Notes : Market & Price Determination Class 12 Notes | EduRev

 Page 1


 
 
46 
 
 
UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION 
 
 
 
 
Market : Market is a place in which buyers and sellers come into contact for the purchase 
and sale of goods and services. 
Market structure: refers to number of firms operating in an industry, nature of competition 
between them and the nature of product. 
Types of market  
a) Perfect competition. 
b) Monopoly. 
c) Monopolistic Competition 
d) Oligopoly. 
 
a) Perfect competition: refers to a market situation in which there are large number of 
buyers and sellers. Firms sell homogeneous products at a uniform price. 
b) Monopoly market: Monopoly is a market situation dominated by a single seller who  has 
full control over the price. 
c) Monopolistic competition: It refers to a market situation in which there are many firms 
who sell closely related but differentiated products.   
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and 
large number of buyers. 
Features of perfect competition: 
1. Very large number of buyers and sellers. 
2. Homogeneous product. 
3. Free entry and exit of firms. 
4. Perfect knowledge.  
5. Firm is a price taker and industry is price maker. 
6. Perfectly elastic demand curve (AR=MR) 
7. Perfect mobility of factors of production. 
8. Absence of transportation cost. 
9. Absence of selling cost. 
 
Features of monopoly: 
1. Single seller of a commodity. 
2. Absence of close substitute of the product. 
3. Difficulty of entry of a new firm. 

 Perfect Competition 

 Monopoly 

 Monopolistic competition 

 Oligopoly 
Page 2


 
 
46 
 
 
UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION 
 
 
 
 
Market : Market is a place in which buyers and sellers come into contact for the purchase 
and sale of goods and services. 
Market structure: refers to number of firms operating in an industry, nature of competition 
between them and the nature of product. 
Types of market  
a) Perfect competition. 
b) Monopoly. 
c) Monopolistic Competition 
d) Oligopoly. 
 
a) Perfect competition: refers to a market situation in which there are large number of 
buyers and sellers. Firms sell homogeneous products at a uniform price. 
b) Monopoly market: Monopoly is a market situation dominated by a single seller who  has 
full control over the price. 
c) Monopolistic competition: It refers to a market situation in which there are many firms 
who sell closely related but differentiated products.   
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and 
large number of buyers. 
Features of perfect competition: 
1. Very large number of buyers and sellers. 
2. Homogeneous product. 
3. Free entry and exit of firms. 
4. Perfect knowledge.  
5. Firm is a price taker and industry is price maker. 
6. Perfectly elastic demand curve (AR=MR) 
7. Perfect mobility of factors of production. 
8. Absence of transportation cost. 
9. Absence of selling cost. 
 
Features of monopoly: 
1. Single seller of a commodity. 
2. Absence of close substitute of the product. 
3. Difficulty of entry of a new firm. 

 Perfect Competition 

 Monopoly 

 Monopolistic competition 

 Oligopoly 
 
 
47 
 
4. Negatively sloped demand curve(AR>MR) 
5. Full control over price. 
6.  Price discrimination exists 
7. Existence of abnormal profit. 
Features of monopolistic competition 
1. Large number of buyers and sellers but less than perfect competition. 
2. Product differentiation. 
3. Freedom of entry and exit. 
4. Selling cost. 
5. Lack of perfect knowledge. 
6. High transportation cost. 
7. Partial control over price. 
Main features of Oligopoly. 
1. Few dominant firms who are large in size 
2. Mutual interdependence. 
3. Barrier to entry. 
4. Homogeneous or differentiated product. 
5. Price rigidity. 
Features of pure competition 
1. Large number of buyers and sellers. 
2. Homogeneous products. 
3. Free entry and exit of firm. 
 
