Forms of Market

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Forms of market
Market refers to a mechanism or an arrangement that facilitates contact between
the buyers and sellers for the sale and purchase of goods and services.
Essential elements of market:

1. Commodity or service: which is bought and sold
2. Buyers and sellers: to transact
3. Close contact among buyers and sellers
4. Mechanism or arrangement where the buyers and sellers interact.
Market structure:
A market structure refers to number of firms operating in the industry, nature of
competition between them and the nature of the product.
Factors determining the market structure in a Capitalist economy

In a capitalist economy, markets have been differentiated from each other on the
following bases.
1. Number of buyers and sellers:
a. To what extent a buyer or seller can influence the price of the
commodity in the market.
b. What is the share of buyer in the total demand and of seller in the
total supply of the commodity?...that will determine the degree of
influence of individual buyer or seller.
2. Nature of a commodity:
a. If commodity is homogeneous or identical and standardised, it will
fetch the same price.
b. If the commodity is differentiated, different sellers of the same
commodity may charge different prices.
3. Entry and exit of firms:
If the entry and exit is free from any restriction then
(i) the abnormal profits will attract new firms and
(ii) the inefficient firms incurring losses are free to leave the
industry
Types of market structures

The factors mentioned above will determine the degree of competition prevailing in
the market.in a capitalist economy the following four forms of markets are
distinguished from each other showing different degrees of competition. They are
1. Perfect competition, 2. Monopoly 3. Monopolistic competition and
4. Oligopoly.
Microeconomics by Charu Saxena 965011166 9810215533

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Firm and industry:

Firm => a firm is a single producing unit which produces goods and services for sale
to earn profits.
Industry => an industry is an aggregate of all the firms producing the same product
or interrelated product. All the firms producing and selling the same or
differentiated products of close substitutes are collectively known as an industry.
Consumer’s demand curve and firm’s demand curve:

Consumer’s demand curve shows the relationship between price and quantity
demanded of a commodity in the market. The consumer may purchase the
commodity from any of the various producers or sellers fo the commodity in the
market.
Firm’s demand curve shows the relationship between the price and quantity
demanded of a particular firm in the market. Quantity demanded of a firm’s product,
obviously is equal to sales or output of that firm. Therefore, firm’s demand curve
also shows the relationship between price of the commodity and firm’s sales or
output.
Perfect competition:
Refers to a market situation in which there are large number of buyers and sellers.
The sellers sell homogenous product at a single uniform price which is set by the
market.
Main features:
1. Large number of buyers and sellers
2. Homogeneity of the product ( homogenous goods)
3. Free entry and exit of firms.
4. Perfect knowledge about market and technology
5. Perfect mobility
6. Absence of transport cost.
7. Firm is the price taker and industry is the price maker.
8. Each firm faces perfectly elastic demand curve.
9. Absence of selling costs: selling costs are the costs incurred by a firm to
promote its sale. A firm under perfect completion faces a horizontal straight
line demand curve as it can sell whatever amount it wishes to sell at the
existing price. Therefore, the selling costs on advertisements, sales
promotion etc. is not required.
Why is AR curve (MR curve) or demand curve parallel to x axis in perfect

competition?
How is seller under perfect competition a price taker?

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Under perfect competition, price of a commodity is determined by the equilibrium

between the market demand and market supply of the whole industry. So, the
industry is called the price maker. No individual firm can influence the price because
its share in total supply is insignificant. Every firm has to accept the given price and
adjust its level of output. It has no option but to sell the product at a price
determined at industry level. It is because of this reason that firm is said to be price
taker and industry, the price maker.
This price is also called equilibrium price because at this price quantity demanded is
equal to quantity supplied.
Industry firm
Price Market Market Price Qty.sold TR (Rs) AR(Rs) MR(Rs)
per unit demand supply per unit (Rs)
2 100 20 6 20
4 80 40 6 21
6 60 60 6 22
8 40 80 6 23
10 20 100 6 24
The equilibrium price of the industry is determined with the forces of demand and
supply at price of Rs 6 per unit. The firm can sell any amount of the commodity at
this price. This means with sale of every additional unit of the commodity, additional
revenue (MR) and AR will be equal to price. Therefore price =AR=MR, and firm’s
demand curve is perfectly elastic demand curve. Since AR = price, therefore, AR
curve is also known as price line
The equilibrium price determined in the industry has to be accepted by each firm in
that industry and it can sell as many units of the commodity it wants at that price.

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Market equilibrium:
Equilibrium literally means the state of balance or rest with no tendency to change.
Market equilibrium:
1. It is defined as a situation in the market when quantity supplied is equal to
quantity supplied at a given price.
2. It is the situation of zero excess supply and zero excess demand.
3. The price of the commodity at which its quantity demanded is equal to its
quantity supplied is called the equilibrium price.
4. The quantity which is demanded and supplied at the equilibrium price is
called the equilibrium quantity.
Price mechanism:
The decisions of consumers in the market are expressed through market demand
and the decisions of the producers are expressed through market supply. The
decisions of producers and consumers are co-ordinated by the interaction of market
demand and market supply. This is known as price mechanism.
Determination of equilibrium price:

