Lilavatibai Podar High School.

ISC

A.Y.: 2021- 2022

Class: XII (B,C,D,E,F & G) Subject: Economics

Topic: Chapter 9: Forms of Market

CHAPTER NO. 9: FORMS OF MARKET

Q1. Define market. (2 Marks)
Ans.: In economic sense, “Market” refers to an arrangement whereby buyers and
sellers come in close contact with each other directly or indirectly for the exchange of
goods and services irrespective of any geographical location; and are able to strike a
deal about the price and the quantity to be bought and sold.

Q2. Define Perfect competition. Explain its features. (3/6 Marks)

Ans.: “Perfect competition is a market structure in which there are a large number of
producers (firms) producing a homogeneous product so that no individual firm can
influence the price of the commodity”.
Features of Perfect competition:
1. Large number of buyers and sellers: The number of buyers and sellers are so large
that no single buyer or seller can influence the market price. This means under perfect
competition, a firm produces such a small part of the total market output that a change
in its output will not have any noticeable effect on the market supply and hence on the
price of the commodity. Thus a firm is a price-taker rather than a price-maker. Hence
the demand curve is perfectly elastic.
Similarly no single buyer can influence the market price by changing his demand for the
commodity since the individual buyer buys such a small quantity of the total output of
the product that any change in the quantity demanded by him has a negligible impact on
the total market demand and market price of the commodity.
2. Homogeneous Product: All the firms under perfect competition produce
homogeneous or identical commodity. The product of one firm is perfect substitute of
another firm’s product and no firm can charge a high price. The homogeneity of the
product refers not only to the ‘physical characteristics’ of the commodity such as
quality, colour, size etc. but also to the ‘environmental factors’ such as location of the
seller, credit facilities etc. The implication of this characteristic is that a uniform price
will rule throughout the market.
3. Freedom of entry and exit: The condition of free entry and exit ensures that all firms
under perfect competition end up earning only normal profits in the long-run. There are
no restrictions- legal, natural, or man-made on the entry and exit of the firms. If the
existing firms are earning abnormal profits, new firms would enter the industry and
increase the total market supply thereby. This would reduce the market price and wipe
out the abnormal profits. On the other hand, if the existing firms are incurring losses,
some of them would start leaving the industry, leading to decrease in supply and rise in
the price till the losses are wiped out.
4. Perfect mobility of Resources: This characteristic ensures that resources or factors
of production can enter or quit a firm or the industry whenever they want to. This
implies that resources are able switch over from one use to another without any
restriction. This condition is essential to make the entry of the firms into and exit of the
firms from the industry possible.
5. Perfect Knowledge: Consumers, firms and resource owners under perfect
competition have perfect knowledge about the market conditions. Each firm knows the
price prevailing in the market and it would not sell the commodity at a price below the
market price. Similarly, each buyer has the perfect knowledge about the prevailing
price and the characteristics of the product being sold and he/she is not prepared to
pay a higher price than the prevailing price in the market. This ensures that price
differences are quickly eliminated and a single price for the commodity would prevail
throughout the market. Besides this, each firm has perfect knowledge about the
available techniques of production. This implies that all the firms have similar cost
conditions, leading to the same per unit cost of production.
6. Absence of Transport Cost: Buyers and sellers incur no transport costs in
purchasing and selling goods. This assumption is necessary to maintain uniform price
throughout the market. Otherwise, prices for identical goods would differ if transport
costs are added to the price of the product.

Q3. Differentiate between Pure competition and Perfect competition. (3 Marks)

