ECONOMICS CHAPTER 9: FORMS OF MARKET Class: XII(ISC) 2017-2018 Q1) Difference between Oligopoly and Monopolistic competition. Basis Oligopoly Monopolistic competition 1. Meaning It is that form of market structure in which there are a few firms selling a product so that there is intense competition among them. The form of market in which there are a large number of sellers of a particular product, with each selling somewhat differentiated but close substitutes of the product sold by other sellers. 2. Number of sellers There are fairly large number of seller each producing a small share of the total output. They follow independent price policy, this do not affect to the rival firms. There are very few producer in an industry, there is intense competition. Each firm with only a few rival firms that it has significant market power to influence the market price. 3. Nature of entry There are no restrictions on the entry of new firms. There is freedom of entry in the sense that new firms are free to the produce close substitutes to the product produce by others. Barriers to entry for new firms. A lot many industries are dominated by a few large firms in most of the modern economies. Some major barrier are economies of large scale production and patent rights etc. 4. Demand curve An indeterminate demand curve as oligopolistic cannot ignore the reaction of the rival firms. Any change in prices by one firm may result in change in prices by the rival firms. As a result, the demand curve keeps on shifting. A monopolistic firm faces a negatively sloping demand curve, it can sell more by lowering the price of a product. ( 1 )
Q2). Differences between the Oligopoly market and Monopoly market. Basis Oligopoly Monopoly 1. Meaning It is that form of market structure in which there are a few firms selling a product so that there is intense competition among them. A market structure in which there exists only a single seller of a product who is the sole producer of the product which has no close substitutes. 2. Competition The actions of rival firms are interdependent. The strategy of each firm depends upon the strategy of the rival. Each firm faces intense competition in the market. 3. Barrier to entry Barriers to entry for new firms. A lot many industries are dominated by a few large firms in most of the modern economies. Some major barrier are economies of large scale production and patent rights etc. The monopoly firm has no rival in the market. It takes independent decisions in market. Therefore monopoly firm does not face any such competition. The entry of new firms is restricted in this market. The closed entry may result from natural, legal or man-made restrictions e.g. government laws, copy rights and patent rights etc. 4. Selling cost Selling costs or advertisement costs play an important role in creating non price competition among the sellers. Since the monopoly firm does not face any competitor, the selling costs have no role to play in this market. Q3) Differentiate between Pure and Perfect Competition. A. The competition is said to be pure when there are large number of buyers and sellers who deal in the homogenous product and industry is characterized by free entry and exit. The competition is said to be perfect when all six conditions are satisfied. There are large no. of buyers and sellers who deal in the homogenous product and industry is characterized by free entry and exit. Producers, consumers and resource owners have perfect knowledge about market condition. There is perfect mobility of resources and there is no transportation costs. Q4) Why is price per unit equal to the AR and MR of a firm under perfect competition? A. A firm operating under competitive situation, sells its products at a fixed price (P) determined through market forces of supply and demand. We know that average price of a product indicates the average revenue (AR) of the firm [AR = TR/Q = PQ/Q= P, where TR= Total revenue, and Q= quantity sold. If the firm sells at a given price then additional revenue from the sale of an additional unit of output will be equal to the price, i.e., marginal revenue (MR) Hence, in case of such a firm, AR = MR = P curve will be parallel to the output axis. ( 2 )
Q5). What will be the shape of the demand curve facing a firm under a perfect competition? A. Under the perfect competition a firm has to sell its product at a given price determined through the free forces of market demand and supply. Hence, the demand curve faced by the firm showing the relationship between price and quantity, will be parallel to the output axis. It would imply perfectly elastic demand. AR is the demand curve. Q6). What do you mean by product differentiation? A. When different firms, particularly under monopolistic competition, sell substitute products which belong to the same class (say, different varieties of toilet soap), then these firms follow the method of product differentiation to enlarge their respective market shares. The purpose of product differentiation is to make the product unique in the minds of the consumers. This can be done