1. Three basic assumptions of equilibrium Price determination under perfect
competition:
i. Price and quantity supplied are positively related
ii. Price ad quantity demanded is negatively related.
iii. Forces of supply and demand operate freely without any
government intervention.
2. Under perfect competition, price of a commodity is determined by the
general interaction of market forces of demand and supply in the industry.
3. The price is determined not by single firm but by collective demand of
consumers and collective supply of producers.
4. At this price which is called equilibrium price, consumers are ready to buy
the same quantity that producers are ready to sell.
5. The important concepts to understand determination of price are:
a. Market demand
b. Market supply and
c. Interaction between demand and supply.
Market demand: refers to the sum total of

………………………………………………………………………………………………….
It is the function of price as other things remaining the same, more is
…………………………………………………………………..
Accordingly, the consumers demand larger quantities of a product at ………

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And lesser quantities at……………………….. As a result, demand curve of the

market slopes ……………………… from left to right which means that the
demand curve is …………………sloped.
Market supply : refers to ______________________________________________

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Interaction between demand and supply:

In a perfectly competitive market, price is determined by interaction of market
forces of demand and supply in the industry. These market forces consisting of total
demand and total supply interact in such a way as to arrive at a price at which
quantity demanded becomes equal to quantity supplied. In other words, equilibrium
is achieved when quantity demanded of the commodity becomes exactly equal to
the quantity supplied in the market. This situation is called market equilibrium and
the price at which it is achieved is called equilibrium price and the quantity is termed
as equilibrium quantity.
Diagrammatically equilibrium price is determined at a point where market demand
curve and supply curve intersect each other.
Market demand and supply schedule

Price Demand Supply trend
(rs) dozens dozens
50 200 1000 Excess
40 400 800 supply
30 600 600 equilibrium
20 800 400 Excess
10 1000 200 demand
In the above market situation,…………….

……………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………..

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What happens when demand and supply curves do not intersect each other?
Such industries where demand and supply curves do not intersect are called non-
viable industry. This situation may arise when there are prospective consumers and
producers of a commodity but still it is not produced because the price at which
producers are ready to produce is so high that the consumers are not willing to buy
even a single unit of the commodity.
Graphically it means that supply and demand curves of that commodity so not
intersect each other at any positive quantity as shown in the diagram.
The demand curve lies below supply curve which indicates tha there is no demand
for the product of suppliers because the price is too high for the consumers
Eg. Manufacturing of commercial aircrafts, machinery for setting up metro lines etc.
Effect of shifts in demand curve and supply curve on the equilibrium price.
Shift in demand or supply means increase or decrease in demand or supply at a given
price. These shifts occur due to change in factors other than price.
1. Change in demand only => shifting of demand curve only
2. Change in supply only => shifting of supply curve only.
3. Simultaneous change in demand and supply => shifting of both the demand
and supply curves.
Shifting of demand curve only shifting of supply curve only
Effect on equilibrium price and Qty. Effect on equilibrium price and Qty.

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Simultaneous change in demand and supply.

1. Increase in supply is equal to increase in demand
2. Increase in supply is less than increase in demand
3. Increase in supply is more than increase in demand
Similarly for decrease in demand and supply.
In case the demand curve shifts rightwards and supply curve leftwards, the
market price will definitely increase but quantity may increase or decrease. If
demand curve shifts leftwards and supply rightwards, market price will
decrease but quantity purchased may increase or decrease)
Diagrams and effects.

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Questions:
1. Explain the effect of increase (rightward shift of demand curve) in demand on
equilibrium price.
2. Explain the effect of rightward shift of demand and supply curves on
equilibrium without any change in the equilibrium price.
3. Explain the sources (causes) of shifts in demand and their effects on

equilibrium price and quantity exchanged.
4. State any three causes of leftward shift of demand curve. (similarly of supply
curve).
5. State any three causes of rightward shift of demand curve. (similarly of
supply curve).
6. How does an increase in income affect demand curve for
a. Normal good
b. Inferior good
Ans: normal good => positive income effect, show increase in demand
and its effect on equilibrium price.
Inferior good=> negative income effect, demand curve will shift
leftwards, show the effect.
7. How do a cost saving technological progress and increase in input price affect
the market price and the quantity exchanged?
Ans. effect of technological progress on supply curve
Effect of increase in input cost (cost of production)
Government intervention on equilibrium price (market determined price)

Sometimes equilibrium price determined by the market forces is too high for the
consumers or too low( unprofitable) for the producers of the commodity. In such a
situation government intervenes directly and indirectly for changing the equilibrium
price, i.e., it fixes the price either below the equilibrium price or above it.
So the government intervention can be
a. Direct intervention: through control price and support price.
b. Indirect intervention: through taxes and subsidies
Support price (floor price): When government fixes price of a product at a level
higher than equilibrium price, it is called support price. Floor means the lowest limit.
It is the minimum price at which a commodity can be purchased.

