chapter 4 price determination in different markets part 2

8/20/2019 Chapter 4 Price Determination in Different Markets Part 2

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CHAPTER – 4

PRICE

DETERMINATION INDIFFERENT MARKETS

Unit 3

Price-output

Determination

Under DifferentMarket Forms

© The Institute of Chartered Accountants of India


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PRICE DETERMINATION IN DIFFERENT MARKETS

Learning Objectives

At the end of this unit you will be able to :

understand how price and quantity demanded and supplied are determined in perfect competition

monopoly oli!opoly and monopolistic competition"

understand the conditions required to make price discrimination by monopolist successful"

understand how firms in an oli!opolist market are independent"

#n this unit we shall study the determination of price and output under perfect competition monopoly

monopolistic competition and oli!opoly" $utput is supplied by indi%idual firms on the basis of market

demand and their cost and re%enue functions" &owe%er the e'istence of different forms of market

structure leads to differences in demand and re%enue functions of the firms" (herefore supplies offered

at different prices by the firm would %ary si!nificantly dependin! upon the market forms" )e start our

analysis with perfect competition"

3.0.0 Features

*uppose you !o to a %e!etable market and enquire about the price of potatoes from a shopkeeper" &e

says potatoes are for ` + per k!" #n the same way you enquire from many shopkeepers and you !et the

same answer" )hat do you notice, ou notice the followin! facts :

.i/ (here are lar!e number of buyers and sellers in the potatoes market"

.ii/ All the shopkeepers are sellin! potatoes at ` +"

.iii/ Product homo!eneity i"e" all the sellers are sellin! almost the same quality of potatoes in the sense

that you cannot 0ud!e by seein! the potatoes from which farmer1s field do they come from"

*uch type of market is known as perfectly competiti%e market" #n !eneral it has the followin!

characteristics :

.i/ (here are lar!e number of buyers and sellers who compete amon! themsel%es and their number is

so lar!e that no buyer or seller is in a position to influence the demand or supply in the market"

.ii/ (he commodity dealt in it is homo!eneous in the sense that the !oods produced by different firms

are identical in nature"

.iii/ 2%ery firm is free to enter the market or to !o out of it"

#f the abo%e three conditions alone are fulfilled then it is called pure competition" (he essential

feature of the pure competition is the absence of monopolistic element" (he number of producers islar!e the commodity is the same and e%eryone has the liberty to enter the industry" *o

monopolistic combinations are not possible"

#n addition to the abo%e stated three features of pure competition some more conditions are

attached to the perfect competition" (hey are:

170 COMMON PROFICIENCY TEST



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.i%/ (here is a perfect knowled!e on the part of buyers and sellers of the quantities of stock of !oods in

the market market conditions and the prices at which transactions of purchase and sale are bein!

entered into"

.%/ Facilities e'ist for the mo%ement of !oods from one centre to another" Also buyers ha%e no

preference as between different sellers and as between different units of commodity offered for

sale also sellers are quite indifferent as to whom they sell"

.%i/ (he commodity or the !oods are sold at a uniform price throu!hout the market at any !i%en point of

time" #n other words all firms indi%idually are price takers they ha%e to accept the price

determined by the market forces of total demand and total supply"

(he last mentioned is a consequence of the conditions pre%ailin! in a market operatin! under conditions

of perfect competition for when there is perfect knowled!e and perfect mobility if any seller tries to

raise his price abo%e that char!ed by others he would lose his customers"

)hile there are few e'amples of perfect competition which is re!arded as a myth by many the !rain or

stock markets approach the condition of perfect competition"

3.0.1 Price deterination under !erfect co!etition

"#ui$ibriu of the Industr% & An industry in economic terminolo!y consists of a lar!e number of

independent firms each ha%in! a number of factories farms or mines under its control" 2ach such unit

in the industry produces a homo!eneous product so that there is competition amon!st !oods produced

by different units called firms" )hen the total output of the industry is equal to the total demand we say

that the industry is in equilibrium the price then pre%ailin! is equilibrium price whereas a firm is said to

be in equilibrium when it has no incenti%e to e'pand or contract production"

As stated abo%e under competiti%e conditions the equilibrium price for a !i%en product is determined

by the interaction of the forces of demand and supply for it as is shown in fi!ure 4"

Y

D S

P R I C E

PE

S D

O Q X

OUTPUT

Fig. ' & "#ui$ibriu of a co!etitive industr%

#n Fi!" 4 $P is the equilibrium price and $5 is the equilibrium quantity which will be sold at that price"

(he equilibrium price is the price at which both demand and supply are equal and therefore no buyer

who wanted to buy at that price !oes dissatisfied and none of the sellers is dissatisfied that he could not

sell his !oods at that price" #t may be noticed that if the price were to be fi'ed at any other le%el hi!her

or lower demand remainin! the same there would not be

GENERAL ECONOMICS 171



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an equilibrium in the market" 6ikewise if the quantities of !oods were !reater or smaller than the

demand there would not be an equilibrium"

"#ui$ibriu of the Fir & (he firm is said to be in equilibrium when it ma'imi7es its profit" (he outputwhich !i%es ma'imum profit to the firm is called equilibrium output" #n the equilibrium state the firm

has no incenti%e either to increase or decrease its output" *ince it is the ma'imum profit !i%in! output

which only !i%es no incenti%e to the firm to increase or decrease it so it is in equilibrium when it !ets

ma'imum profit"

Firms in a competiti%e market are price-takers" (his is because there are a lar!e number of firms in the

market who are producin! identical or homo!eneous products" As such these firms cannot influence the

price in their indi%idual capacities" (hey ha%e to accept the price fi'ed .throu!h interaction of total

demand and total supply/ by the industry as a whole"

*ee the followin! fi!ure :

(a) Market

D S

P R I C E

P R I C E

P P

S D

QUANTITYO

(b) Individual SellerY

D/AR/MR

QUANTITY N M

X

Fig. ( & The fir)s deand curve under !erfect co!etition

#ndustry price $P is fi'ed throu!h the interaction of total demand and total supply of the industry" Firms

ha%e to accept this price as !i%en and as such they are price-takers rather than price-makers" (hey cannot

increase the price $P indi%idually because of the fear of losin! customers to other firms" (hey do not try

to sell the product below $P because they do not ha%e any incenti%e for lowerin! it" (hey will try to sell

as much as they can at price $P"

As such P-line acts as demand cur%e for the firm" (hus the demand cur%e facin! an indi%idual firm in a

perfectly competiti%e market is a hori7ontal one at the le%el of market price set by the industry and firms

ha%e to choose that le%el of output which yields ma'imum profit" 6et us continue our e'ample on pa!e

898 in which demand and supply schedules for the industry were as follows :




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Tab$e * 3 & "#ui$ibriu !rice for industr%

Price Demand Supply

( ̀) (units) (units)

8 9 +

; 3+ 3+

3 ;