DETERMINATION OF PRICE UNDER PERFECT COMPETITION 
 
Equilibrium: It means a position of rest, there is no tendency to change. 
Market equilibrium: It means equality between quantity demanded and quantity supplied of 
a commodity in the market. 
Equilibrium price: This is the price at which market demand of a commodity is exactly equal 
to the market supply. 
Market demand: It refers to the sum total demand for a commodity by all buyers in the 
market. 
Market supply: It refers to supply of a commodity by all the firms in the market 
 
 
 
 
Page 3


 
 
46 
 
 
UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION 
 
 
 
 
Market : Market is a place in which buyers and sellers come into contact for the purchase 
and sale of goods and services. 
Market structure: refers to number of firms operating in an industry, nature of competition 
between them and the nature of product. 
Types of market  
a) Perfect competition. 
b) Monopoly. 
c) Monopolistic Competition 
d) Oligopoly. 
 
a) Perfect competition: refers to a market situation in which there are large number of 
buyers and sellers. Firms sell homogeneous products at a uniform price. 
b) Monopoly market: Monopoly is a market situation dominated by a single seller who  has 
full control over the price. 
c) Monopolistic competition: It refers to a market situation in which there are many firms 
who sell closely related but differentiated products.   
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and 
large number of buyers. 
Features of perfect competition: 
1. Very large number of buyers and sellers. 
2. Homogeneous product. 
3. Free entry and exit of firms. 
4. Perfect knowledge.  
5. Firm is a price taker and industry is price maker. 
6. Perfectly elastic demand curve (AR=MR) 
7. Perfect mobility of factors of production. 
8. Absence of transportation cost. 
9. Absence of selling cost. 
 
Features of monopoly: 
1. Single seller of a commodity. 
2. Absence of close substitute of the product. 
3. Difficulty of entry of a new firm. 

 Perfect Competition 

 Monopoly 

 Monopolistic competition 

 Oligopoly 
 
 
47 
 
4. Negatively sloped demand curve(AR>MR) 
5. Full control over price. 
6.  Price discrimination exists 
7. Existence of abnormal profit. 
Features of monopolistic competition 
1. Large number of buyers and sellers but less than perfect competition. 
2. Product differentiation. 
3. Freedom of entry and exit. 
4. Selling cost. 
5. Lack of perfect knowledge. 
6. High transportation cost. 
7. Partial control over price. 
Main features of Oligopoly. 
1. Few dominant firms who are large in size 
2. Mutual interdependence. 
3. Barrier to entry. 
4. Homogeneous or differentiated product. 
5. Price rigidity. 
Features of pure competition 
1. Large number of buyers and sellers. 
2. Homogeneous products. 
3. Free entry and exit of firm. 
 
DETERMINATION OF PRICE UNDER PERFECT COMPETITION 
 
Equilibrium: It means a position of rest, there is no tendency to change. 
Market equilibrium: It means equality between quantity demanded and quantity supplied of 
a commodity in the market. 
Equilibrium price: This is the price at which market demand of a commodity is exactly equal 
to the market supply. 
Market demand: It refers to the sum total demand for a commodity by all buyers in the 
market. 
Market supply: It refers to supply of a commodity by all the firms in the market 
 
 
 
 
 
 
48 
 
Very short answer questions 
1. Define perfect competition. 
Ans:- Perfect competition is a market with large number of buyers and sellers , selling 
homogeneous product at same price. 
2. Define monopoly. 
Ans: Monopoly is a market situation dominated by a single seller who has full control over 
the price. 
3. Define monopolistic competition. 
Ans:- It refers to a market situation in which many buyers and sellers selling differentiated 
product and  have partial control over the price. 
4. Under which market form firm is a price maker? 
Ans:- Monopoly 
5. What are selling cost? 
Ans:- Cost incurred by a firm for the promotion of sale is known as selling cost. 
(Advertisement cost) 
6. What is oligopoly? 
Ans:- Oligopoly is defined as a market structure in which there are few large sellers who sell 
either homogenous or differentiated goods. 
7. In which market form is there product differentiation? 
Ans:- Monopolistic competition  market and oligopoly market. 
8. What is product differentiation? 
Ans: It means close substitutes offered by different producers to show their output differs 
from other output available in the market. Differentiation can be in colour, size packing, 
brand name etc to attract buyers. 
9. What do you mean by patent rights? 
Ans:- Patent rights is an exclusive right or license granted to a company to produce a 
particular output under a specific technology.  
10. What is price discrimination? 
Ans: - It refers to charging of different prices from different consumers for different units of 
the same product. 
11. What is the shape of marginal revenue curve under monopoly? 
Ans:- Under monopoly market MR curve is downwards sloping curve form left to right and it 
lies below the AR curve. 
12. What do you mean by abnormal profits? 
Ans:- It is a situation for the firm when TR > TC. 
 