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It leads to more supply and short demand. It is generally fixed for agricultural
products like food grains, sugar etc. to safeguard the interests of producers (farmers)
diagram
Since it leads to a situation of excess supply, the government may purchase large
amount of excess supply at its fixed price to protect the interest of farmers.
Minimum wage legislation: like fixation of minimum price of an agricultural crop,
government fixes minimum wage of labourers by law at a level higher than what the
free market forces of demand and supply would determine it the aim is to help the
labourers and provide them social security since their bargaining power id quite
weak.
Control price: also called (ceiling price): when government fixes price of a product at
a level lower than equilibrium price, the price is called control price. It is the
maximum price that can be charged for a commodity. This is done so that necessities
become available to common people at affordable price.
Since control price is lower than equilibrium price, it leads to excess demand and
short supply situation.
Diagram: see above
The implication of price control is that it leads to:
a. Rationing: it is a system of distributing essential goods in limited
quantities at control prices. This is done through Fair price shops.
Govt. establishes system of PDS as a tool to help the consumers
especially vulnerable sections of society through these shops which
sell goods at control prices.
b. Black market: control price leads to the emergence of black-market in
which the commodity is sold at a price higher than the government
fixed price because there emerges a situation of excess demand due
to rationing and control price which attracts suppliers to sell at higher
prices illegally.
c. Dual marketing: to avoid the situation of black market, government
sometimes introduces the system of having two prices for the same
commodity at the same time. Accordingly a certain quantity of the
commodity is supplied to consumers at a fixed price through fair price
shops and at the same time it is made available in the open market at
a price determined by the free forces of demand and supply
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Equilibrium in imperfect markets: Monopoly, monopolistic competition and

Oligopoly
Monopoly
 Refers to a market structure in which there is a single seller and there
are no close substitutes of the commodity.
 A monopoly market structure requires that there is a single producer
of a particular commodity; no other commodity works as a substitute
for this commodity;
 Here the firm is a price maker because it can fix the price for its
product. It has free control over the supply of the product.
 This market structure may arise because of the following reasons:
Granting of a licence by the government,
Granting of patent rights by the government and
Forming a cartel.
 MR<AR, both the curves are downward sloping. The firm faces a
market demand curve (AR curve) which is negatively sloped. It means
that the firm will have to reduce the price to increase its sale. The
demand curve of a monopolist is less elastic because the product has
no close substitutes.
 In order to examine the difference in the equilibrium resulting from a
monopoly in the commodity market as compared to other market
structures, we also need to assume that all other markets remain
perfectly competitive. In particular, we need
o (i) that the market of the particular commodity is perfectly
competitive from the demand side ie all the consumers are
price takers; and
o (ii) that the markets of the inputs used in the production of
this commodity are perfectly competitive both from the supply
and demand side.
Main features of Monopoly:

1. Single seller of the commodity.
2. Absence of close substitutes
3. Difficult entry of a new firm.
4. Price maker with constraint: a monopolist firm can no doubt charge any price
but it cannot sell any quantity at that price. Hence demand curve is a
constraint.
5. Price discrimination: unlike uniform price at which a product is sold in perfect
competition, a monopolist can charge different prices for his product from
different persons and in different market areas.

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CAUSES of monopoly:
1) Granting of a licence by the government:

A monopoly market emerges when government gives a firm licence i.e., exclusive
legal rights to produce a given product or service in a particular area or region.
For example: Delhi Vidyut board had the exclusive right to distribute electricity in
Delhi but after privatisation, the same rights have been given to two private
companies with exclusive areas to serve.
2) Granting of patents rights:

Patent right is an exclusive right granted to a firm to produce a particular product
or use a particular technology on the basis of its claim to be the discoverer of the
product or the technology. Clearly nobody will undertake the risk of making
investment in research and discovery if it does not get its fruits. Once patents
rights are given to one firm, no other firm can use that technology or produce
that product and hence the holder of the patent right gets the monopolistic
rights
3) Forming a cartel:
Sometimes individual firms while retaining their identities, unite into a group and
coordinate their output s and pricing policy in such a way as to reap the benefits
of monopoly. Such formation is called a cartel. Thus cartel is a business
combination under which firms coordinate their output and pricing policy to reap
benefits on monopoly. E.g., OPEC
Competitive Behaviour versus Competitive Structure

A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly the opposite of the meaning of what is commonly
understood by competition or competitive behaviour. We see that Coke and
Pepsi compete with each other in a variety of ways to achieve a higher level
of sales or a greater share of the market. Conversely, we do not find individual
farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market
price of soft drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
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competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. Pure monopoly is the most visible exception.
Marginal Revenue and Price Elasticity of Demand

The MR values also have a relation with the price elasticity of demand.
– price elasticity of demand is more than 1 when the MR has a positive value,
and becomes less than the unity when MR has a negative value.
Short run equilibrium

TC-TR approach MC –MR approach
Merits of monopoly:
1. Formation of monopoly leads to more efficiency thereby lowering the cost of
production.
2. Patent rights encourage discovery and invention of new product and
technique.
3. Public monopolies like Railways protect the rights and interests of the public
and save them from exploitation.
4. Overproduction and resultant crises are avoided because a monopolist, being
the sole producer, is in a position to produce the exact quantity of its product
which will be demanded.
5. A monopolist need not spend large sums of money on wasteful and
competitive advertisement and publicity.
6. He avoids duplication of staff and equipment which means lower prices and
consumer benefits.
Demerits of monopoly:
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A perfectly competitive firm operates where AR=MC. A monopolist firm or

industry operates where price is greater than MC. Thus in general, price will be
higher and output lower if the firm behaves monopolistically rather than
competitively.
This means the consumers will be worse off in monopoly than in PC.
Since a monopolist charges a price higher than MC, it will produce an inefficient
amount of output. To deal with this problem, many countries including India have
antitrust legislation which refers to those legislations which deal with the issue
of market power of firm in relation to efficiency. In India, MRTP Act of 1969 is
antitrust legislation.
1. Distinguish between perfect competition and monopoly. (Similarly between

