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Q.1. What is market? Give main bases of distribution of market.
Ans. Market refers to a medium through which buyers and sellers of a particular good or service come in contact with each other in order to facilitate an exchange. Basis of Classification of Market Market can be classified on the basis of following characteristics:
(i) Number of Buyers and Sellers in the Market: If number of buyers and sellers is very high in the market then it is the perfectly competitive market structure or monopolistic competition. However, in ; monopolistic competition, number of sellers remains less than perfect competition. If there is only one ; seller of commodity in the market and the number of buyers is high then it will be monopoly market ; structure. If there are a few sellers of a commodity then it will oligopolistic market.
(ii) Nature of Commodity: If the goods sold by all firms in the market are identical or homogeneous then it will be the position of perfectly competitive market. Product differentiation, on the other : hand, is considered the base of monopolistic competition.
(iii) Degree of Price Control: If a firm has full control on the price of the commodity it sells in market then it will be a monopoly. If the control is partial then it will be monopolistic competition and ; in case of zero control, the market will be perfectly competitive.
(iv) Knowledge of the Market: If sellers and buyers have full knowledge of market situation then it : will be perfect competition. In contrast, imperfect knowledge is the speciality of monopoly and : monopolistic competition.
(v) Mobility of Factors: Production factors have full mobility under perfect competition.
Q.2. Explain the implications of the following:
(i) The feature ‘differentiated products’ under monopolistic competition.
(ii) The feature ‘large number of sellers’ under perfect competition.
Ans. (i) In monopolistic competition, the products of various firms differ in terms of colour, shape, quality, durability, etc. Product differentiation implies that the products sold by different firms are similar but not identical. This gives an individual firm some monopoly power, that is, the power to influence the demand for its product by changing the price. Buyers can easily differentiate between the products produced by different firms.
(ii) There is large number of sellers under perfect competition. All sellers sell such an insignificant portion of the total market supply of the commodity that none of them is in a position to influence the prevailing market price. The price of the product under perfect competition is determined in the industry by the market forces of demand and supply. An individual firm is merely a price taker and not a price maker.
Q.3. Give difference between monopoly and monopolistic competition.
Ans. Following are the points of difference between monopoly and monopolistic competition:
Q.4. Distinguish between collusive and non-collusive oligopoly. Explain how the oligopoly firms are interdependent in taking price and output decisions.
Ans. Collusive oligopoly is the one in which the firms co-operate with each other in determining the price. They follow a common price policy and do not compete with each other. Non-collusive oligopoly, on the other hand, is the one in which the firms act independently. They compete with each other and independently determine the price of their products.
Oligopoly firms are significantly affected by each other’s price and output decisions. If a firm increases the price of its product with the motive of earning higher profits, the other firms will not follow. Consequently, the leading firm will lose its customers to the firms, which charge lower price. On the contrary, if a firm lowers its price for maximising sales and earn higher profits, the other firm may also reduce their price in response.
Consequently, the increase in total market sales is shared by all the firms in the market. The leading firm that initiated selling at a lower price may actually receive smaller share of the increase than expected.
Thus, the oligopoly firm has to take into consideration the actions and reactions of its rivals while taking its price and output decisions.