclusive sale. Thus pure monopoly is market structure in which a single firm is the sole producer of a product for which there are no close substitutes. Since the monopoly is the only seller in the market, it has neither rivals nor Board; you travel by railway train owned and run by government of India. All these are examples of monopoly.

Definitions

(1) According to Kuotsoyiannis, Monopoly is a market situation in which there is a single seller, there are no close substitutes for commodity it produces, and there are barriers to entry. (2) In the words of Baumol, A pure monopoly is defined as the firm that is also an industry. It is the only supplier of some particular commodity for which there exist no close substitutes.

Main Features or Main Characteristics of Monopoly

1. 2. 3. 4. 5. 6. 7. 8.

One Seller and Large Number of Buyers Monopoly is also an Industry Restrictions on the Entry of the New Firms. No Close Substitutes Price Maker Price Determination Absence of Supply Curve Different Average and Marginal Revenue Curves

Imperfect Competitive Market

In the words of Fairchild, If a market is not organized, if contact between the buyers and sellers is established with great difficulty and they are not in a position to compare the goods and prices paid, then we face a situation of imperfect Competition. Thus, Imperfect Competition is a wide term that includes, the following situations of market (1) Monopolistic Competition, wherein the number of sellers is quite large. (2) Oligopoly, wherein the sellers are few in numbers. (3) Duopoly, where there are only two sellers. MAIN FORMS OF MARKET, PRIVATISATION & GLOBALISATION

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Monopolistic Competition

(1) According to J.S.Bains, Monopolistic competition is joined in the industry where there is a large number of small sellers, selling differentiated but close substitute products. (2) In the words of Leftwitch, Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller. (3) According to Lim Chong Yah, Monopolistic Competition is a market situation where there are many producers but each offers a slightly differentiated product.

Main Features or Main Characteristics of Monopolistic Competition

1. 2. 3. 4. 5. 6. 7. 8. 9.

Large Number of Firms and Buyers Product Differentiation Freedom of Entry and Exit of Firms Selling Costs Price Policy Less Mobility Imperfect Knowledge Non-price Competition AR and MR Curves

Oligopoly
An oligopoly is a market in which there are few producers of a product. For instance, there are only five firms in India, manufacturing Cars. Hence, car-market will be called oligopoly. In this case, also each firm has to take into account the price being charged by the other. To that extent, firms are inter-dependent. If they enter into some sort of agreement they can change price. If they do not conclude any agreement among themselves, they can suffer loses.

Main Features or Main Characteristics of Oligopoly

1. 2. 3. 4. 5.

Few Sellers Inter-dependence Selling Costs Group Behavior Uncertainty of Demand Curve

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Privatisation Merits and Demerits
In the wake of disintegration of Russia and other socialistic economies at the beginning of the last decade of the twentieth century, the tendency of Privatisation among world economies has been gaining ground. Among the economic problems of India, Privatisation of public sector industries has become a debatable issue today. From the beginning of the process of economic development of India, public sector has been receiving greater attention than private sector. In 1993-94, of 246 public sector enterprises, 240 were in operation. Capital worth Rs. 1, 59,307 crore was lying invested in these units. They provided employment to 23 lakh laborers. Of these, 120 enterprises were earning profit. They earned profit of Rs. 4,435 crore. On the contrary, 120 enterprises were incurring losses, aggregating to Rs. 9,951 crore. Thus net profit of all the public sector enterprise amounted to Rs. 5,287 crore only. It works out to be 2.78 percent return on the capital invested in the public sector. Thus, the country has been incurring hug losses on account of public sector enterprises. New economic reforms introduced in 1991 are directed against the expansion of public sector and in favor of private sector. Policy of Privatisation is the main plank of new economic reforms. In simple words, Entrusting of Public Sector industries to private sector is called Privatisation.

Meaning of Privatisation
Privatisation of industries means opening the gates of public sector to private sector. It enhances the importance of private sector because private sector comes to play significant role in the economic development of the country. Thus, transferring of public sector industries to private sector is called Privatisation. It may manifest itself wholly or partially. Accordingly, the term Privatisation is used in two senses: 1. Narrow Meaning of Privatisation: In a narrow sense, Privatisation implies the private ownership of public enterprises. 2. Broader Meaning of Privatisation: In a broad sense, Privatisation implies transferring the ownership of public sector to private sector or managing and controlling of public sector by private individuals without transferring the ownership.