different mkt forms)
2. Give similarities between PC and Monopoly.
3. Compare demand curves (or AR curves) for a product of a firm in PC, Monopoly
and monopolistic Competition.
Monopolistic competition
1) Refers to a market situation in which there are many firms which sell closely
related but differentiated products.
2) Large number of small sellers selling differentiated but close substitutes.
Features
a) A large number of firms:
The number of firms selling similar product is fairly large but not very large as in
perfect competition, each supplying a small percentage of total supply of the
product. As a result, firms are in a position to influence marginally the price of
their product due to brand name. eg. Toothpastes=> colgate, pepsodent, etc.
b) Product differentiation:
Most important feature of MC. It means that buyers of a product
differentiate between the same products produced by different firms.
Differentiated products are closely related but not identical or homogeneous.
Each frim produces a unique brand of the same product which can be
differentiated from brands of other firms. Differentiation of the products can
be on the basis of brand name, shape, colour, quality, quantity, type of
service and workmanship. Eg: toilet soaps like lux, liril, hamam,etc. belong to
this category. Thus, each firm enjoys the monopoly power over brand of its
product and has some control over price.
The main aim of PD is to create an impression in the minds of consumers that
its product is not only different but also superior to that of other firms
c) Free entry and exit of firms:
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New firms can enter the market if found profitable. Similarly inefficient firms
already operating in the market are free to quit the market if they incur
losses. Because of this feature that like PC, monopolistic competition also
gives rise to normal profit.no firm receives abnormal profit in the long run
because then new firms can emerge and old ones can expand output and
adjust supply with changing demand. This means P=LAC.
{ profit maximising condition is MR=MC or LMC in the long run
 MR=LMC and P=LAC}
d) Selling costs: are the expenses which are incurred for promoting sales or for
inducing customers to buy a good of particular brand. These include the cost
of advertising through newspapers, T.V and radio, free sampling, show-
windows, salaries of salesmen and costs on other sale promotional activities.
These costs are also called advertisement costs and they are incurred to to
increase the demand for a product or to persuade buyers to buy the product
of a firm in preference to others. They are said to be incurred to alter the
demand curve.
Selling costs are incurred in Monopolistic competition and oligopoly and in
no other market condition.
e) Demand curve:
The demand curve or AR curve is downward sloping because the firm can sell
more only by lowering the price of its products. Demand curve faced by the
firm here is more elastic(due to availability of substitutes) as compared to
that in monopoly.
Here P>MC
At equilibrium< MC=MR, in imperfect market situation AR>MR because more
can be sold only by lowering the price
 AR>MC or P>MC
 Why MR<AR ? because here firm fixes the price itself.
It can sell more only by reducing its price with the
result that with the sale of every additional unit, both
AR and MR fall but the fall in MR > fall in AR. Its reason
is that whereas fall in MR is limited to one unit, the
falling AR gets divided among all the units. Consequently
MR becomes < AR.

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OLIGOPOLY
Oligopoly is a market situation in which an industry has only a few firms (or few large firms
producing most of its output) mutually dependent for taking decisions about price and
output. The two features of this definition
– few firms and
- interdependence between firms .
TYPES
If in an oligopoly market, the firms produce homogeneous products, it is called perfect
oligopoly.
If the firms produce differentiated products, it is called imperfect oligopoly.
If in an oligopoly market, the firms compete with each other, it is called a non-collusive, or
non-cooperative, oligopoly. If the firms cooperate with each other in determining price or
output or both, it is called collusive oligopoly, or cooperative oligopoly.
When there are only two firms producing a product, it is called duopoly. It is a special case
of oligopoly.
FEATURES
(1) Few firms

Few firms mean either only a few firms in number or a few big firms producing most of the
output of the industry. The exact number of firms is not defined. The word ‘few’ signifies
that the number of firms is manageable enough to make a guess of the likely reactions of
rival by a firm.
(2) Firms are interdependent in taking price and output decisions.

When there is only a limited number of firms, it is likely that rivals have some knowledge as
to how these firms operate. It one firm does something about the price and quantity of the
product it produces, the rivals are likely to take quick note of it and react by changing their
own price and output plans. Therefore the given firm, expecting reactions from its rivals,
takes into account such possible reactions before taking any decision about the price and
output of the product it produces. It makes each firm dependent on other firms in the
industry. Because of this reason, the demand curve facing an oligopoly firm is
indeterminate. The firm does not know how his rivals firms will react to its decisions.
(3) Barriers to the entry of firms.

The main reason why the number of firms is small is that there are barriers which prevent
entry of firms into industry. Patents, large capital, control over the crucial raw materials etc,
prevent new firms from entering into industry. Only those who are able to cross these
barriers are able to enter.
(4) Non-price competition
Firms try to avoid price competition for the fear of price war. They use other methods like ad

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The Simple Case of Zero Cost in monopoly
Suppose there exists a village situated sufficiently far away from other villages. In this
village, there is exactly one well from which water is available. All residents are completely
dependent for their water requirements on this well. The well is owned by one person who
is able to prevent others from drawing water from it except through purchase of water. The
person who purchases the water has to draw the water out of the well.
The profit received by the firm equals the revenue received by the firm minus the cost
incurred, that is, Profit = TR – TC. Since in this case TC is zero, profit is maximum when TR is
maximum. This, as we have seen earlier, occurs when output is of 10 units. This is also the
level when MR equals zero. The amount of profit is given by the length of the vertical line
segment from ‘a’ to the horizontal axis. The price at which this output will be sold is the
price that the consumers as a whole are willing to pay. This is given by the market demand
curve D. At output level of 10 units, the price is Rs 5. Since the market demand curve is the
AR curve for the monopolist firm, Rs 5 is the average revenue received by the firm. The total
revenue is given by the product of AR and the quantity sold, ie Rs 5 × 10 units = Rs 50. This is
depicted by the area of the shaded rectangle.
Comparison with Perfect Competition