Ans.:
PURE COMPETITION PERFECT COMPETITON
1. Pure competition was put forward by the 1. Whereas Perfect competition was put
American economists. A purely forward by the British economists. A
competitive market involves 3 basic perfectly competitive market involves the
characteristics: following characteristics:
(a) Large number of buyers and sellers. (a) Large number of buyers and sellers.
(b) Homogeneous product (b) Homogeneous product
(c) Free entry and exit of the firms (c) Free entry and exit of the firms
(d) Perfect mobility of resources
(e) Perfect knowledge
(f) Absence of transport costs
2. Pure competition is a real concept i.e. 2. Perfect competition is a myth; it is the
market for agricultural commodities like most ideal market structure which is
wheat, rice etc. are the best examples of hardly found in the real world. But it is
pure competition. important as it provides a base for all
other market structures.
3. There is absence of monopoly element 3. Perfect competition is a wider term and
under pure competition. It is a narrower it requires that there should be no
term. It is much simpler and less imperfections in the market.
exclusive concept than perfect
competition according to Prof.
Chamberlin.
Q4. Define Monopoly. Explain the features of Monopoly. (3/6 Marks)
Ans.:” Monopoly is a market structure in which there exists only a single seller or sole
producer of the product, which has no close substitutes”. E.g. Indian railways owned
and run by the Government of India, State electricity board like Punjab electricity board
in Punjab.
Features of Monopoly:
1. Single seller: Monopoly is a market situation where there is only one single seller
called ‘monopolist’ of a commodity and large number of buyers. Because there is only
one single seller, there is no difference between a monopoly firm and an industry since
both are the same. A monopolist has complete influence over the price and no
individual buyer can influence the price of the product under monopoly.
2. Absence of close substitutes: This feature states that, a monopolist produces such a
commodity which has no close substitutes. The goods which can be easily used for
each other and are available at nearly the same price are known as close substitutes.
Monopoly is a market devoid of competition. However there may be distant substitutes
for the monopolist’s product. E.g. Electricity board may have monopoly over a
particular city, because there is absence of close substitutes. But generator sets can
be a distant substitute in this case.
3. Closed entry: Monopoly is characterised by very high barriers to entry, which exist
when entrepreneurs face obstacles while joining a profitable industry. There are some
barriers or restrictions on the entry of new firms into the monopoly industry. The closed
entry may result from natural, legal, or man-made restrictions. These restrictions take
several forms such as patent rights, copy rights, government laws and economies of
scale etc. These barriers to entry provide market power to the monopolist as a result of
which, the monopolist can earn abnormal profit even in the long-run.
4. Price-maker: A monopoly firm is a ‘price-maker’ or ‘price-setter’. It is the sole
producer of a product. It can exercise considerable influence on the market supply of
the commodity and its price. Hence monopoly represents a situation of a high market
power and that is why it is called a ‘price-maker’ unlike perfect competition which has
zero market power.
5. Possibility of price discrimination: Price discrimination refers to a situation when a
producer sells the same product to different buyers at two or more different prices for
reasons not associated with difference in the cost of supplying the product to different
consumers. Since a monopolist has complete control over the market supply, he may
charge different prices for his product from different consumers. E.g. Electricity board
sells electricity at a cheaper rate for agricultural use than for home use. Similarly many
hospitals charge lower operation fees from the poor patients and higher fees from the
rich patients. Railways charge lower freight rates for transporting essential products
like food products, coal etc. as compared to transportation of other products.
Q5. Define the following: (2 Marks each)
(i) Price Discrimination, (ii) Product differentiation
Ans.: (i) Price Discrimination: Price discrimination refers to a situation when a producer
sells the same product to different buyers at two or more different prices for reasons
not associated with difference in the cost of supplying the product to different
consumers. Hence a Monopolist may charge a single price for the product it sells or it
may charge different prices for its product from different sets of consumers.
E.g. Electricity board sells electricity at a cheaper rate for agricultural use than for
home use. Similarly, Railways charge lower freight rates for transporting essential
products like food products, coal etc. as compared to transportation of other products.

(ii) Product Differentiation: Product differentiation means that though the product of
one firm is differentiated from the product of another one in terms of physical
characteristics of the product like difference in quality, size, design, packaging etc. and
in terms of conditions surrounding the sale of the product like location of the seller, his
reputation, efficiency, trustworthiness, credit facility etc. They are not entirely distinct
products, rather are close substitutes. E.g. different varieties of toothpaste, like
Colgate, Pepsodent, and Close-up etc. Different varieties of soaps like Lux, Pears,
Lifebuoy etc.