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Y MARKET (INDUSTRY) Y FIRM

D MC

P R I C E S

PE P T R AR = MR

D

S

O X O

Q1 OUTPUTQ2

XQUANTITY

Fig. - & "#ui$ibriu !osition of a fir under !erfect co!etition

#n fi!ure C DD and ** are the industry demand and supply cur%es which equilibrate at 2 to set the

market price as $P" (he firms of perfectly competiti%e industry adopt $P price as !i%en and considers P-

6ine as demand .a%era!e re%enue/ cur%e which is perfectly elastic at P" As all the units are priced at the

same le%el M@ is a hori7ontal line equal to A@ line" ote that MB cur%e cuts M@ cur%e at two places (

and @ respecti%ely" Eut at ( the MB cur%e is cuttin! M@ cur%e from abo%e" ( is not the point of

equilibrium as the second condition is not satisfied" (he firm will benefit if it !oes beyond ( as the

additional cost of producin! an additional unit is fallin!" At @ the MB cur%e is cuttin! M@ cur%e from

below" &ence @ is the point of equilibrium and $5; is the equilibrium le%el of output"

3.0. /u!!$% curve of the fir in a co!etitive aret : $ne interestin! thin! about the MB cur%e of

a firm in a perfectly competiti%e industry is that it depicts the firm1s supply cur%e" (his can be shown

with the help of the followin! e'ample"

Y PRICE

O


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MCY S

5.00P4 = 5.00 D

4

P3 = 4.004.00

D3

P R I C E3.00P2 = 3.00 AVCD

22.00

P1 = 2.00 D1 S

O Q Q Q Q4X

X 1 2 3Q Q Q Q OUTPUT41 2 3

OUTPUT

Fig. 10 & argina$ cost and su!!$% curves for a !rice2taing fir




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*uppose the market price of a product is ` ; Borrespondin! to it we ha%e D8 as demand cur%e for the

firm" At price ` ; the firm supplies 58 output because here M@ MB" #f the market price is ` 3 the

correspondin! demand cur%e is D;" At ` 3 the quantity supplied is 5;" *imilarly we ha%e demand cur%es

at D3 and D


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Fi!ure 88 shows how a firm can earn supernormal profits in the short run"

(he dia!ram shows that in order to attain equilibrium the firm tries to equate mar!inal re%enue with

mar!inal cost" M@ .mar!inal re%enue/ cur%e is a hori7ontal line and MB .mar!inal cost/ cur%e is a U-shaped cur%e which cuts the M@ cur%e at 2" At 2 M@ MB" $5 is the equilibrium output for the firm"

(he firm1s profit per unit is 2E .A@-A(B/ A@ is 25 and A(B is E5" (otal profits are AE2P"

4ora$ !rofits & )hen a firm 0ust meets its a%era!e total cost it earns normal profits" &ere A@ A(B"

Y

MC

P R I C E

ATC

PE P = AR = MR

O QX

OUTPUT

Fig. 1 & /hort run e#ui$ibriu of a co!etitive fir & 4ora$ !rofits

(he fi!ure shows that M@ MB at 2" (he equilibrium output is $5" *ince A@A(B or $P 25 the

firm is 0ust earnin! normal profits"

Losses & (he firm can be in an equilibrium position and still makes losses" (his is the position when the

firm is minimisin! losses" )hen the firm is able to meet its %ariable cost and a part of fi'ed cost it willtry to continue production in the short run" #f it reco%ers a part of the fi'ed costs it will be beneficial for

it to continue production because fi'ed costs .such as costs towards plant and machinery buildin! etc"/

are already incurred and in such case it will be able to reco%er a part of them" Eut if a firm is unable to

meet its a%era!e %ariable cost it will be better for it to shut down"




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YMC

ATC

P R I C E

BA

LOSSES

P E P = AR = MR

OX

Q OUTPUT

Fig. 13 & /hort run e#ui$ibriu of a co!etitive fir & Losses

#n fi!ure 83 2 is the equilibrium point and at this point A@ 25 and A(B E5 since E5I25 the firm

is earnin! E2 per unit loss and the total loss is AE2P"

3.0.+ Long ,un "#ui$ibriu of the Fir & #n the lon! run firms are in equilibrium when they ha%e

ad0usted their plant so as to produce at the minimum point of their lon! run AB cur%e which is tan!ent

to the demand cur%e defined by the market price" #n the lon! run the firms will be earnin! 0ust normal

profits which are included in the A(B" #f they are makin! supernormal profits in the short run new

firms will be attracted into the industry this will lead to a fall in price .a down ward shift in the

indi%idual demand cur%es/ and an upward shift of the cost cur%es due to increase in the prices of factors

as the industry e'pands" (hese chan!es will continue until the A(B is tan!ent to the demand cur%e" #f the

firms make losses in the short run they will lea%e the industry in the lon! run" (his will raise the price

and costs may fall as the industry contracts until the remainin! firms in the industry co%er their totalcosts inclusi%e of the normal rate of profit"

#n Fi!" 8


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Y FIRMY INDUSTRY

S T &

R E V E

N U E

LMC S

SMC1SAC1

LAC P R I C E

D S1

C O

PC SAC P

M

P1S

P1S

DS1O

OUTPUT X O QX

Q1

QUANTITY DEMANDED

& SUPPLIED

.a/ .b/

Fig. 1+ & Long run e#ui$ibriu of the fir in a !erfect$% co!etitive aret

(he condition for the lon! run equilibrium of the firm is that the mar!inal cost should be equal to the

price and the lon! run a%era!e cost

i"e" 6MB 6AB P

(he firm ad0usts its plant si7e so as to produce that le%el of output at which the 6AB is the minimum

possible" At equilibrium the short run mar!inal cost is equal to the lon! run mar!inal cost and the short

run a%era!e cost is equal to the lon! run a%era!e cost" (hus in the lon! run we ha%e

*MB 6MB *AB 6AB P M@

(his implies that at the minimum point of the 6AB the correspondin! .short run/ plant is worked at its

optimal capacity so that the minima of the 6AB and *AB coincide" $n the other hand the 6MB cuts the

6AB at its minimum point and the *MB cuts the *AB at its minimum point" (hus at the minimum point

of the 6AB the abo%e equality is achie%ed"

3.0.5 Long run e#ui$ibriu of the industr% & A perfectly competiti%e industry is in lon! run

equilibrium when .i/ all the firms are earnin! normal profits only i"e" all the firms are in equilibrium .ii/

there is no further entry or e'it from the market"




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YINDUSTRY

Y FIRM

C O S T / R E V

E N U E

D S LMC

P R I C E

SMC LAC

E1SAC

P PP = AR = MR

S D

OQ

X OM

X

QUANTITY OUTPUT

Fig. 15 & Long run e#ui$ibriu of a co!etitive industr% and its firs

Fi!ure 8+ shows that in the lon!-run A@ M@ 6AB 6MB at 28" *ince 28 is the minimum point of 6AB cur%e the firm produces equilibrium output $M at the minimum .optimum/ cost" A firm producin!

output at optimum cost is called an optimum firm" All the firms under perfect competition in lon! run

are optimum firms ha%in! optimum si7e and these firms char!e minimum possible price which 0ust

co%ers their mar!inal cost"