We compare the above outcome with what it would be under perfectly competitive market
structure. Let us assume that there is an infinite number of such wells. If one well owner
charges Rs 5 per unit of water to get a profit of Rs 50, another well owner realising there are
still consumers willing to buy water at a lower rate, will fix the price lower than Rs 5, say at
Rs 4. Consumers will decide to purchase from the second water seller and demand a larger
quantity of 12 units creating a total revenue of Rs 48. In similar fashion, another water seller,
in order to obtain the revenue, would offer a still lower price, say Rs 3, and selling 14 units
earning revenue of Rs 42. Since there are an infinite number of firms, price would continue
to move down infinitely till it reaches zero. At this output, 20 units of water would be sold
and profit would become zero. Through this comparison, we can see that a perfectly
competitive equilibrium results in a larger quantity being sold at a lower price.
Conclusion:
If the monopoly firm has zero costs or only has fixed cost, the quantity supplied

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in equilibrium is given by the point where marginal revenue is zero. In contrast, perfect
competition would supply an equilibrium quantity given by the point where average revenue
is zero.
• Positive short run profit to a monopoly firm continues in the long run.
MARKET
Market is a mechanism by which buyer and seller interact to determine price and quanitity
of a good or service.
Features of Market
1) Commodity 2) Buyers & Sellers 3) Communications 4)
Place or Area
Q 1) Define a market?
Q 2) Name two different forms of market ?
Q 3) Give one example of perfect competitive market ?
Q 4) Name any two forms of imperfectly competitive market ?
Perfect Competition
Perfect competition is defined as a market structure in which individual form cannot
influence the prevailing market price of the product on its own.
Q 1) Define Perfect Competition ?
Q 2) What is perfect markets and what are its conditions ?
Q 3) What are the necessary conditions for perfect competition to prevail in the market ?
Q 4) IN which market forms the products are homogeneous ?
Q 5) Explain the term homogenous ?
Q 6) Explain a feature of large number of buyers and sellers in perfect competitive
market
Q 7) industry is price maker and firm is price taker. Explain ?
Q 8) How is the supply curve of a firm determined under perfect competition ?
Q 9) Explain the nature of AR/MR/D/P curves under perfect competition?
Q 10) Explain the free entry and free exit feature of the perfect competition ?
Q 11) What is the implication of perfect knowledge in perfect competitive market ?
Q 12) What is the implication of perfect mobility of factors of production ?
Q 13) What is the shape of demand curve under perfect competitive market ?
Q 14) Can a firm under perfect competition incur losses. Explain ?
Q 15) Prove that under perfect competitive market in the long run, the price of the
commodity is equal to LAC and LMC and price cannot be higher or lower than the minimum
average cost and all the firms would be earning zero abnormal profits or normal profits.
Q 16) Compare perfect competition with monopolistic competition ?
Q 17) Compare perfect competition with monopoly?
MONOPOLY
Q 1) Define monopoly ?
Q 2) How many firms are three in a monopoly market ?
Q 3) Explain the condition in a monopoly in the market ?
Q 4) What are patent right ?
Q 5) What is patent life ?

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Q 6) What is the implication of barriers to entry in monopoly market form

Q 7) What is cartel ?
Q 8) What is the shape of D curve under monopoly ?
Q 9) What are the shape of TR/AR/MR curves under monopoly market conditions ?
Q 10) What is profit maximization condition for a monopoly firm?
Q 11) How is price determined under monopoly?
Q 12) What is price discrimination ? Why does monopolist wants to practice it ?
Q 13) What are the conditions necessary for the monopolistic to be able to practice price
discrimination ?
Q 14) In which market form there is no close substitute of the product ?
Q 15) IN which market three is a single seller of the product of the market ?
Q 16) Discuss the various ways in which the monopoly market structure may arise ?
Q 17) Can a monopolistic sustain losses in the short period of time ?
Q 18) Explain how price exceeds MC in monopoly or in monopolistic competition ?
Q 19 Differentiate perfect competition with monopoly ?
Q 20) Differentiate monopoly with monopolistic competition ?
Q 21) Write merits and demerits of monopoly ?
Monopolistic Competition
In monopolistic competition there are large numbers of buyers and sellers. There is free
entry and exit of the firms in the long run and there is product differentiation.
Q 1) Give two examples of monopolistic competition ?
Q 2) Explain the features of monopolistic competition ?
Q 3) What is product differentiation ?
Q 4) Which features of monopolistic competition is competitive in nature
Q 5) What is selling cost ?
Q 6) What is persuasive advertising ?
Q 7) What is the shape of D curve under monopolistic market ?
Q 8) What is the relationship between price and marginal cost in the monopolistic
competitive market?
Q 9) Which feature of monopolistic competition is monopolist in nature?
Q 10) If firms are earning abnormal profits, how will the number of firms in the industry
change.
Q 11) If the firm are making abnormal losses, how will the firm in the industry change?
Q 12) Mention the factor that would make competition imperfect ?
Q 13) Why the demand curve is competitive elastic under monopolistic market?
Q 14) Compare monopolistic competition with monopoly?
Equilibrium Price
Q1. Give the meaning of equilibrium Price .Or Define equilibrium price.
Q2.How is equilibrium price determined under perfect competition?
Q3. Who determines price under perfect competition?
Q4. Give the meaning of excess demand for a product.
Q5. Give the meaning of excess supply for a product.
Q6. Define market equilibrium.

