1

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

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. Consumers demand curve and firms demand curve: Consumers 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. Firms demand curve shows the relationship between the price and quantity demanded of a particular firm in the market. Quantity demanded of a firms product, obviously is equal to sales or output of that firm. Therefore, firms demand curve also shows the relationship between price of the commodity and firms 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?
Microeconomics by Charu Saxena 965011166 9810215533

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 Market demand 100 80 60 40 20 firm TR (Rs)

Price per unit 2 4 6 8 10

Market supply 20 40 60 80 100

Price per unit 6 6 6 6 6

Qty.sold (Rs) 20 21 22 23 24

AR(Rs)

MR(Rs)

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 firms 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.

Microeconomics

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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
Microeconomics by Charu Saxena 965011166 9810215533

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 supply 40 400 800 30 600 600 equilibrium 20 800 400 Excess demand 10 1000 200 In the above market situation,. ..

Microeconomics

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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 nonviable 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.

Microeconomics

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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.

Microeconomics

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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.
Microeconomics by Charu Saxena 965011166 9810215533

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 anti- trust 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, showwindows, 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 ? Microeconomics by Charu Saxena 965011166 9810215533

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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. Microeconomics by Charu Saxena 965011166 9810215533

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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.

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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.

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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) co- operate 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 .

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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 firms 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 consumers 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.

Microeconomics

by Charu Saxena

965011166 9810215533

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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 Microeconomics by Charu Saxena 965011166 9810215533

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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 Microeconomics by Charu Saxena 965011166 9810215533

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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

Microeconomics

by Charu Saxena

965011166 9810215533