Page 4


 
 
46 
 
 
UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION 
 
 
 
 
Market : Market is a place in which buyers and sellers come into contact for the purchase 
and sale of goods and services. 
Market structure: refers to number of firms operating in an industry, nature of competition 
between them and the nature of product. 
Types of market  
a) Perfect competition. 
b) Monopoly. 
c) Monopolistic Competition 
d) Oligopoly. 
 
a) Perfect competition: refers to a market situation in which there are large number of 
buyers and sellers. Firms sell homogeneous products at a uniform price. 
b) Monopoly market: Monopoly is a market situation dominated by a single seller who  has 
full control over the price. 
c) Monopolistic competition: It refers to a market situation in which there are many firms 
who sell closely related but differentiated products.   
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and 
large number of buyers. 
Features of perfect competition: 
1. Very large number of buyers and sellers. 
2. Homogeneous product. 
3. Free entry and exit of firms. 
4. Perfect knowledge.  
5. Firm is a price taker and industry is price maker. 
6. Perfectly elastic demand curve (AR=MR) 
7. Perfect mobility of factors of production. 
8. Absence of transportation cost. 
9. Absence of selling cost. 
 
Features of monopoly: 
1. Single seller of a commodity. 
2. Absence of close substitute of the product. 
3. Difficulty of entry of a new firm. 

 Perfect Competition 

 Monopoly 

 Monopolistic competition 

 Oligopoly 
 
 
47 
 
4. Negatively sloped demand curve(AR>MR) 
5. Full control over price. 
6.  Price discrimination exists 
7. Existence of abnormal profit. 
Features of monopolistic competition 
1. Large number of buyers and sellers but less than perfect competition. 
2. Product differentiation. 
3. Freedom of entry and exit. 
4. Selling cost. 
5. Lack of perfect knowledge. 
6. High transportation cost. 
7. Partial control over price. 
Main features of Oligopoly. 
1. Few dominant firms who are large in size 
2. Mutual interdependence. 
3. Barrier to entry. 
4. Homogeneous or differentiated product. 
5. Price rigidity. 
Features of pure competition 
1. Large number of buyers and sellers. 
2. Homogeneous products. 
3. Free entry and exit of firm. 
 
DETERMINATION OF PRICE UNDER PERFECT COMPETITION 
 
Equilibrium: It means a position of rest, there is no tendency to change. 
Market equilibrium: It means equality between quantity demanded and quantity supplied of 
a commodity in the market. 
Equilibrium price: This is the price at which market demand of a commodity is exactly equal 
to the market supply. 
Market demand: It refers to the sum total demand for a commodity by all buyers in the 
market. 
Market supply: It refers to supply of a commodity by all the firms in the market 
 
 
 
 
 
 
48 
 
Very short answer questions 
1. Define perfect competition. 
Ans:- Perfect competition is a market with large number of buyers and sellers , selling 
homogeneous product at same price. 
2. Define monopoly. 
Ans: Monopoly is a market situation dominated by a single seller who has full control over 
the price. 
3. Define monopolistic competition. 
Ans:- It refers to a market situation in which many buyers and sellers selling differentiated 
product and  have partial control over the price. 
4. Under which market form firm is a price maker? 
Ans:- Monopoly 
5. What are selling cost? 
Ans:- Cost incurred by a firm for the promotion of sale is known as selling cost. 
(Advertisement cost) 
6. What is oligopoly? 
Ans:- Oligopoly is defined as a market structure in which there are few large sellers who sell 
either homogenous or differentiated goods. 
7. In which market form is there product differentiation? 
Ans:- Monopolistic competition  market and oligopoly market. 
8. What is product differentiation? 
Ans: It means close substitutes offered by different producers to show their output differs 
from other output available in the market. Differentiation can be in colour, size packing, 
brand name etc to attract buyers. 
9. What do you mean by patent rights? 
Ans:- Patent rights is an exclusive right or license granted to a company to produce a 
particular output under a specific technology.  
10. What is price discrimination? 
Ans: - It refers to charging of different prices from different consumers for different units of 
the same product. 
11. What is the shape of marginal revenue curve under monopoly? 
Ans:- Under monopoly market MR curve is downwards sloping curve form left to right and it 
lies below the AR curve. 
12. What do you mean by abnormal profits? 
Ans:- It is a situation for the firm when TR > TC. 
 