19
Q7. How is equilibrium price affected by increase in demand?

Q8. How is equilibrium price affected by increase in supply?
Q9. How is equilibrium price affected by decrease in demand?.
Q10. How is the equilibrium of a commodity affected when demand increase more than the
supply?
Q11. How is the equilibrium of a commodity affected when demand increase less than the
supply?
Q12. What will be the effect on equilibrium price and production of an increase in equal
proportion of demand and supply of a commodity?
Q13. What will be the effect on equilibrium price and quantity of supply curve shifts
rightward while demand curve remains constant?
Q14. How does a favorable change of taste affect the market price and quantity exchanged?
Q15. How does an increase in excise tax rate affect the market price and quantity
exchanged?
Q16. What is the relationship between the control price and equilibrium price?
Q17. When demand is perfectly elastic if supply increases what happens to equilibrium
price?
1 mark:
1. What do you call a market in which monopoly and competition both exist?
2. In which market form, there is no need of selling costs?
3. In which market form the goods are sold at uniform price?
4. In which market form are the product homogeneous?
5. In which market form are the average and marginal revenue of a firm always equal?
6. In which market form are there no close substitutes of the product?
7. In which market form is there product differentiation?
8. In which market form there are restrictions on the entry of new firms?
9. Under which market form, a firm is a price maker?
10. What is that market called wherein there are only two sellers?
3- 4 marks:
11. Identify the market forms for the two sellers of goods X and Y, given the following
information. Give reasons for your answer
Output sold in units Price of X (Rs) Price of Y (Rs)
100 10 10
150 9 10
200 8 10
12. What is the value of the MR when the demand curve is elastic?
Ans: MR is positive when demand curve is elastic (eD>1)
13. Will the monopolist firm continue to produce in the short run if a loss is incurred at
the best short run level or output?
Ans: No the monopolist will stop production in the long run if he incurs loss in the
short run.

20
14. At what level of price do the firms in a perfectly competitive market supply when
free entry and exit is allowed in the market? How is equilibrium quantity determined
in such a market?
Ans: In long run, free entry and exit of firm takes place. Equilibrium price will be
where Price= Minimum AC and corresponding to this equilibrium quantity is
determined.
15. How is the equilibrium number of firms determined in a market where entry and
exit is permitted?
Ans: let X= Equilibrium quantity
XF= supply of each firm
So , the formula for calculating equilibrium number of firms (N) is
N=X/XF
16. Compare the effect of shift in demand curve on the equilibrium when the number of
firms in the market is fixed with the situation when entry and exit is permitted?
Ans: when number or firms in the market is fixed:
Increase in demand will raise both equilibrium price and quantity
When entry and exit of firms in the market is permitted:
New firms will be attracted by super normal profits arising due to excess demand
caused by increase in demand. It will result in fall in price till it becomes equal to
minimum AC. Therefore equilibrium price remains unchanged.
17. A shift in demand curve has a larger effect on price and smaller effect on quantity
when the number of firms is fixed compared to the situation when free entry and
exit is permitted. Explain.
Ans:
When number of firms is fixed
Shift in demand curve (i.e. , increase) has
an effect on price (OP to OP1) and quantity
(OQ to OQ1)
when entry and exit is permitted

Shift in demand curve (i.e. , increase) has
no effect on price but quantity rises from
OQ to OQ1
So the statement given in the question is correct. There is no effect on price in

second case whereas effect on quantity in first case is less than that in second case.

21
18. From the schedule provided below calculate the total revenue, demand curve and
the price elasticity of demand:
qty 1 2 3 4 5 6 7 8 9
MR 10 6 2 2 2 0 0 0 -5
19. Comment on the shape of the MR curve in case the TR curve is a (i) positively sloped
straight line (ii) horizontal line.
Ans: (i) MR is falling but positive when TR is positively sloped straight line. Rising TR
implies that quantity demanded rises in greater proportion to fall in price.
(ii) MR is zero, when TR is horizontal line.
20. Explain why the demand curve facing a firm under monopolistic competition is
negatively sloped?
21. What is the reason for the long run equilibrium of a firm in monopolistic competition
to be associated with zero profit?
Ans: it is because of possibility of free entry and exit of the firms. In case of super
normal profits, new firms will enter and in case of losses, firms will leave the market.
Therefore, zero abnormal profits (i.e., only normal profits) exist in the long run.
22. The market demand curve for a commodity and the total cost for a monopoly firm
producing the commodity is given by the schedules below. Use the information to
calculate the following:
Qty 0 1 2 3 4 5 6 7 8
Price 52 44 37 31 26 22 19 16 13
TC 10 60 90 100 102 105 109 115 125
a. The MR and MC schedules.
b. The quantities for which MR=MC.
c. The equilibrium quantity of output and the equilibrium price of the
commodity.
d. TR, TC and total profit in equilibrium.
23. List the three different ways in which oligopoly firm may behave.
Ans: oligopoly firm may (i) cooperate with each other and formally have a contract
of their policies. (ii) co-operate with each other but have informal understanding
and (iii) not cooperate with each other.
24. What is meant by prices being rigid? How can oligopoly behaviour lead to such an
outcome?
Ans: rigid prices implies that there will be no frequent change in the price of the
commodity even when there is change in cost or demand. Following oligopoly
behaviour leads to such an outcome:
a. Firms fear the reactions of the rival firms towards change in price.
b. Cost of informing the customers, advertisement/ pricelists etc. discourages
the firms to change the price .