Q6. Distinguish between Perfect competition and Monopoly. (3/6 Marks)

Ans.:
PERFECT COMPETITION
1. There are large number of
buyers and sellers in a
perfectly competitive market,
and no individual seller/firm
can influence the market.
2. A firm cannot adopt
independent price policy. It is
a price-taker and not a price-
maker.
3. The demand curve of a
competitive firm is perfectly
elastic i.e. horizontal straight
line parallel to the X-axis
where P=AR=MR
4. There is free entry and exit of
the firms in the long-run.
Hence a firm can get only
normal profits in the long-run.
5. Due to homogeneity of the
products under perfect
competition, the firm has no
market power to influence the
price of the product.
MONOPOLY
1. There is only one single seller and many
buyers under monopoly, and a single
seller/firm has the power to influence the
market.
2. A monopolist firm can have independent price
policy. It is a price-maker.
3. The demand curve of a monopolist is
downwards sloping and less elastic where
AR>MR
4. There is closed or restricted entry of the firms.
Hence a firm can earn super-normal
(abnormal) profits even in the long-run.
5. Whereas in a monopoly market, a firm can
have large market power to influence the price
of the product.
6. Price discrimination is not 6. Price discrimination is possible under
possible, i.e., a firm charges a monopoly
uniform or same price from all
its buyers.

Q7. Define Monopolistic competition. Explain the features of Monopolistic competition.

(3/6 Marks)
Ans.: Monopolistic competition is the form of market in which there are a large number
of sellers of a particular product, with each seller selling somewhat differentiated but
close substitutes to the product sold by other sellers.
E.g. different varieties of toothpaste, like Colgate, Pepsodent, and Close-up etc.
Different varieties of soaps like Lux, Pears, Lifebuoy etc.

Features of Monopolistic competition:

1. Large number of buyers and sellers: Monopolistic competition is a perfect blending of
perfect competition and monopoly, where it is characterised by large number of buyers
and sellers and on the other hand each seller is a monopolist of his own and an
individual seller/firm can follow an independent price policy. They are the price-makers.
Under monopolistic competition a firm has a slight market power to influence the price.
Since the number of buyers is very large, no individual buyer can influence the price of
the product by changing his demand.
2. Differentiated Products: Product differentiation is the key element of monopolistic
competition. Products produced by different firms are substitutes for each other, but
not perfect substitutes. They may differ in terms of physical characteristics of the
product like difference in quality, size, design, packaging etc. and in terms of conditions
surrounding the sale of the product like location of the seller, his reputation, efficiency,
trustworthiness, credit facility etc. They are not entirely distinct products, rather are
close substitutes. E.g. firms producing different varieties of toothpaste under different
brand names like Colgate, Pepsodent, and Close-up etc. Different varieties of soaps like
Lux, Pears, Lifebuoy etc.
3. Free entry and exit: Under monopolistic competition, there is freedom of entry where
new firms are free to produce close substitutes. At the same time, the existing firms are
free to leave the industry. Hence in the long-run, the firms under monopolistic
competition earn normal profits and free entry would ensure that there are no abnormal
or super-normal profits. Similarly, free exit would ensure that no firm incurs losses in
the long-run.
4. Selling Cost: Selling cost is the expenditure incurred by the firm to promote the sale
of its product through various sales promotion measures. The firms under monopolistic
competition incur selling cost on sales promotion for competing with each other. These
maybe in the form of advertisements in the newspapers, T.V. commercials, door to door
campaigns etc. These sales promotion measures are taken up by the firms to basically
promote the sale of their product by attracting consumers. However there is absence of
selling cost under perfect competition and monopoly because of the homogeneity of the
product in case of perfect competition and due to absence of competition under
monopoly.
5. Non-price competition: Under monopolistic competition, firms compete with each
other not only by cutting the price, but also on the basis of non-price competition like
producing differentiated products, incurring advertisement expenditure etc.
6. Independent Price Policy: A firm under monopolistic competition can follow an
independent price policy. It can make its own price and output decisions. It can
influence the price of the commodity to some extent. It means a firm under monopolistic
competition is the price-maker for its product. Thus, firms under monopolistic
competition set their own prices, but the market demand determines the amount of
sales at these prices.

Q8. Define selling cost. (2 Marks)

Ans.: Selling cost is the expenditure incurred by the firm to promote the sale of its
product through various sales promotion measures. The firms under monopolistic
competition incur selling cost on sales promotion for competing with each other. These
maybe in the form of advertisements in the newspapers, T.V. commercials, door to door
campaigns etc. These sales promotion measures are taken up by the firms to basically
promote the sale of their product by attracting consumers.