(hus in the lon! run in perfect competition the market mechanism leads to an optimal allocation of

resources" (he optimality is shown by the followin! conditions associated with the lon! run equilibrium

of the industry :

a" (he output is produced at the minimum feasible cost"

b" Bonsumers pay the minimum possible price which 0ust co%ers the mar!inal cost i"e" MB A@"

c" Plants are used at full capacity in the lon! run so that there is no wasta!e of resources i"e" MB AB"

d" Firms earn only normal profits i"e" AB A@"

e" Firms ma'imi7e profits .i"e" MBM@/ but the le%el of profits will be 0ust normal"

#n other words in the lon! run

6A@ 6M@ P 6MB 6AB and there will be optimum allocation of resources"

Eut it should be remembered that the perfectly competiti%e market system is a myth" (his is because the

assumptions on which this system is based are ne%er found in the real world market conditions"

(he word =Monopoly1 means Jalone to sellK" Monopoly is a situation in which there is a sin!le seller of

a product which has no close substitute" Pure monopoly is ne%er found in practice" &owe%er in public

utilities such as transport water and electricity we !enerally find a monopoly form of market"




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3.1.0 Features of ono!o$% aret & (he followin! are the ma0or features of the monopoly market :

617 /ing$e se$$er of the !roduct : #n a monopoly market there is only one firm producin! or supplyin!a product" (his sin!le firm constitutes the industry and as such there is no distinction between firm

and industry in a monopolistic market"

67 ,estrictions to "ntr% : #n a monopolistic market there are stron! barriers to entry" (he barriers to

entry could be economic institutional le!al or artificial"

637 4o c$ose2substitutes & (he monopolist !enerally sells a product which has no close substitutes" #n

such a case the cross elasticity of demand for the monopolist1s product and any other product is

7ero or %ery small" (he price elasticity of demand for monopolist1s product is also less than one" As

a result the monopolist faces a steep downward slopin! demand cur%e"

)hile to some e'tent all !oods are substitutes for one other there may be essential characteristics in a

!ood or !roup of !oods which !i%e rise to !aps in the chain of substitution" #f one producer can so

e'clude competition that he controls the supply of a !ood he can be said to be =monopolist1 L a sin!le seller"

(he monopolist may use his monopolistic power in any manner in order to reali7e ma'imum re%enue"

&e may also adopt price discrimination"

#n real life complete monopoly is seldom found" Eut one producer may dominate the supply of a !ood

or !roup of !oods" #n public utilities e"!" transport water electricity !eneration etc" monopolistic

markets may e'ist so as to reap the benefits of lar!e scale production"

3.1.1 ono!o$ist)s ,evenue Curves : *ince the monopolist firm is assumed to be the only producer of

a particular product its demand cur%e is identical with the market demand cur%e for the product" (he

market demand cur%e which e'hibits the total quantity of a product that buyers will offer to buy at each

price also shows the quantity that the monopolist will be able to sell at e%ery price that he sets" #f we

assume that the monopolist sets a sin!le price and supplies all buyers who wish to purchase at that price

we can easily find his a%era!e re%enue and mar!inal re%enue cur%es"

Y

P R I C E

MR D = AR

XO

QUANTITY

Fig. 18 & A ono!o$ist)s deand curve and argina$ revenue curve




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*uppose the strai!ht line in Fi!" 89 is the market demand cur%e for a particular product =A1" *uppose Mr"

> and Bo" is the only producer of the product A so that it faces the entire market demand" (he firm faces

a downward slopin! demand cur%e because if it wants to sell more it has to reduce the price of the

product"

)e ha%e tabulated selected %alues of price and quantity from this demand cur%e in (able + and

computed the amounts of a%era!e total and mar!inal re%enue correspondin! to these le%els"

Tab$e * 5

Average revenue9 Tota$ revenue and argina$ revenue for a ono!o$ist

Quantity Average Revenue Total Revenue Marginal Revenue

sold (AR = P) (TR) (MR)

8"

8 C"+ C"+ C"+

; C" 8?" ?"+

3 ?"+ ;+"+ 4"+

< ?" 3;" 9"+

+ 4"+ 34"+ +"+

9 4"


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.i/ A@ and M@ are both ne!ati%ely by sloped .downward slopin!/ cur%es"

.ii/ M@ cur%e lies half-way between the A@ cur%e and the a'is" i"e" it cuts the hori7ontal line

between a'is and A@ into two equal parts".iii/ A@ cannot be 7ero but M@ can be 7ero or e%en ne!ati%e"

3.1. Profit a:iisation in a ono!o$ised aret & "#ui$ibriu of the ono!o$% fir : Firms in a

perfectly competiti%e market are price-takers so that they are only concerned about determination of

output" Eut this is not the case with a monopolist" A monopolist has to determine not only his output but

also the price of his product" *ince he faces a downward slopin! demand cur%e if he raises the price of

his product his sales will !o down" $n the other hand if he wants to impro%e his sales %olume he will

ha%e to be content with lower price" &e will try to reach that le%el of output at which profits are

ma'imum i"e" he will try to attain the equilibrium le%el of output" &ow he attains this le%el can be found

out as is shown below"

/hort run "#ui$ibriu

Conditions for e#ui$ibriu & (he twin conditions for equilibrium in a monopoly market are the same

as discussed earlier"

.i/ MB M@

.ii/ MB cur%e must cut M@ cur%e from below" raphically

we can depict these conditions in fi!ure 84"

C O S

T & R E V E N U E

MC


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E

AR

QX

OUTPUT

MR

Fig. 1' & "#ui$ibriu of a ono!o$ist 6/hort run7

(he fi!ure shows that MB cur%e cuts M@ cur%e at 2" (hat means at 2 the equilibrium price is $P and

the equilibrium output is $5"

#n order to know whether the monopolist is makin! profits or losses in the short run we need to

introduce the a%era!e total cost cur%e" (he followin! fi!ure shows two possibilities for a monopolist

firm in the short run"




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C O S T / R E V

E N U EY

MC ATC

AP

CPROFIT

B

E

AR

MR

O Q OUTPUT X

Fig. 1( & Fir)s e#ui$ibriu under ono!o$% & a:iisation of !rofits

Fi!ure 8? shows that MB cuts M@ at 2 to !i%e equilibrium output as $5" At $5 the price char!ed is

$P .we find this by e'tendin! line 25 till it touches A@ or demand cur%e/" Also at $5 the cost per unit

is E5" (herefore profit per unit is AE or total profit is AEBP"

Can a monopolist incur losses? $ne of the misconceptions about a monopolist is that he always makes

profits" #t is to be noted that nothin! !uarantees that a monopolist makes profits" #t all depends upon his

demand and cost conditions" #f he faces a %ery low demand for his product and his cost conditions are

such that A(B IA@ he will not be makin! profits rather he will incur losses" Fi!ure 8C depicts this

position"