Measures of Privatisation

Three measures of Privatisation are (I) Ownership Measure, (II) Organizational Measures and (III) Operational Measures. 1) Ownership Measures: Ownership Measures of Privatisation are those measures by which full or partial ownership of a public enterprise is vested in private sector. It has four forms: MAIN FORMS OF MARKET, PRIVATISATION & GLOBALISATION

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a) Total Denationalization or Full Ownership: It implies transferring of full ownership of a public enterprise to private sector. Thus, Private sector becomes full owner of Public Sector. b) Partial Ownership or Joint Venture: It implies partial ownership of or partnership in public sector by the private sector. Both public and private sectors is jointly owner of that enterprise. Percentage share of private sector depends upon the policy of the government. c) Liquidation: It implies sale of public sector assets to private sector. The latter may utilize these assets for the same purpose or any other purpose. d) Management Buy-Out: It implies selling of the public sector enterprise to the workers employed in it. These workers form a co-operative society, get loan from banks and become owners of the public enterprise. 2) Organizational Measures: By virtue of these measures government control over public enterprises is restricted. Its different forms are as under: a) Holding Company: Government forms a holding company. Mangers are given freedom to operate it. Decisions are taken by the mangers on the basis of market conditions. b) Leasing: Ownership of the enterprise remains vested in the government but its management is entrusted to private sector for a given period. c) Restructuring: It implies that the management of public enterprise be conducted according to market disciple. 3) Operational Measures: These measures are concerned with the improvement in the efficiency of the public enterprise. Management is allowed to have its own way. Workers are allowed to participate in management and decision making. Any other measures likely to increase the efficiency of enterprise are also taken in hand.

Causes of Privatisation

(1) (2) (3) (4)

Disintegration of Socialist Economies Inefficient Public Sector Uneconomic Price Policy Burden on the Government

Objectives of Privatisation

1. 2. 3. 4.

To increase the efficiency and competitive power of the enterprises. To reduce deficit financing and public deficit. To strengthen industrial management. To earn more and more foreign currency.

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5. To make optimum use of economic resources and diffuse their ownership. 6. To achieve rapid industrial development of the country.

Merits or Advantages of Privatisation

1. 2. 3. 4. 5. 6.

Reduction in Economic Burden Increase in Efficiency Reduction in Sense of Irresponsibility Scientific Management Reduction in Political Interference Encouragement to New Inventions

Demerits or Disadvantages of Privatisation

1. 2. 3. 4. 5. 6.

Industrial Sickness Lack of Social Welfare Class Struggle Increase in Inequality Increase in Unemployment Ignores Weaker Sections

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Globalisation Merits and Demerits
The worldwide movement toward economic, financial, trade, and communications integration.

Globalization implies the opening of local and nationalistic perspectives to a broader outlook of an interconnected and interdependent world with free transfer of capital, goods, and services across national frontiers. However, it does not include unhindered movement of labor and, as suggested by some economists, may hurt smaller or fragile economies if applied indiscriminately. The features of globalisation are given below: 1. Foreign direct investment upto 51% of foreign equity is allowed. 2. In respect of foreign technology agreement, automatic permission is provided to high priority industries upto 1 crore. 3. Free flow of goods and services in any country. 4. Free flow of capital and technology. 5. Rupee has been made fully convertible. 6. Tax and tariff duty modified.

Effects of globalization
1. 2. 3. 4. 5. Enhancement in the information flow between geographically remote locations. The global common market has a freedom of exchange of goods and capital. There is a broad access to a range of goods for consumers and companies. Worldwide production markets emerge. Free circulation of people of different nations leads to social benefits.

Merits of Globalisation
1. 2. 3. 4. 5. 6. 7. 8. 9. Flow of Foreign Control Entry of Multinational Corporations Increase in Efficiency Increase in Knowledge Availability of Modern Technology and Marketing Socio-Economic Transformation Promotes Competition Develops World Trade International Division of Labour

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Demerits of Globalisation
1. Cut-throat Foreign Competition 2. Causes Economic Inequality 3. Increase in Debt Burden 4. Adverse Effect on Balance of Payments 5. Increased Dependence on Multinational Corporations 6. Increase in Consumerism 7. Element of Uncertainty 8. Dubious Experiments of Policy Reforms 9. Interference of International Institutions 10. Depletion of Natural Resources

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