Q9. Explain Persuasive advertising. (2 Marks)

Ans.: Persuasive advertising: The sales promotion measures may take the form of
persuasive or competitive advertisement like advertisement in newspapers, TV
commercials, etc. These measures may take the door-to-door campaign, discount
offers as well. The purpose of these sales promotion measures by the producer of a
particular brand is to lure away consumers from the other brands by persuading them
to buy his brand rather than other brands.

Q10. Distinguish between Perfect competition and Monopolistic competition. (3/6

Marks)
Ans.:
Perfect Competition Monopolistic Competition
1. A perfectly competitive market is 1. Monopolistic competition is a market
characterised by a large number situation, where there are large number of
of buyers and sellers selling buyers and sellers selling somewhat
homogeneous products differentiated product but close substitutes to
the product sold by other sellers.
2. A firm cannot have an independent 2. A firm can have independent price-policy. It
price policy. It is a price-taker, not is a price-maker.
the price-maker.
3. Price = AR=MR and hence the 3. AR and MR curves are downwards sloping
demand curve is parallel to the X- and MR remains below AR. i.e. MR<AR. i.e.
axis. i.e. Perfectly elastic demand more elastic or relatively elastic demand
curve. curve.
4. There is perfect mobility of the 4. There is no perfect mobility of the factors of
factors of production. production.
5. In Perfect competition, since all 5. There is significant impact of selling costs.
the firms produce homogeneous
products, there is no need for
selling costs.
6. A firm under perfect competition 6. A monopolistic firm has some market power
has no power to influence the to influence the price.
market and the price.

Q11. Differentiate between Monopolistic competition and Monopoly. (6 Marks)

Ans.:
Monopolistic Competition MONOPOLY
1. Monopolistic competition is a market 1. There is only one single seller and many
situation, where there are large number of buyers under monopoly, and a single
buyers and sellers selling somewhat seller/firm has the power to influence the
differentiated product but close substitutes to market.
the product sold by other sellers.
2. Even though the firms produce 2. There is absence of close substitute for the
differentiated products, there are close product sold by the monopolist.
substitutes but not perfect substitutes for the
products sold by the sellers.
3. AR and MR curves are downwards sloping 3.The demand curve of a monopolist is
and more elastic where MR remains below AR. downwards sloping and less elastic where MR
i.e. MR<AR remains below AR. i.e. MR < AR.
4. There is free entry and exit of the firms and 4. There is restriction on the entry of the firms.
the firm in the long run earns normal profits. Hence a firm can earn super-normal
(abnormal) profits even in the long-run.
5. There is significant impact of selling costs. 5. Whereas in a monopoly market, there exists
no selling cost.
6. A monopolistic firm has slight market power 6. Under monopoly, a firm has large market
to influence the price. power to influence the price.

Q12. Explain why price =AR =MR under Perfect competition. (2 Marks)
Ans.: Total revenue is the total amount of income received by the firm from selling a
given amount of its output. Thus, TR = P x Q
Average revenue is the revenue earned per unit of the product sold. Thus,
AR = TR/Q = P x Q / Q = P. Therefore AR = Price.
Marginal revenue is the addition to total revenue which results from the sale of one
additional unit of output. Thus, MRn = TRn – TRn-1
Under perfectly competitive market, since homogenous goods are sold, uniform price
prevails in the market. Hence a firm under perfect competition is not required to reduce
the price to sell more units of output. So the AR curve is constant at all levels of output
because AR is the same as price and price under perfect competition is constant. Since
every additional unit can be sold at the same price, it follows that firm’s MR resulting
from an increase in sale by one unit is constant and equal to the price of the product.
Since the Price = AR =MR under perfect competition, the AR and the MR curve is
perfectly elastic under perfect competition.

Q13. Define Oligopoly. Explain the features of Oligopoly. (3/6 Marks)

Ans.: Oligopoly is a market structure where there are few firms selling a product so that
there is intense competition among them. E.g. goods like automobiles, electronic
products and many of the consumer products like baby foods, vegetable oils, soft
drinks, etc.