 
 
49 
 
13. Why AR is equal to MR under perfect competition? 
Ans:- AR is equal to MR under perfect competition because price is constant. 
14. What are advertisement costs? 
Ans:- Advertisement cost are the expenditure incurred by a firm for the promotion of its sales 
such as publicity through TV , Radio , Newspaper , Magazine etc. 
15.  What is short period? 
Ans:- Short period refers to that much time period when quantity of output can be changed 
only by changing the quantity of variable input and fixed factors remaining same. 
16. Define long period. 
Ans:- Long period refers to that much time period available to a firm in which it can increase 
its outputs by changing its fixed and variable inputs. 
17.  What is market period? 
Ans: Market period is defined as a very short time period in which supply of commodity 
cannot be increased. 
18. What is meant by normal profit? 
Ans:- Normal profit is the minimum amount of profit which is required to keep an 
entrepreneur in production in the long run. 
19. What is break-even price? 
ANs:-In a perfectly competitive market, break- even price is the price at which a firm earn 
normal profit (Price=AC). In the long run, Break- even price is that price where P=AR=MC 
Short Answer Questions: (3 / 4 Marks) 
 
1. Explain any four characteristics of perfect competition market. 
Ans:-  
i) Large number of buyers and sellers : The number of buyers and sellers are so large in 
this market that no firm can influence the price. 
ii) Homogeneous products:  Products are uniform in nature. The products are perfect 
substitute of each other. No seller can charge a higher price for the product. Otherwise he 
will lose his customers. 
iii) Perfect knowledge: Buyers as well as sellers have complete knowledge about the 
product. 
iv) Free entry and exit of firm: Under perfect competition any firm can enter or exit in the 
market at any time. This ensures that the firms are neither earning abnormal profits nor 
incurring abnormal losses. 
 
 
 
 
 
Page 5


 
 
46 
 
 
UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION 
 
 
 
 
Market : Market is a place in which buyers and sellers come into contact for the purchase 
and sale of goods and services. 
Market structure: refers to number of firms operating in an industry, nature of competition 
between them and the nature of product. 
Types of market  
a) Perfect competition. 
b) Monopoly. 
c) Monopolistic Competition 
d) Oligopoly. 
 
a) Perfect competition: refers to a market situation in which there are large number of 
buyers and sellers. Firms sell homogeneous products at a uniform price. 
b) Monopoly market: Monopoly is a market situation dominated by a single seller who  has 
full control over the price. 
c) Monopolistic competition: It refers to a market situation in which there are many firms 
who sell closely related but differentiated products.   
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and 
large number of buyers. 
Features of perfect competition: 
1. Very large number of buyers and sellers. 
2. Homogeneous product. 
3. Free entry and exit of firms. 
4. Perfect knowledge.  
5. Firm is a price taker and industry is price maker. 
6. Perfectly elastic demand curve (AR=MR) 
7. Perfect mobility of factors of production. 
8. Absence of transportation cost. 
9. Absence of selling cost. 
 
Features of monopoly: 
1. Single seller of a commodity. 
2. Absence of close substitute of the product. 
3. Difficulty of entry of a new firm. 

 Perfect Competition 

 Monopoly 

 Monopolistic competition 

 Oligopoly 
 
 
47 
 
4. Negatively sloped demand curve(AR>MR) 
5. Full control over price. 
6.  Price discrimination exists 
7. Existence of abnormal profit. 
Features of monopolistic competition 
1. Large number of buyers and sellers but less than perfect competition. 
2. Product differentiation. 
3. Freedom of entry and exit. 
4. Selling cost. 
5. Lack of perfect knowledge. 
6. High transportation cost. 
7. Partial control over price. 
Main features of Oligopoly. 
1. Few dominant firms who are large in size 
2. Mutual interdependence. 
3. Barrier to entry. 
4. Homogeneous or differentiated product. 
5. Price rigidity. 
Features of pure competition 
1. Large number of buyers and sellers. 
2. Homogeneous products. 
3. Free entry and exit of firm. 
 