S T / R E V E N U EY

SMCSATC

C A C O

P B

E AR

O Q OUTPUT X

MR

Fig. 1- & "#ui$ibriu of the ono!o$ist & Losses in the short run

#n the abo%e fi!ure MB cuts M@ at 2" &ere 2 is the point of loss minimisation" At 2 the equilibrium

output is $5 and the equilibrium price is $P" (he a%era!e total cost .*A(B/ correspondin! to $5 is

5A" Bost per unit of output i"e" 5A is !reater than re%enue per unit




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which is E5" (hus the monopolist incurs losses to the e'tent of AE per unit or total loss is AEPB"

)hether the monopolist stays in business in the short run depends upon whether he meets his a%era!e

%ariable cost or not" #f he co%ers his a%era!e %ariable cost and at least a part of fi'ed cost he will not

shut down because he contributes somethin! towards fi'ed costs which are already incurred" #f he is

unable to meet his a%era!e %ariable cost e%en he will shut down"

Long Run Equilibrium : 6on! run is a period lon! enou!h to allow the monopolist to ad0ust his plant

si7e or to use his e'istin! plant at any le%el that ma'imi7es his profit" #n the absence of competition the

monopolist need not produce at the optimal le%el" &e can produce at sub-optimal scale also" #n other

words he need not reach the minimum of 6AB cur%e he can stop at any place where his profits are

ma'imum"

Y

MC

P R I C

E

ATC

PA

CPROFITS B

ED = AR

O Q X

MR OUTPUT

Fig. 0 & Long run e#ui$ibriu of a ono!o$ist

&owe%er one thin! is certain : (he monopolist will not continue if he makes losses in the lon! run" &e

will continue to make super normal profits e%en in the lon! run as entry of outside firms is blocked"

3.1.3 Price ;iscriination & Bonsider the followin! e'amples"

(he family doctor in your nei!hbourhood char!es a hi!her fees from a rich patient compared to the fees

char!ed from a poor patient e%en thou!h both are sufferin! from %iral fe%er" )hy,

2lectricity companies sell electricity at a cheaper rate for home consumption in rural areas than for

industrial use" )hy,

(he abo%e cases are e'amples of price discrimination" )hat is price discrimination, Price

discrimination occurs when a producer sells a specific commodity or ser%ice to different buyers at two

or more different prices for reasons not associated with differences in cost"Price discrimination is a method of pricin! adopted by the monopolist in order to earn abnormal profits"

#t refers to the practices of char!in! different prices for different units of the same commodity"




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Further e'amples :

.a/ @ailways separate hi!h-%alue or relati%ely small-bulk commodities which can bear hi!her frei!ht

char!es from other cate!ories of !oods".b/ *ome countries dump !oods at low prices in forei!n markets to capture them"

.c/ *ome uni%ersities char!e hi!her tuition fees from e%enin! class students than from other scholars"

.d/ A lower subscription is char!ed from student readers in case of certain 0ournals"

.e/ A hi!her price for %e!etables may be char!ed in posh localities inhabited by the rich than in other

localities"

Price discrimination cannot persist under perfect competition because the seller has no influence o%er

market determined rate" Price discrimination requires an element of monopoly so that the seller can

influence the price of his product"

Conditions for !rice discriination & Price discrimination is possible only under the followin!conditions :

.i/ (he seller should ha%e some control o%er the supply of his product i"e" monopoly power in some

form is necessary .not sufficient/ to discriminate price"

.ii/ (he seller should be able to di%ide his market into two or more sub-markets"

.iii/(he price-elasticity of the product should be different in different sub-markets" (he monopolist

fi'es a hi!h price for his product for those buyers whose price elasticity of demand for the product

is less than one" (his implies that when the monopolist char!es a hi!her price from them they do

not si!nificantly reduce their purchases in response to hi!h price"

.i%/ #t should not be possible for the buyers of low-priced market to resell the product to the buyers of

hi!h-priced market"

(hus we note that a discriminatin! monopolist char!es a hi!her price in a market which has a relati%ely

inelastic demand" (he market which is hi!hly responsi%e to price chan!es is char!ed less" $n the whole

the monopolist benefits from such discrimination"

A numerical e'ample will help you understand price- discrimination more clearly"

*uppose the sin!le monopoly price is ` 3 and the elasticities of demand in markets A and E are

respecti%ely ; and +" (hen

e - 8

M@ in market A A@

A

e

; - 8 3;

8+

e - 8

M@ in market E A@

E e




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+ - 8 3

+ ;<#t is thus clear that the mar!inal re%enues in the two markets are different when elasticities of demand at

the sin!le price are different" Further we see that the mar!inal re%enue in the market in which elasticity

is hi!h is !reater than the mar!inal re%enue in the market where elasticity is low" ow it is profitable for

the monopolist to transfer some amount of the product from market A where elasticity is less and

therefore mar!inal re%enue is low to market E where elasticity is hi!h and mar!inal re%enue is lar!e"

(hus when the monopolist transfers one unit from A to E the loss in re%enue . ` 8+/ will be more than

compensated by !ain in re%enue .` ;


21/46

in elasticity of demand" For the sake of makin! our analysis simple we shall e'plain a case where the

total market is di%ided into two sub-markets"

#n order to reach the equilibrium position the discriminatin! monopolist has to take three decisions: 8"how much total output should he produce and ;" how the total output should be distributed between the

two sub-markets and 3" what prices he should char!e in the two sub-markets"

(he same mar!inal principle will !uide his decision to produce a total output as that which !uides a

perfect competitor or a simple monopolist" #n other words the discriminatin! monopolist will compare

the mar!inal re%enue with the mar!inal cost of the output" Eut he has to find out first the a!!re!ate

mar!inal re%enue of the two sub-markets taken to!ether and compare this a!!re!ate mar!inal re%enue

with mar!inal cost of the total output" A!!re!ate mar!inal re%enue cur%e is obtained by summin! up

laterally the mar!inal re%enue cur%es of the sub-markets"

#n fi!ure ;8 M@ a is the mar!inal re%enue cur%e in sub-market A correspondin! to the demand cur%e D a"

*imilarly M@ b is the mar!inal re%enue in sub-market E correspondin! to the demand cur%e D b" owthe a!!re!ate mar!inal re%enue cur%e AM@ which has been shown in Panel .iii/ of fi!ure ;8 has been

deri%ed by addin! up laterally M@ a and M@ b" Mar!inal cost cur%e of the monopolist is shown by thecur%e MB in Panel .iii/ of fi!ure ;8"

(he discriminatin! monopolist will ma'imi7e his profits by producin! the le%el of output at which

mar!inal cost cur%e .MB/ intersects the a!!re!ate mar!inal re%enue cur%e .AM@/" #t is manifest from

the dia!ram .iii/ that profit ma'imi7in! output is $M for only at $M a!!re!ate mar!inal re%enue is

equal to the mar!inal cost of the whole output" (hus the discriminatin! monopolist will decide to

produce $M le%el of output"

$nce the total output to be produced has been determined the ne't task for the discriminatin!

monopolist is to distribute the total output between the two sub-markets" &e will distribute the total

output $M in such a way that the mar!inal re%enues in the two sub-markets are equal" (he mar!inalre%enues in the two-sub-markets must be equal if the profits are to be ma'imi7ed" #f he is so allocatin!