Features of Oligopoly:
1. Intense Competition: Intense competition is bound to exist under Oligopoly, since
there are few firms selling a product. Each firm keeps a track of its rival firms and in the
process plans various strategies to face the competition from the rival firms. Each firm
under Oligopoly has the power to influence the market price. The number of firms is so
small that any action by one firm is likely to affect the rival firms. Oligopoly is the highest
form of inter-firm competition among a few competitors.
2. Interdependence: A very important feature of Oligopoly is the interdependence of
firms in respect of decision-making. Few firms under Oligopoly are worried as to how its
rivals will react to anything it does. The reason for this is that when the number of
competitors is small, any change in price, output, product, etc. by one firm will affect
the rival firms and will force them to retaliate by changing their price, output, product,
etc. E.g. If Maruti Udyog offers free insurance of the cars to the buyers, then other car
companies will also make the same offer. It is this interdependence, action and reaction
by the rival firms, which sometimes leads to price war and price cutting among
competitors. E.g. Coke and Pepsi.
3. Nature of the Product: The firms under Oligopoly may have “Oligopoly without
product differentiation” (or Pure Oligopoly) and “Oligopoly with product differentiation”.
E.g. cooking gas of Indane and Burshane are the examples of pure Oligopoly, whereas
in automobile industry Maruti, Santro, Indica, Scorpio are examples of differentiated
Oligopoly.
4. Importance of selling cost: Due to intense competition and interdependence of firms
under oligopoly, the firms compete with each other through various sales promotion
measures like price cutting, discounts, door-to-door campaign, advertisement etc.
Hence there is great importance of selling cost and advertisement under oligopoly
market structure. In fact many a times, advertisements can become a matter of life and
death. E.g. T.V. commercials war among Coke and Pepsi is testimony to this fact.
5. Barrier to entry: The existence of Oligopoly in the long-run necessitates the existence
of barriers to the entry of new firms to the industry. Some major barriers to entry are
economies of large scale production, cost advantage of the existing firms, price-
cutting, control over important inputs, patent rights, etc. These factors prevent the
entry of new firms and preserve the Oligopoly.
6. Indeterminate Demand Curve of an Oligopolist: A demand curve shows the amounts
of the product a firm can sell at various prices. A firm under perfect competition or
monopoly or monopolistic competition faces a definite demand curve because it can
ignore the reaction of the rival firms in view of the interdependence of firms. But this is
not so under Oligopoly. An Oligopoly cannot ignore the reaction of the rival firms in view
of the interdependence of firms. Any change in the price by one firm may result in a
change in prices by the rival firms. As a result, the demand curve faced by an oligopolist
keeps on shifting. Therefore the demand curve of an oligopolist is not definite, instead it
is indeterminate and a kinked demand curve.

Q14. Give three points of difference between Oligopoly and Monopoly. (3 Marks)
Ans.:
OLIGOPOLY MONOPOLY
1. Oligopoly is a market structure 1. There is only one single seller
where there are few firms selling a and many buyers under
product so that there is intense monopoly, and a single seller/firm
competition among them. E.g. has the power to influence the
Automobiles, electronic products, market.
etc.
2. There is great importance of selling 2. There is absence of selling cost
cost and advertisement under under monopoly market
Oligopoly market structure. Firms structure. However under
under Oligopoly compete with each monopoly, there is no need for
other through various sales indulging in sales promotion
promotion measures like measures because of the
advertisement, price-cutting, door- absence of any close substitute
to –door campaign etc. product in the market.

3. The demand curve of an oligopolist 3.The demand curve of a

is indeterminate and it is a Kinky
demand curve.
4. The nature of the product under
Oligopoly is homogeneous or
differentiated.
monopolist is downwards sloping
and less elastic where MR
remains below AR. i.e. MR < AR.
4. Whereas the nature of the
product is homogeneous under
Monopoly.