22
c. Small changes in demand and cost sometimes may not induce the firms to
change the price because sufficient profit margin may already be included in
it.
25. Define collusive and non -collusive oligopoly.

Collusive oligopoly refers to a situation where firms cooperate with each other raher
than compete in setting price and output. Agreement may be written or oral and it
may be entered to cooperate by raising prices, restricting output, dividing markets
or otherwise, with the thin objectives of restraining competition and to keep their
bargaining position stronger against the buyers.
Non collusive oligopoly refers to the situation where firms compete with each other
and follows its own price and output policy which is independent of the rival firms.
Every firm tries to increase its market share through competition.
26. What is the price line?

Price line shows the relationship between the market price and a firm’s output level.
It also represents demand curve of a firm. It is a horizontal straight line as in perfect
competition, market price is fixed. At fixed price, the firm can sell any number of
units of its commodity.
diagram
27. What is the implication of product differentiation for the price charged by the
producers in the market?
Ans: PD does not mean that there is necessarily real difference in the products of
different firms. Quite often the differences are imaginary. For example, pepsi, coca
cola and thums up are similar but differentiated products. Its implication for the
price charged by the producers in the market is that a seller can influence the price
of his product depending upon the degree of consumer’s preference for his product
and the extent of competition from close substitutes of the product. He can,
therefore charge a slightly higher price for his product without losing his customers.

23
1. Explain market equilibrium.

2. When do we say there is excess demand for a commodity in the market?
3.(a) When do we say there is excess supply for a commodity in the market?
(b)What happens when there is excess demand in the market?
o When at a given price market demand of a commodity is more than its market
supply, it is called excess demand for the commodity.
o It shows that the market price is less than the equilibrium price. This price cannot
persist. The price will change as buyers will not be able to buy what they want to
buy.
o The pressure of excess demand will push the market price up. This will have two way
impact: supply will increase because the producers are willing to supply more at a
higher price and on the other hand, demand will go down because buyers are willing
to buy less at a higher price.
o This tendency of supply going up and demand going down will continue till market
supply because equal to market demand.
o Thus excess demand will be wiped out and equilibrium price will be established.
o Diagram.
(c) What happens when there is excess supply in the market?
4. What will happen if the price prevailing in the market is
(i) above the equilibrium price?
(ii) below the equilibrium price?
5. Explain how price is determined in a perfectly competitive market with fixed
number of firms.
6. Suppose the price at which equilibrium is attained in exercise 5 is above the
minimum average cost of the firms constituting the market. Now if we allow for
free entry and exit of firms, how will the market price adjust to it?
7. At what level of price do the firms in a perfectly competitive market supply
when free entry and exit is allowed in the market? How is equilibrium quantity
determined in such a market?
8. How is the equilibrium number of firms determined in a market where entry
and exit is permitted?
9. How are equilibrium price and quantity affected when income of the consumers
(a) increase? (b) decrease?
10. Using supply and demand curves, show how an increase in the price of shoes
affects the price of a pair of socks and the number of pairs of socks bought and sold.
11. How will a change in price of coffee affect the equilibrium price of tea? Explain
the effect on equilibrium quantity also through a diagram.
12. How do the equilibrium price and quantity of a commodity change when price
of input used in its production changes?
13. If the price of a substitute(Y) of good X increases, what impact does it have on
the equilibrium price and quantity of good X?
14. Compare the effect of shift in demand curve on the equilibrium when the number
of firms in the market is fixed with the situation when entry-exit is permitted.
15. Explain through a diagram the effect of a rightward shift of both the demand

24
and supply curves on equilibrium price and quantity.

16. How are the equilibrium price and quantity affected when
(a) both demand and supply curves shift in the same direction?
(b) demand and supply curves shift in opposite directions?
17. In what respect do the supply and demand curves in the labour market differ
from those in the goods market?
18. How is the optimal amount of labour determined in a perfectly competitive market?
19. How is the wage rate determined in a perfectly competitive labour market?
20. Can you think of any commodity on which price ceiling is imposed in India?
What may be the consequence of price-ceiling?
21. A shift in demand curve has a larger effect on price and smaller effect on
quantity when the number of firms is fixed compared to the situation when
free entry and exit is permitted. Explain.
22. Suppose the demand and supply curve of commodity X in a perfectly competitive
market are given by:
qD = 700 – p
qS = 500 + 3p for p ≥ 15
= 0 for 0 ≤ p < 15
Assume that the market consists of identical firms. Identify the reason behind
the market supply of commodity X being zero at any price less than Rs 15.
What will be the equilibrium price for this commodity? At equilibrium, what
quantity of X will be produced?
23. Considering the same demand curve as in exercise 22, now let us allow for free
entry and exit of the firms producing commodity X. Also assume the market
consists of identical firms producing commodity X. Let the supply curve of a
single firm be explained as
qS
f = 8 + 3p for p ≥ 20
= 0 for 0 ≤ p < 20
(a) What is the significance of p = 20?
(b) At what price will the market for X be in equilibrium? State the reason for
your answer.
(c) Calculate the equilibrium quantity and number of firms.
24. Suppose the demand and supply curves of salt are given by:
qD = 1,000 – p qS = 700 + 2p
(a) Find the equilibrium price and quantity.
(b) Now suppose that the price of an input used to produce salt has increased
so that the new supply curve is
qS = 400 + 2p
How does the equilibrium price and quantity change? Does the change
conform to your expectation?
(c) Suppose the government has imposed a tax of Rs 3 per unit of sale of salt.
How does it affect the equilibrium price and quantity?
25. Suppose the market determined rent for apartments is too high for common people