the output into two markets that the mar!inal re%enues in the two are not equal then it will pay him to

transfer some amount from the sub-market in which the mar!inal re%enue is less to the sub-market in

which the mar!inal re%enue is !reater" $nly when the mar!inal re%enues in the two markets are equal it

will be unprofitable for him to shift any amount of the !ood from one market to the other"

For the discriminatin! monopolist to be in equilibrium it is essential not only that the mar!inal re%enues

in the two sub-markets should be the same but that they should also be equal to the mar!inal cost of the

whole output" 2quality of mar!inal re%enues in the two markets with mar!inal cost of the whole output

ensures that the amount sold in the two sub-markets will to!ether be equal to the whole output $M

which has been fi'ed by equali7in! a!!re!ate mar!inal re%enue with mar!inal cost" #t will be seen from

fi!ure .iii/ that at equilibrium output $M mar!inal cost is M2"

ow the output $M has to be distributed in the two markets in such a way that the mar!inal re%enue

from them should be equal to the mar!inal cost .M2/ of the whole output" #t is clear form the dia!ram .i/

that $M8 must be sold in the sub-market A because mar!inal re%enue




22/46


M828 at amount $M8 is equal to mar!inal cost M2" *imilarly $M ; must be sold in sub-market E since

mar!inal re%enue M;2; of amount $M; is equal to the mar!inal cost M2 of the whole output" (o

conclude demand and cost conditions bein! !i%en the discriminatin! monopolist will produce totaloutput $M and will sell amount $M8 in sub-market A and amount $M; in sub-market E" #t should be

carefully noted that the total output $M will be equal to $M8 H $M;"

Another important thin! which the discriminatin! monopolist has to disco%er is what prices will be

char!ed in the two sub-markets" #t is clear from the demand cur%e that amount $M 8 of the !ood can be

sold at price $P8 in sub-market A" (herefore price $P8 will be set in sub-market A" 6ike wise amount

$M; can be sold at price $P; in sub-market E" (herefore price $P; will be set in sub-market E" Further

it should be noted that price will be hi!her in the market A where the demand is less elastic than in

market E where the demand is more elastic" (hus price $P8 is !reater than the price $P;"

Fig. 1& Fi:ation of tota$ out!ut and !rice in the t


23/46

Do%e claims to ensure for youn! smooth skin" (he practice of product and ser%ice differentiation !i%es

each seller a chance to attract business to himself on some basis other than price" (his is the

monopolistic part of market the situation" (hus this market contains features of both the markets

discussed earlier L monopoly and perfect competition" #n fact this type of market is more common than

pure competition or pure monopoly" (he industries in monopolistic competition include clothin!

manufacturin! and retail trade in lar!e cities" (here are many hundreds of manufacturers of women1s

dresses and hundreds of !rocery shops in a medium si7ed or lar!e city"

3..1 Features of ono!o$istic Co!etition &

6i7 Large number o sellers : #n a monopolistically competiti%e market there are a lar!e number of

sellers who indi%idually ha%e a small share in the market"

6ii7 Product dierentiation : #n a monopolistic competiti%e market the products of different sellers are

differentiated on the basis of brands" (hese brands are !enerally so much ad%ertised that a

consumer starts associatin! the brand with a particular manufacturer and a type of brand loyalty is

de%eloped" Product differentiation !i%es rise to an element of monopoly to the producer o%er the

competin! product" As such the producer of an indi%idual brand can raise the price of his product

knowin! that he will not lose all the customers to other brands because of absence of perfect

substitutability" *ince howe%er all the brands are close substitutes of one another the seller will

who increases the price of the product lose some of his customers to his competitors" (hus this

market is a blend of monopoly and perfect competition"

6iii7 !reedom o entry or e"it : ew firms are free to enter into the market and e'istin! firms are free to

quit it"

6iv7 #on$price competition : #n a monopolistically competiti%e market sellers try to compete on bases

other than price as for e'ample a!!ressi%e ad%ertisin! product de%elopment better distribution

arran!ements efficient after-sales ser%ice and so on" A key base of non-price competition is adeliberate policy of product differentiation" *ellers attempt to promote their products not by cuttin!

prices but by incurrin! hi!h e'penditure on publicity and ad%ertisement and other sales promotin!

techniques" (his is because price competition may result in price L wars which may throw a few

firms out of market"

3..1 Price2out!ut deterination under ono!o$istic co!etition & "#ui$ibriu of a fir & #n

a monopolistically competiti%e market since the product is differentiated each firm does not face a

perfectly elastic demand for its products" 2ach firm is a price maker and is in a position to determine the

price of its own product" As such the firm is faced with a downward slopin! demand cur%e for its

product" enerally the less differentiated the product is from its competitors the more elastic this cur%e

will be"




24/46


OTPT

Fig. & /hort run e#ui$ibriu of a fir under ono!o$istic co!etition & /u!er2nora$ !rofits

(he firm depicted in fi!ure ;; has a downward slopin! but flat demand cur%e for its product" (he firm is

assumed to ha%e U-shaped short run cost cur%es"

Conditions for the "#ui$ibriu of an individua$ fir : (he conditions for price-output determination

and equilibrium of an indi%idual firm may be stated as follows :

.i/ MB M@

.ii/ MB cur%e must cut M@ cur%e from below"

Fi!ure ;; shows that MB cuts M@ cur%e at 2" At 2 the equilibrium price is $P and the equilibrium

output is $M" *ince per unit cost is *M per unit super-normal profit .i"e" price-cost/ is 5* .or P@/ and

the total super-normal profit is P5*@"

#t is also possible that a monopolistically competiti%e firm may incur losses in the short run" (his is

shown in fi!" ;3"

(he fi!ure shows that per unit cost .&/ is hi!her than price $( .or N/ of the product of the firm and

the loss per unit is N& .&-N/" (he total loss is &N("

)hat about lon! run equilibrium of the industry, #f the firms in a monopolistically competiti%e industry

earn super-normal profits in the short run there will be an incenti%e for new firms to enter the industry"

As more firms enter profits per firm will !o on decreasin! as the total demand for the product will be

shared amon! a lar!er number of firms" (his will happen till all the profits are wiped away and all thefirms earn only normal profits" (hus in the lon! run all the firms will earn only normal profits"




25/46

OTPT

Fig. 3 & /hort run e#ui$ibriu of a fir under ono!o$istic Co!etition * =ith $osses

OTPT

Fig. + & The $ong2ter e#ui$ibriu of a fir in ono!o$istic co!etition

Fi!ure ;< shows the lon! run equilibrium of a firm in a monopolistically competiti%e market" (he

a%era!e re%enue cur%e touches the a%era!e cost cur%e at point ( correspondin! to quantity 5 and price P"

At equilibrium .i"e" MB M@/ supernormal profits are 7ero since a%era!e re%enue equals a%era!e costs"

All firms are earnin! 7ero supernormal profits or 0ust normal profits"

#n case of losses in the short run the loss makin! firms will e'it from the market and this will !o on till

the remainin! firms make normal profits only"