in two ways. Firstly, the products may be differentiated on the basis of physical and chemical characteristics like components, size, colour, packaging, design etc. Secondly it can be done on the basis of conditions surrounding the sale of the product like location, courtesy of the seller, his reputation, efficiency, trustworthiness, credit facility etc. Q7). Identify the type of market which has a characteristic of perfect substitute. Give one reason for your answer. A. In a perfectly competitive market, each firm sells homogeneous products, i.e., these products are perfect substitutes. If the products are not assumed to be perfect substitutes then individual sellers would be able to influence the prices of particular products sold by them. But in a perfectly competitive market any individual seller has no influence over the market price of the product. Hence it is assumed that products sold by individual firms are perfect substitutes in this market. Q8). (a) Explain the term monopsony market. State any two features. (b) Give an example of such market. A. (a) If there is a single buyer of any product or a factor service in any market, that market structure is referred to as the monopsony market. Two features are: Single Buyer: Monopsony is a market structure where there is only one buyer of a commodity, service or input. It is a case of only one firm purchasing the entire product or factor service. Specialized Product or Input: The suppliers of the product or service are supplying a specialized product to the monopsonist which cannot be used by any other firm producing similar product. E.g the radiator supplied by a supplier to Maruti Udyog limited can be used in a Maruti car only. (b) The Defence Department of the Government of India is the single purchaser of fighter aircrafts in India. Hence, in the fighter aircraft market of India, we observe the monopsony power of the Government of India. ( 3 )
Q9). Why are selling costs not required in perfectly competitive market? A. Selling costs (like costs of advertisement) are not required by any firm in a perfectly competitive market because: (a) Here, each firm sells homogeneous products which are perfect substitutes, (b) the buyers have perfect knowledge about the market, (c) each firm faces a perfectly elastic demand curve, i.e., it can sell more at a given price. So, selling costs will only raise its average cost of production and reduce its profit. Q10). What is the significance of freedom of entry and exit of firms under perfect competition? A. This condition is significant in a perfectly competitive market because the long run equilibrium of a firm in this market (where the firm neither earns excess profit nor incurs any loss) becomes possible due to this assumption. If there is short run excess profit, new firms are free to enter into this market. So, in the long run, there is neither any new entry nor any exit of firms from the market, and each firm earns only normal profit. Q11) Why is the demand curve of an Oligopolistic indeterminate? A. An oligopoly market has few sellers with intense competition. They cannot ignore the reaction of the rival firms in view of the interdependence of firms. Any change in the price of one firm may result in a change in the prices by the rival firms. As a result the demand curve faced by an Oligopolistic keeps shifting. Q12) Explain any two features of Monopoly Two main features of a Monopoly are: 1. Single seller: There is only one seller or producer of a commodity. It is a case of one firm controlling the supply of the product. No buyer can influence the price and the difference between a firm and an industry disappears. 2. Closed Entry: Monopoly is caused by high barriers to entry, which exist when entrepreneurs find obstacles to join a profitable industry. The closed entry may result from natural, legal, or manmade restrictions such as patent rights, economies of scale, etc. Closed entry brings about market power and they can earn abnormal profits. AR curves of a Firm under different market forms. Price A B C Output In the above graph A represents the Demand curve {AR} of a firm under perfect competition. B represents the Demand curve {AR} of a firm under imperfect competition. C represents the Demand curve {AR} of a firm under monopoly structure. ( 4 )
EXTRA QUESTIONS: Q1: Define Perfect competition and explain its main features. Q2: What is monopoly? Explain the important characteristics of monopoly market. Q3: Define monopolistic competition and discuss its important features. Q4: What is meant by Oligopoly market? Discuss its important characteristics. Q5: Distinguish between: a. Monopoly and Monopolistic competition. b. Perfect competition and Monopoly competition. c. Monopolistic competition and perfect competition. INSTRUCTIONS TO STUDY THIS CHAPTER: Please read your book for detailed information of the above topics. The length of the answer depends on the marks in the question paper and may not only be substituted with what is mentioned in the notes. Examples can be used to elaborate your points for this chapter. ( 5 )