25
to afford. If the government comes forward to help those seeking apartments on rent
by imposing control on rent, what impact will it have on the market for apartments
26. What happens when demand and supply curves do not intersect with each other?
Ans: it is the case of non -viable industry. Explain with diagram
27. For a non- viable industry, where does the supply curve lie relative to the demand curve?
Ans: it lies above demand curve.
28. Name three forms of imperfect competition.
29. What does free entry and exit of firms in an industry imply?
Ans: it implies that the abnormal profit is driven to 0.
30. What does the FAD theory of famines say?

Ans: when the available quantity of food grains falls leading to a rise in its price, the poor
people can no longer afford to buy even minimum quantity of food grain for survival. This
causes heavy starvation taking the shape of famine.
31. When will an increase in demand imply an increase in price but no change in quantity
supplied?
Ans: when supply of the product is perfectly inelastic.
32. how will equilibrium price and quantity of a commodity be affected in the following
situations? Use diagram
1. When its supply decreases and its demand is perfectly elastic
2. When demand increases or decreases without a change in supply.
3. When there is increase in supply
4. When both demand and supply curves shift to the right
5. When there is no change in the equilibrium price even if demand and supply
increases.
33.Identify the market form for two sellers of goods X and Y from the following table. Give
reasons
Output sold (unit) price of X Rs price of Y (Rs)
150 15 25
200 14 25
300 12 25
Long run equilibrium: LAC=LMC

Break -even price: price where abnormal profits = 0
Abnormal loss: excess of TC over TR
Relation- ship between AC and MC at the long run competitive equilibrium: both r equal
Normal profits: it is the minimum amount of profit which is required to keep an
entrepreneur in business in long run

Forms of Market

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1

Essential elements of market:

Factors determining the market structure in a Capitalist economy

Types of market structures

Microeconomics by Charu Saxena 965011166 9810215533

Firm and industry:

Consumer’s demand curve and firm’s demand curve:

Why is AR curve (MR curve) or demand curve parallel to x axis in perfect

Microeconomics by Charu Saxena 965011166 9810215533

Under perfect competition, price of a commodity is determined by the equilibrium

Microeconomics by Charu Saxena 965011166 9810215533

Determination of equilibrium price:

Market demand: refers to the sum total of

Microeconomics by Charu Saxena 965011166 9810215533

And lesser quantities at……………………….. As a result, demand curve of the

Market supply : refers to ______________________________________________

Interaction between demand and supply:

Market demand and supply schedule

In the above market situation,…………….

Microeconomics by Charu Saxena 965011166 9810215533

Shifting of demand curve only shifting of supply curve only

Microeconomics by Charu Saxena 965011166 9810215533

Simultaneous change in demand and supply.

Microeconomics by Charu Saxena 965011166 9810215533

3. Explain the sources (causes) of shifts in demand and their effects on

Government intervention on equilibrium price (market determined price)

Microeconomics by Charu Saxena 965011166 9810215533

Equilibrium in imperfect markets: Monopoly, monopolistic competition and

Main features of Monopoly:

Microeconomics by Charu Saxena 965011166 9810215533

1) Granting of a licence by the government:

2) Granting of patents rights:

Competitive Behaviour versus Competitive Structure

Marginal Revenue and Price Elasticity of Demand

Short run equilibrium

A perfectly competitive firm operates where AR=MC. A monopolist firm or

1. Distinguish between perfect competition and monopoly. (Similarly between

Microeconomics by Charu Saxena 965011166 9810215533

(1) Few firms

(2) Firms are interdependent in taking price and output decisions.

(3) Barriers to the entry of firms.

Microeconomics by Charu Saxena 965011166 9810215533

The Simple Case of Zero Cost in monopoly

Comparison with Perfect Competition

Microeconomics by Charu Saxena 965011166 9810215533

Microeconomics by Charu Saxena 965011166 9810215533

Q 6) What is the implication of barriers to entry in monopoly market form

Microeconomics by Charu Saxena 965011166 9810215533

Q7. How is equilibrium price affected by increase in demand?

Microeconomics by Charu Saxena 965011166 9810215533

when entry and exit is permitted

So the statement given in the question is correct. There is no effect on price in

Microeconomics by Charu Saxena 965011166 9810215533

Microeconomics by Charu Saxena 965011166 9810215533

25. Define collusive and non -collusive oligopoly.

26. What is the price line?

Microeconomics by Charu Saxena 965011166 9810215533

1. Explain market equilibrium.

Microeconomics by Charu Saxena 965011166 9810215533

and supply curves on equilibrium price and quantity.

Microeconomics by Charu Saxena 965011166 9810215533

30. What does the FAD theory of famines say?

Long run equilibrium: LAC=LMC