#t is to be noted that an indi%idual firm which is in equilibrium in the lon! run is in the lon! run is in

equilibrium position at a position where it has e'cess capacity" (hat is it is producin! a lower quantitythan its full capacity le%el" (he firm in Fi!ure ;< could e'pand its output from 5 to @ and reduce

a%era!e costs" Eut it does not do so because to do so would be to reduce a%era!e re%enue to minimum

more than a%era!e costs" #t implies that firms in monopolistic competition are not of optimum si7e and

there e'ists e'cess capacity .5 @ in our e'ample abo%e/ of production with each firm"




26/46


)e ha%e studied price and output determination under three market forms namely perfect competition

monopoly and monopolistic competition" &owe%er in the real world economies we find that many of the industries are oli!opolistic" $li!opoly is an important form of imperfect competition" $li!opoly is

often described as =competition amon! the few1" #n other words when there are few .two to ten/ sellers

in a market sellin! homo!eneous or differentiated products oli!opoly is said to e'ist" Bonsider the

e'ample of cold drinks industry or automobile industry" (here are a handful firms manufacturin! cold

drinks in #ndia" *imilarly there are a few members of automobile industry in #ndia" (hese industries

e'hibit some special features which are discussed in the followin! para!raphs" Prof" *ti!ler defines

oli!opoly as that Jsituation in which a firm bases its market policy in part on the e'pected beha%ior of a

few close ri%alsK"

T%!es of O$igo!o$%:

Pure o$igo!o$% or !erfect o$igo!o$% occurs when the product is homo!eneous in nature e"!" Aluminum

industry" ;ifferentiated or i!erfect o$igo!o$% is based on product differentiation e"!" (alcum powder"O!en and c$osed o$igo!o$%: #n an open oli!opoly market new firms can enter the market and compete

with the e'istin! firms" Eut in closed oli!opoly entry is restricted"

Co$$usive and Co!etitive o$igo!o$%: )hen few firms of the oli!opolist market come to a common

understandin! or act in collusion with each other in fi'in! price and output it is collusi%e oli!opoly"

)hen there is a absence of such understandin! amon! the firms and they compete with each other it is

called competiti%e oli!opoly"

Partia$ or fu$$ o$igo!o$%: $li!opoly is partial when the industry is dominated by one lar!e firm which is

considered or looked upon as the leader of the !roup" (he dominatin! firm will be the price leader" #n

full oli!opoly the market will be conspicuous by the absence of price leadership"

/%ndicated and organi>ed o$igo!o$%: *yndicated oli!opoly refers to that situation where the firms sell

their products throu!h a centrali7ed syndicate" $r!ani7ed oli!opoly refers to the situation where thefirms or!ani7e themsel%es into a central association for fi'in! prices output quotas etc"

3.3.1 Characteristics of O$igo!o$% aret &

.i/ Interde!endence & (he most important feature of oli!opoly is interdependence in decision-makin!

of the few firms which comprise the industry" (his is because when the number of competitors is

few any chan!e in price output or product by a firm it will ha%e direct effect on the fortunes of the

ri%als who will then retaliate by chan!in! their own prices output or ad%ertisin! technique as the

case may be" #t is therefore clear that an oli!opolistic firm must consider not only the market

demand for its product but also the reactions of other firms in the industry to any ma0or decision it

takes"

.ii/ I!ortance of advertising and se$$ing costs : A direct effect of interdependence of oli!opolists isthat the firms ha%e to employ %arious a!!ressi%e and defensi%e marketin! weapons to !ain a !reater

share in the market or to maintain their share" For this firms ha%e to incur a !ood deal of costs on

ad%ertisin! and other measures of sales promotion"




27/46

(herefore there is !reat importance for ad%ertisin! and sellin! costs in an oli!opoly market" #t is to

be noted that firms in such type of market a%oid price cuttin! and try to compete on non-price basis

because if they start under cuttin! one another a type of price-war will emer!e which will dri%e a

few of them out of the market as customers will try to buy from the seller sellin! at the cheapest

price"

.iii/ ?rou! behaviour & (he theory of oli!opoly is a theory of !roup beha%iour not of mass or

indi%idual beha%iour and to assume profit ma'imisin! beha%iour on oli!opolist1s part may not be

%ery %alid" (here is no !enerally accepted theory of !roup beha%iour" Do the members of a !roup

a!ree to pull to!ether in promotion of common interest or will they fi!ht to promote their

indi%idual interests, Does the !roup possess any leader, #f so how does he !et the others to follow

him, (hese are some of the questions that need to be answered by the theory of !roup beha%iour"

Eut one thin! is certain" 2ach oli!opolist closely watches the business beha%iour of the other

oli!opolists in the industry and desi!ns his mo%es on the basis of some assumptions of how they

beha%e or are likely to beha%e"

3.3"1 Price and out!ut decisions in an o$igo!o$istic aret & Eecause of interdependence anoli!opolistic firm cannot assume that its ri%al firms will keep their prices and quantities constant when

it makes chan!es in its price andOor quantity" )hen an oli!opolistic firm chan!es its price its ri%al firms

will retaliate or react and chan!e their prices which in turn would affect the demand of the former firm"

(herefore an oli!opolistic firm cannot ha%e sure and definite demand cur%e since it keeps shiftin! as

the ri%als chan!e their prices in reaction to the price chan!es made by it" ow when an oli!opolist does

not know his demand cur%e what price and output he will fi' cannot be ascertained by economic

analysis" &owe%er economists ha%e established a number of price-output models for oli!opoly market

dependin! upon the beha%iour pattern of other firms in the market"

3.3. @ined ;eand Curve : #t has been obser%ed that in many oli!opolistic industries prices remain

sticky or infle'ible for a lon! time" (hey tend to chan!e infrequently e%en in the face of declinin! costs"

Many e'planations ha%e been !i%en for this price ri!idity under oli!opoly and the most popular e'planation is the kinked demand cur%e hypothesis !i%en by an American economist Paul A" *wee7y"

&ence this is called *wee7y1s Model"

(he demand cur%e facin! an oli!opolist accordin! to the kinked demand cur%e hypothesis has a =kink1

at the le%el of the pre%ailin! price" (he kink is formed at the pre%ailin! price le%el" #t is because the

se!ment of the demand cur%e abo%e the pre%ailin! price le%el is hi!hly elastic and the se!ment of the

demand cur%e below the pre%ailin! price le%el is inelastic" A kinked demand cur%e dD with a kink at

point P is shown in Fi!" ;+"




28/46


Y d

PP

P R I C E

D

O M OUTPUT X

Fig. 5 & @ined ;eand Curve under o$igo!o$%

(he pre%ailin! price le%el is MP and the firm produces and sells output $M" ow the upper se!ment dP

of the demand cur%e dD is relati%ely elastic and the lower se!ment PD is relati%ely inelastic" (his

difference in elasticities is due to the particular competiti%e reaction pattern assumed by the kinked

demand cur%e hypothesis" (his assumed pattern is :

