EXTRA QUESTION ’s
(Q1) There are different brands of cell phones sold in India, at a competitive price. What form of the market it is ?
Ans: Oligopoly . There are only a few well known brands dominating the cell phone market in India.Further, these oligopoly firms are engaged in a price competition. This point to the fact that cell phone market in India is more like non-collusive oligopoly rather than collusive oligopoly.
(Q2) Which condition/feature gives rise to shape of revenue curves under monopoly ?
Ans: No close substitute
(Q3) Is FDI (foreign direct investment) in retail trading a step towards competitive market structure ? Give reason.
Ans: FDI in retail trading is expected to promote competitive market structure. But, a market structure in which there is competition among a few. Because, only big firms can bring FDI. Once big firms enter the market, they tend to increase their control of the market through heavy advertisement. Initially, these firms may sell their product at a lower price, lower than the domestic producers. This is called ‘price-cutting.’ But once they achieve a strong foot-hold, they start exploiting the market by charging higher and higher price. There is a competitive market structure, but with high market concentration.
(Q4) What is the difference between ‘perfectly competitive market structure’ and ‘competitive market structure under oligopoly’ ? Which of these two (market structure), in your opinion is more suitable for the growth and development of the Indian economy ?
Ans: Perfectly competitive market structure refers to that form of the market in which there is a large number of small producers. An individual producer exercises no control over the market. He exercises no control over price. He can sell any quantity at the given price. The producers earn only normal profits in the long run.
Competitive market structure under oligopoly refers to that form of the market in which there are a few big firms producing a commodity. Each firms has a significant share of the market. Accordingly, price and output policy of one firm significantly impacts the price and output policy of the rival firms. There is a high degree of interdependence among firms which leads to cut-throat competition. Each firm tries to increase its share of the market through innovative technology and by introducing innovative products in the market.Both these market structures are suitable for the growth and development of the Indian economy.But in different areas of production activity.Being dominated by a large number of small producers, retail trade in India is generating lots of employment opportunities. On the other hand, there are certain areas of production which need huge investment and innovative technology. These include automobile industry, civil aviation, software engineering, defence goods industry
(Q5) Imagine yourself as a CEO of a global software company like Microsoft. How will you decide your price policy ?
Ans: Global firms like Microsoft are operating in an oligopoly market structure.
(a) In such a market structure, priority is accorded to the formation of a cartel in which different firms collectively exploit the market like a monopolist.
(b) Non-price competition that is to implies greater reliance on advertisement rather than price-cutting. Competitive price policy is often avoided.
(Q6) Identify the market forms for the sellers of goods A and B, given the following information. Give reasons for your answer.
Output Sold (in Units) Price of A (Rs.) Price of B (Rs.)
10 5 5
20 5 4
30 5 3
Ans: Market of good A is perfectly competitive, because there is no change in the price, which is assumed to be given as Rs. 5 at various levels of output.
Market of good B may be monopoly or monopolistic competitive market (Imperfect in nature) because in order to sell more of the commodity, the seller has to reduce price.
(Q7) The following headline appeared in The Times of India, on 28th December, 2014 : “ Purchase only made-in-India gadgets .” Use economic theory to analyse the impact of the statement in terms of competition in the domestic market.
Ans: The government issued this advisory to its various departments.Competition in the domestic market is likely to reduce. The market will drift more towards oligopolistic structure in which a few domestic firms dominate the market.
(Q8) Ram Singh is a small producer of grains. He has no choice to fix the price of grains at the time of harvest, and is exploited by merchants. How will you help him ?
Ans: He market for foodgrains is nearly perfect competition. In this market structure, no individual producer can influence the price of the commodity. But individual producers can always organize themselves into a group or a cooperative society. This organisation can exercise power to influence the price.
(Q9) What is the difference between perfect market and perfect competition ?
Ans: Perfect Market means :
(a) Perfect knowledge
(b) Perfect mobility of factors of production
(c) Absence of selling cost and transporation cost
Perfect competition means perfect market plus
(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Free entry and exit of firms.
(Q10) Agricultural goods markets depict characteristics close to which form of market?
Ans: Perfect Competition.
(Q11) Competition protects and promotes interests of consumers. Do you agree ?
Ans: Competition among producers may help promote interests of consumers, because producers may offer better quality goods at lower prices. But this may not always be so. Advertisement, sales promotion, etc., are devices that work to cheat consumers.
(Q12) Governments work to check monopolies. Good/Bad.
Ans: Monopolies are not always bad. There are many industries and services which cannot work, if there is no monopoly, e.g., water supply, electricity generation and transmission, metro rail, etc.
(Q13) ‘ Perfect competition promotes equity ’ Comment.
Ans: Perfect competition ensures cost-efficient use of available resources. Competition compels those producers who are less efficient and hence their cost of production is higher. These resources find their way into more-productive channels.
(Q14) ‘ Monopoly can promote equity ’ Comment.
Ans: For a monopolist, size of market is generally large. he can produce on large-scale, derive the economies of scale, produce at a relatively lower cost per unit, and hence a lower price of the product.