Q15. Differentiate between Oligopoly and Perfect competition. (6 Marks)

Ans.:
OLIGOPOLY
1 Oligopoly is a market
structure where there are
few firms selling a product
so that there is intense
competition among them.
E.g. Automobiles,
electronic products, etc.
2 There is great importance
of selling cost and
PERFECT COMPETITION
1 A perfectly competitive market is
characterised by a large number
of buyers and sellers selling
homogeneous products so that
no individual firm can influence
the price.
2 In Perfect competition, since all
the firms produce homogeneous
 advertisement under products, there is no need for
Oligopoly market selling costs.
structure. Firms under
Oligopoly compete with
each other through various
sales promotion measures
like advertisement, price-
cutting, door-to –door
campaign etc.

3 The demand curve of an 3 Price = AR=MR and hence the

oligopolist is indeterminate demand curve is parallel to the
and it is a Kinky demand X-axis. i.e. Perfectly elastic.
curve. AR > MR

4 The nature of the product 4 A firm under perfect competition

under Oligopoly is
homogeneous or
differentiated. The firm is a
price – maker.
5 The firms earn abnormal
profits in the long –run.
has no power to influence the
market and the price. A firm
cannot have an independent
price policy. The nature of the
product is homogeneous. Hence
the firm is a price-taker, not the
price-maker.
5 The firm earns normal profits in
the long – run.

There are barriers to the 6 There is free entry and exit of the
6 entry of new firms into the firms.
Oligopoly market.

Q16. Define Monopsony. (2 Marks)

Ans.: Monopsony can be defined as a situation where there is a single buyer of the
product who is not in competition with other buyers for the product which he
purchases, and in which the entry into the market by other buyers is impossible.
E.g. Government is a monopsonist in the market while purchasing variety of goods for
defence requirements.

Q17. Explain the demand curves of firms under different market structures. (3 Marks)
Ans.: The demand curve of a firm shows different quantities of its product which it is
able to sell at different prices. The demand curve is the AR curve of the firm.
Under perfectly competitive market situation the AR curve is perfectly elastic parallel to
the x-axis, because it is not required to reduce the price to sell more.
Any firm under imperfect competition, including monopoly and monopolistic
competition, faces a negatively sloping AR curve as it is required to reduce the price if it
wants to sell more. But as compared to the demand curve of the monopolist, the AR
curve of a firm under monopolistic competition is more elastic because of the existence
of the rival firms producing close substitutes. The AR curve faced by a firm under
perfect competition, monopoly and monopolistic competition is shown in the following
diagram:

Price Perfectly Elastic Perfect competition

More Elastic

Less Elastic Monopolistic competition

Monopoly

O Output X

AR Curves of a firm under different market forms

Q18. Explain any 3 similarities between Perfect competition and Monopolistic

competition. (3 Marks)
Ans.: 1.There exist large number of buyers and sellers under both, Perfectly
competitive market and Monopolistic market structures.

2. There are no restrictions upon entry or exit of firms in both, Perfectly competitive
market and Monopolistic market.

3. Firms earn only normal profits in the long-run in both, Perfectly competitive market
and Monopolistic market.
Q19. Differentiate between Oligopoly and Monopolistic competition. (3/6 Marks)
Ans.:
OLIGOPOLY
1 Oligopoly is a market structure where
there are few firms selling a product
so that there is intense competition
among them. E.g. Automobiles,
electronic products, etc.
2 There is restricted entry or barriers to
entry of new firms in the industry.
3 The demand curve of an oligopolist is
indeterminate and it is a Kinky demand
curve. AR > MR
4 The nature of the product under
Oligopoly is homogeneous or
differentiated.
5 The firms earn abnormal profits
in the long –run.
In Oligopoly, the firm has significant
6 power to influence the price of the
commodity. There is interdependence of
the firms in respect of decision-making
which sometimes leads to price war.
--------------------------------------------------------x----------------------------------------------------------
MONOPOLISTIC COMPETITION
1. Monopolistic competition is a market
situation, where there are large number
of buyers and sellers selling somewhat
differentiated product but close
substitutes to the product sold by other
sellers.
2. There is free entry and exit of firms in
the industry.
3. AR and MR curves are downwards
sloping and MR remains below AR. i.e.
more elastic or relatively elastic demand
curve. AR > MR
4. The nature of the product under
Monopolistic competition is
differentiated product with close
substitutes.
5. The firm earns normal profits in the
long-run.
6. A monopolistic firm has slight market
power to influence the price in the
market. The firm can follow an
independent price policy where it makes
its own price and output decisions.