2ach oli!opolist belie%es that if it lowers the price below the pre%ailin! le%el its competitors will follow

him and will accordin!ly lower prices whereas if it raises the price abo%e the pre%ailin! le%el its

competitors will not follow its increase in price"

(his is because when an oli!opolist lowers the price of its product its competitors will feel that if they

do not follow the price cut their customers will run away and buy from the firm which has lowered the

price" (hus in order to maintain their customers they will also lower their prices" (he lower portion of

the demand cur%e PD is price inelastic showin! that %ery little increase in sales can be obtained by a

reduction in price by an oli!opolist" $n the other hand if a firm increases the price of its product there

will a substantial reduction in its sales because as a result of the rise in its price its customers will

withdraw from it and !o to its competitors which will welcome the new customers and will !ain in sales"

(hese happy competitors will ha%e therefore no moti%ation to match the price rise" (he oli!opolist who

raises its price will lose a !reat deal and will therefore refrain from increasin! price" (his beha%iour of

the oli!opolists e'plains the elastic upper portion of the demand cur%e .dp/ showin! a lar!e fall in sales

if a producer raises his price"

2ach oli!opolist will thus adhere to the pre%ailin! price seein! no !ain in chan!in! it and a kink will be

formed at the pre%ailin! price" (hus ri!id or sticky prices are e'plained accordin! to the kinked demand

cur%e theory"




29/46

(he features of %arious types of market form are summarised in the table !i%e below:

C$assification of aret Fors

Form of Market umber of ature Price 2lasticity De!ree of Bontrol

*tructure Firms of product of Demand of a firm Bontrol o%er price

.a/ Perfect 6ar!e number &omo!eneous #nfinite one

competition of firms

.b/ Monopoly $ne Unique product *mall ery Bonsiderable

without close

substitute

.c/ #mperfect

Bompetition

i/ Monopolistic 6ar!e number Differentiated 6ar!e *ome

Bompetition of firms products

ii/ $li!opoly Few Firms &omo!eneous or *mall *ome

differentiated product

Perfect Co!etition

A market is said to be perfectly competiti%e if it possesses the followin! characteristics lar!e

number of buyers and sellers homo!eneous product free entry and e'it perfect mobility of

factors of production perfect knowled!e about the market conditions absence of transport

cost no !o%ernment interference and absence of collusion"

A firm is in equilibrium when its MB M@ and MB cur%e cuts the M@ cur%e from below"

#n the short Lrun firms may be earnin! supernormal profits or earnin! losses at the equilibrium

price"

#n the lon!-run all the supernormal profits or losses !et wiped away with entry or e'it of the

firms from the industry and all firms earn only normal profit"ono!o$%

Monopoly is an e'treme form of imperfect competition with a sin!le seller of a product which

has no close substitute"

Monopolist has a considerable control o%er the price of his product"

(he short-run equilibrium of the monopolist is at the point where MBM@"

#n the lon!-run the supernormal profit will be continued because entry is restricted"

$ne of the important features of monopoly is price discrimination i"e" char!in! different

prices for the same product from different consumers"

I!erfect Co!etition

#mperfect competition is an important cate!ory wherein the indi%idual firm e'ercises control

o%er the price to a smaller or lar!er de!ree dependin! upon the de!ree of imperfection present"

ono!o$istic Co!etition

#t refers to the market situation in which many producers produce !oods which are close

substitutes of one another"




30/46


(he essential feature of monopolistic competition is the e'istence of lar!e number of firms

product differentiation sellin! costs and freedom of entry and e'it of firms"

#n monopolistic competition the features of monopoly and perfect competition are partially present"

Demand cur%e is hi!hly elastic and a firm en0oys some control o%er the price"

O$igo!o$istic Co!etition

$li!opoly is also referred to as =competition amon! the few1 as a few bi! firms produce and

compete in this market

(here are different types of oli!opoly like pure and differentiated oli!opoly open and closed

oli!opoly collusi%e and competiti%e oli!opoly partial and full oli!opoly and syndicated and

or!ani7ed oli!opoly"

(he main characteristics of oli!opoly are interdependence importance of ad%ertisin! and

sellin! cost and !roup beha%ior"

(he price will be kept unchan!ed for a lon! time due to fear of retaliation and price tend to be

sticky and infle'ible" (he sticky price is e'plained by the kinked demand cur%e"

8" #n the table below what will be equilibrium market price,

Price ( ̀ ) Demand (tonnes per annum) Supply (tonnes per annum)

8 8


31/46

.c/ ` 8

.d/ ` 8

3" Assume that when price is ` ; the quantity demanded is 8+ units and when price is ` 8? the

quantity demanded is 89 units" Eased on this information what is the mar!inal re%enue resultin!

from an increase in output from 8+ units to 89 units,

.a/ ` 8?

.b/ ` 89

.c/ ` 8;

.d/ ` ;?


32/46


?" )hat is the shape of the demand cur%e faced by a firm under perfect competition,

.a/ &ori7ontal

.b/ ertical

.c/ Positi%ely sloped

.d/ e!ati%ely sloped

C" )hich is the first order condition for the profit of a firm to be ma'imum,

.a/ AB M@

.b/ MB M@

.c/ M@ A@

.d/ AB A@

8" )hich of the followin! is not a characteristic of a Jprice takerK,

.a/ (@ P ' 5

.b/ A@ Price

.c/ e!ati%ely L sloped demand cur%e

.d/ Mar!inal @e%enue Price

88" )hich of the followin! statements is false,

.a/ 2conomic costs include the opportunity costs of the resources owned by the firm"

.b/ Accountin! costs include only e'plicit costs"

.c/ 2conomic profit will always be less than accountin! profit if resources owned and used by the

firm ha%e any opportunity costs".d/ Accountin! profit is equal to total re%enue less implicit costs"

8;" )ith a !i%en supply cur%e a decrease in demand causes

.a/ an o%erall decrease in price but an increase in equilibrium quantity"

.b/ an o%erall increase in price but a decrease in equilibrium quantity"

.c/ an o%erall decrease in price and a decrease in equilibrium quantity"

.d/ no chan!e in o%erall price but a reduction in equilibrium quantity"

83" #t is assumed in economic theory that

.a/ decision makin! within the firm is usually undertaken by mana!ers but ne%er by the owners"

.b/ the ultimate !oal of the firm is to ma'imise profits re!ardless of firm si7e or type of business

or!anisation"

.c/ as the firm1s si7e increases so do its !oals"

.d/ the basic decision makin! unit of any firm is its owners"




33/46

8


34/46


8C" )hich of the followin! is not a characteristic of a perfectly competiti%e market,

.a/ 6ar!e number of firms in the industry"

.b/ $utputs of the firms are perfect substitutes for one another"

.c/ Firms face downward-slopin! demand cur%es"

.d/ @esources are %ery mobile"

;" )hich of the followin! is not a characteristic of monopolistic competition,

.a/ 2ase of entry into the industry"

.b/ Product differentiation"

.c/ A relati%ely lar!e number of sellers"

.d/ A homo!enous product"

;8" All of the followin! are characteristics of a monopoly e'cept :

.a/ there is a sin!le firm"

.b/ the firm is a price taker"

.c/ the firm produces a unique product"

.d/ the e'istence of some ad%ertisin!"