(Q15) Organisation of Petroleum Exporting Countries (OPEC) is a cartel of oil producers. How does it impact us ?
Ans: We are denied the advantages of free market. Producers fix the price the price that suits them. By and large, demand for this product is inelastic. Hence, oil-importing nations end up paying higher price.
(Q16) Price discrimination can be made socially desirable. Explain how.
How does price discrimination under monopoly be of any help to the society ?
Ans: Although practice of price discrimination is negatively adopted by a monopolist to exploit the customers yet it can be used positively in helping the poor to get minimum level of consumption. By fixing lower prices of essential commodities like wheat, rice, sugar, kerosene, etc. for the poor, the act of price discrimination can be made socially desirable. Moreover this approach can be made applicable in public utilities also like electricity supply, LPG cylinders, water supply, etc.
(Q17) Indian railways is an example of state monopoly. Explain how state monopoly has benefitted the people.
Ans: State monopoly is advantageous to the society if it works in public interest. Indian railways through its policy of price discrimination has made rail service accessible to all people (rich, poor, middle class) at reasonable price. Since Indian railways is a natural monopoly, it can, therefore, provide rail service at a lower cost than other competing firms.
(Q18) Under monopoly, the barriers to entry and exit of firms leads to absence of competition in the market. Do you think this is necessary in certain strategic areas such as production of defence goods and atomic energy ?
Ans: Yes, barriers to entry and exit of firms is necessary in certain strategic areas (defense goods, atomic energy, etc.) because these areas are of national security and production of such goods cannot be left open for competition.
(Q19) Differentiate between consumer’s demand curve and firm’s demand curve.
Ans: In case of consumer’s demand, the demand curve shows the relationship between the price and the quantity demanded by an individual buyer. On the other hand, ‘In case of firm’s demand, the demand curve shows the relationship between price and quantity demanded of firm’s output by various buyers in the market. In addition to it, firm’s demand curve also shows the relationship between price of the commodity and firm’s output sold by it
(Q20) Explain the significance of the term ‘close’ in the context of ‘availability of close substitutes’ feature of the monopolistic competition.
Ans: The word ‘close’ means that goods can be used in place of each other with equal ease and satisfaction. That is why, close substitutes offer competition in the market of a good. As a result, price difference between different brands of a product does not remain much.
(Q21) What are selling costs? To which market forms they are relevant and to which market forms they are not relevant? Give reasons.
Ans: Selling costs refer to the expenses which a firm incurs for promoting sales of its product. Selling costs are relevant in monopolistic competition and oligopoly. Since products are differentiated under monopolistic Competition, selling expences are incurred by firms to promote their sales. Under oligopoly, firms also compete on the basis of advertisement, as they generally want to avoid price wars. Selling costs are not relevant in perfect competition and monopoly . In perfect competition products of the sellers are homogeneous. Each firm can sell any quantity of output at the market price. Hence, there is no scope for selling costs here. Similarly, under monopoly there is no scope for advertisement and other sales promotion activities, as there is no competition here.
(Q22) ‘Price discrimination and product differentiation help in promoting producer’s profits’. Explain.
Ans: True. Because under monopoly, producer charges different prices from different buyers for the same product . Such a policy of a monopolist is known as price discrimination and is introduced with the motive of earning greater amount of profits.
Under monopolistic competition, producer produces a variety of the product so as to promote its sales. He incurs heavy expenditure on advertisement to popularise his brands and raises the extent of profit. Thus he raises his profits through product differentiation.
However both these policies help in value additions but product differentiation is most effective and practical policy with the producers.
(Q23) Consumer benefits by collusive or non collusive oligopoly?
Ans: Consumer gets more benefit from non collusive oligopoly because he pays competitive price. In case of collusive oligopoly, firms act like a monopoly and the price charged is higher than in case of non collusive oligopoly. Therefore, government always discourages collusions for the social welfare.
(Q24) A firm can maximise its profit by selling low quantity at higher prices or by selling higher quantity at lower price. Both yield the same revenue. In your opinion, which choice will be better ?
Ans: When a firm low quantity at a higher price, it is a situation of monopoly. Similarly when a firm sells higher quantity at a lower price, it is a situation of perfect competition. Firm in this situation is getting maximum profits. Yet it should perfer the second situation of perfect competition. It will raise the extent of sales and overall profitability of the firm Moreover, it will help in promoting social welfare of the society by providing more satisfaction to the consumers.
(Q25) Perfect competition is no competition. How ?
Ans: (a) There is no price war or price competition in the market.
(b) Also, there is no commodity competition because all producers of a commodity are selling only homogeneous product
(Q26) “ Purchase only made-in india gadgets ” Use economic theory to analyse the impact of the statement in terms of competition in the domestic market.
Ans: Often this heading comes as an appeal by the government to the citizens of the country. This appeal is expected to offer protection to the domestic industry from foreign competition. Competition in the domestic market is likely to reduce. The market will drift more towards oligopolistic structure in which a few domestic firms dominate the market.