;;" $li!opolistic industries are characteri7ed by :

.a/ a few dominant firms and substantial barriers to entry"

.b/ a few lar!e firms and no entry barriers"

.c/ a lar!e number of small firms and no entry barriers"

.d/ one dominant firm and low entry barriers"

;3" Price-takin! firms i"e" firms that operate in a perfectly competiti%e market are said to be JsmallK

relati%e to the market" )hich of the followin! best describes this smallness,

.a/ (he indi%idual firm must ha%e fewer than 8 employees"

.b/ (he indi%idual firm faces a downward-slopin! demand cur%e"

.c/ (he indi%idual firm has assets of less than ` ; lakh"

.d/ (he indi%idual firm is unable to affect market price throu!h its output decisions"

;


35/46

;+" Monopolistic competition differs from perfect competition primarily because

.a/ in monopolistic competition firms can differentiate their products"

.b/ in perfect competition firms can differentiate their products"

.c/ in monopolistic competition entry into the industry is blocked"

.d/ in monopolistic competition there are relati%ely few barriers to entry"

;9" (he lon!-run equilibrium outcomes in monopolistic competition and perfect competition are

similar because in both market structures

.a/ the efficient output le%el will be produced in the lon! run"

.b/ firms will be producin! at minimum a%era!e cost"

.c/ firms will only earn a normal profit"

.d/ firms realise all economies of scale"

;4" A monopolist is able to ma'imise his profits when :

.a/ his output is ma'imum"

.b/ he char!es a hi!h price"

.c/ his a%era!e cost is minimum"

.d/ his mar!inal cost is equal to mar!inal re%enue"

;?" #n which form of the market structure is the de!ree of control o%er the price of its product by a firm

%ery lar!e,

.a/ Monopoly

.b/ #mperfect Bompetition

.c/ $li!opoly

.d/ Perfect competition

;C" A%era!e re%enue cur%e is also known as:

.a/ Profit Bur%e

.b/ Demand Bur%e

.c/ A%era!e Bost Bur%e

.d/ #ndifference Bur%e

3" Under which of the followin! forms of market structure does a firm ha%e no control o%er the price

of its product,

.a/ Monopoly

.b/ Monopolistic competition

.c/ $li!opoly

.d/ Perfect competition




36/46


38" Discriminatin! monopoly implies that the monopolist char!es different prices for his commodity :

.a/ from different !roups of consumers

.b/ for different uses

.c/ at different places

.d/ any of the abo%e"

3;" Price discrimination will be profitable only if the elasticity of demand in different sub markets:

.a/ uniform

.b/ different

.c/ less

.d/ 7ero

33" #n the conte't of oli!opoly the Ninked demand hypothesis is desi!ned to e'plain

.a/ Price and output determination

.b/ Price ri!idity

.c/ Price leadership

.d/ Bollusion amon! ri%als"

3


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39" #f firms in the toothpaste industry ha%e the followin! market shares which market structure would

best describe the industry,

Market share .G of market/

(oothpaste 8?"4

Dentipaste 8


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.c/ #t is always beneficial for a firm in a perfectly competiti%e market to discriminate prices"

.d/ Ninked demand cur%e is related to an oli!opolistic market"


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+8" )hich of the followin! is not a characteristic of a competiti%e market,

a" (here are many buyers and sellers in the market"

b" (he !oods offered for sales are lar!ely the same"

c" Firms !enerate small but positi%e super normal profits in the lon! run"

d" Firms can freely enter or e'it the market"

+;" )hich of the followin! markets would most closely satisfy the requirements for a

perfectly competiti%e market,

a" 2lectricity

b" Bable tele%ision

c" Bola

d" Milk

+3" (he competiti%e firm ma'imi7es profit when it produces output up to the point where

a" price equals a%era!e %ariable cost

b" mar!inal re%enue equals a%era!e re%enue

c" mar!inal cost equals total re%enue

d" mar!inal cost equals mar!inal re%enue

+


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+4" #n the lon!-run equilibrium of a competiti%e market firms operate at

a" the intersection of the mar!inal cost and mar!inal re%enue

b" their efficient scalec" 7ero economic profit

d" all of these answers are correct

+?" )hich of the followin! is not a characteristic of a monopolistically competiti%e market,

a" Free entry and e'it

b" Abnormal profits in the lon!run

c" Many sellers

d" Differentiated products

+C" #n a %ery short period market :

a" the supply is fi'ed

b" the demand is fi'ed

c" demand and supply are fi'ed

d" none of the abo%e

9" (ime element was concei%ed by

a" Adam *mith

b" Alfred Marshall

c" Pi!ou

d" 6ionel @obinson

98" (otal re%enue

a" price Rquantity b" price R income

c" income Rquantity


9;" A%era!e re%enue is the re%enue earned

a" per unit of input

b" per unit of output

c" different units of input

d" different units of output

93" A@ can be symbolically written as:

a" M@ O 5

b" price R quantity

c" (@ O 5





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9


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c" neither price maker nor price taker


48" A Monopolist is a price

a" maker

b" taker

c" ad0uster


4;" Price discrimination is one of the features of QQQQQQQQQQQ

a" monopolistic competition

b" monopoly

c" perfect competition

d" oli!opoly

43" Under monopoly the de!ree of control o%er price is:

a" none

b" some

c" %ery considerable


4


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c" spot market


4?" (he market for the ultimate consumers is known as

a" whole sale market

b" re!ulated market

c" unre!ulated market

d" retail market

4C" (he condition for pure competition is

a" lar!e number of buyer and seller free entry and e'ist

b" homo!enous product

c" both .a/ and .b/

d" lar!e number of buyer and seller homo!enous product perfect knowled!e about the product

?" Pure oli!opoly is based on theTTTTTTTT products

a" differentiated

b" homo!eneous

c" unrelated


?8" #n oli!opoly when the industry is dominated by one lar!e firm which is considered as leader

of the !roup (hen it is called:

a" full oli!opoly

b" collusi%e oli!opoly

c" partial oli!opoly

d" syndicated oli!opoly

?;" )hen the products are sold throu!h a centrali7ed body oli!opoly is known as

a" or!ani7ed oli!opoly

b" partial oli!opoly

c" competiti%e oli!opoly

d" syndicated oli!opoly

?3" )hen the monopolist di%ides the consumers into separate sub markets and char!es

different prices in different sub-markets it is known as

a" first de!ree of price discrimination

b" second de!ree of price discrimination

c" third de!ree of price discrimination

d" none of the abo%e"




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?


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C" )hich of the followin! statements is incorrect,

a" Under monopoly there is no difference between a firm and an industry"

b" A monopolist may restrict the output and raises the price"

c" Bommodities offered for sale under a perfect competition will be hetero!eneous"

d" Product differentiation is peculiar to monopolistic competition"

8" c ;" c 3" c

chapter 4 price determination in different markets part 2

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