(Q26) Explain how monopoly is allocaticely inefficient.
Ans: Under monopoly price is greater and output is lower as compared to perfect competition. Higher price and lesser quantity results into transfer of income (benefits) from consumers to the monopolists. The loss suffered by the consumers is in terms of higher price. The loss is also suffered by the producers int erms of revenue loss due to fall in output. Thus allocating inefficiency in monopoly causes a deadweight loss to the society.
(Q27) Explain the wastage of monopolistic competition.
Ans: But all firms under monopolistic competition have excess capacity. Excess capacity refers to the difference between the output at which cost is minimized and the output actually produced under monopolistic competition . This shows that optimum level of output cannot be obtained. So losses take place due to excess capacity under monopolistic competition. Further, firms spent a large amount of money on advertisement etc. this can simply be called social wastage.
(Q28) ‘With more working women in Mumbai, a huge demand for automatic washing machines has led to their price soaring high in the market.’ Use a diagram and economic theory to analyse the above statement.
Ans: As the number of working women increases in Mumbai, the demand for automatic machines also increases and as a result, their price shoots up.
(Q29) Honda claims that their cars are better than that of Toyota. How should consumer respond ?
Ans: A consumer should not be carried away by the advertisements. He should have technical knowledge to compare the different qualities of different products.
(Q30) What is the basis of classification of Market ?
(Q31) “Under Perfect competition firm is price taker and under Monopoly he is price make Elaborate ? Diagram
(Q32) How is the demand curve under monopolistic market different from demand curve of a firm under perfect competition ?
(Q33) How is the seller under perfect competition a price taker and not a price market ? What is the relevance of the characteristic that there are “large number of sellers” in this context ?
(Q34) State any four factor on the basis of which any particular market is defined ?
(Q35) What is meant by abnormal profit ?
(Q36) If the firms are earning abnormal profits, how will the number of firms in the industry change?
(Q37) If the firms are making abnormal losses, how will the number of firms in the industry change?
(Q38) “Perfect competition is actually no competition” Explain
(Q39) Why should the government always monitor the operations of a monopolist ?
(Q40) If mother dairy raises the price of its milk how should Amul respond ?
(Q41) In which form of market the following exist? Give their implication :-
(a) Perfect substitute
(b) close substitute
(c) no close substitute
(Q42) Answer the following :
(a) What is the shape of demand curve in an oligopoly market ?
(b) Can a monopolist sell any quantity he likes at a price?
(Q43) Do you find a situation of price rigidity under oligopoly ? What does it lead to ?
(Q44) Maruti, Tata, Fiat, Ford and GM are only a few auto producers in the Indian market. Identify the form of market in which they sell their products and also explain its features. If these companies decide to form a cartel, then will the consumer stand to benefit?
(Q45) Differentiate between price discrimination and product differentiation.
(Q46) You are planning to invest in a new production unit. The consultant informs you that this product sells in a perfectly competitive market, and that in this type of market every producer operates on no-profit no-loss basis . Why should you invest ?
(Q47) Some firms under monopolistic competition are successful in creating a differentiated image of their products through heavy selling costs. It enables them to charge higher prices for their products. However, such product differentiation is sometimes imaginary. As a result,consumers suffer because they have to pay higher prices for the product, which is also available in the market at lesser price.
(i) Do you think, this is justified in terms of moral business ethics ?
(ii) Why ethical business behaviour is important in this modern competitive world ?
(iii) What can be done to handle this situation ?
Ans: (i) No, this is not justified.
(ii) Ethical business behaviour is important as it improves public image, earns people’s confidence and trust and leads to greater success.
(iii) Even in the present scenario of buyer’s market, buyers are often manipulated.Buyers should ensure before buying a costly product that the extra price paid for the product is for extra features possessed by the product. If an advertisement makes false claim about the quality of a product, then the buyer should make a complaint against the advertiser.
(Q48). Market power sometimes lead to misallocation of resources. What should the government do when market failure occurs?
Ans: Market power is the product of market forces.
(1) Every government needs to keep its eyes open. It should keep watch on the activities of the producers and guide them into desirable directions.
(2) The government may nationalize the monopolies in the national interest.
(3) The government may prevent firms from engaging I anti-competitive practices such as collerding form a carted.
(4) The government may participate in those areas of production where private sector does not come forward due to low rate of return.
(Q49). Is excess capacity under monopolistic competition always wasteful?
Ans: No. Even if firms produce less at a higher cost, it has its own advantages because.
(1) A variety of products will better satisfy consumer’s satisfaction.
(2) Consumers want freedom of choice and they are prepared to pay a high price for it.
(Q50). Indian railway is an example of state monopoly. Explain how state monopoly has benefited the people.
Ans: State monopoly is advantageous to the society. It works in public interest. Indian railways through its price discrimination policy has made rail service accessible to all economic groups (rich, poor, middle class people) at reasonable price. Indian railways is a natural monopoly. Therefore, it can provide rail service at a lower cost than other competing firms.