DETERMINATION OF PRICE UNDER PERFECT COMPETITION 
 
Equilibrium: It means a position of rest, there is no tendency to change. 
Market equilibrium: It means equality between quantity demanded and quantity supplied of 
a commodity in the market. 
Equilibrium price: This is the price at which market demand of a commodity is exactly equal 
to the market supply. 
Market demand: It refers to the sum total demand for a commodity by all buyers in the 
market. 
Market supply: It refers to supply of a commodity by all the firms in the market 
 
 
 
 
 
 
48 
 
Very short answer questions 
1. Define perfect competition. 
Ans:- Perfect competition is a market with large number of buyers and sellers , selling 
homogeneous product at same price. 
2. Define monopoly. 
Ans: Monopoly is a market situation dominated by a single seller who has full control over 
the price. 
3. Define monopolistic competition. 
Ans:- It refers to a market situation in which many buyers and sellers selling differentiated 
product and  have partial control over the price. 
4. Under which market form firm is a price maker? 
Ans:- Monopoly 
5. What are selling cost? 
Ans:- Cost incurred by a firm for the promotion of sale is known as selling cost. 
(Advertisement cost) 
6. What is oligopoly? 
Ans:- Oligopoly is defined as a market structure in which there are few large sellers who sell 
either homogenous or differentiated goods. 
7. In which market form is there product differentiation? 
Ans:- Monopolistic competition  market and oligopoly market. 
8. What is product differentiation? 
Ans: It means close substitutes offered by different producers to show their output differs 
from other output available in the market. Differentiation can be in colour, size packing, 
brand name etc to attract buyers. 
9. What do you mean by patent rights? 
Ans:- Patent rights is an exclusive right or license granted to a company to produce a 
particular output under a specific technology.  
10. What is price discrimination? 
Ans: - It refers to charging of different prices from different consumers for different units of 
the same product. 
11. What is the shape of marginal revenue curve under monopoly? 
Ans:- Under monopoly market MR curve is downwards sloping curve form left to right and it 
lies below the AR curve. 
12. What do you mean by abnormal profits? 
Ans:- It is a situation for the firm when TR > TC. 
 
 
 
49 
 
13. Why AR is equal to MR under perfect competition? 
Ans:- AR is equal to MR under perfect competition because price is constant. 
14. What are advertisement costs? 
Ans:- Advertisement cost are the expenditure incurred by a firm for the promotion of its sales 
such as publicity through TV , Radio , Newspaper , Magazine etc. 
15.  What is short period? 
Ans:- Short period refers to that much time period when quantity of output can be changed 
only by changing the quantity of variable input and fixed factors remaining same. 
16. Define long period. 
Ans:- Long period refers to that much time period available to a firm in which it can increase 
its outputs by changing its fixed and variable inputs. 
17.  What is market period? 
Ans: Market period is defined as a very short time period in which supply of commodity 
cannot be increased. 
18. What is meant by normal profit? 
Ans:- Normal profit is the minimum amount of profit which is required to keep an 
entrepreneur in production in the long run. 
19. What is break-even price? 
ANs:-In a perfectly competitive market, break- even price is the price at which a firm earn 
normal profit (Price=AC). In the long run, Break- even price is that price where P=AR=MC 
Short Answer Questions: (3 / 4 Marks) 
 
1. Explain any four characteristics of perfect competition market. 
Ans:-  
i) Large number of buyers and sellers : The number of buyers and sellers are so large in 
this market that no firm can influence the price. 
ii) Homogeneous products:  Products are uniform in nature. The products are perfect 
substitute of each other. No seller can charge a higher price for the product. Otherwise he 
will lose his customers. 
iii) Perfect knowledge: Buyers as well as sellers have complete knowledge about the 
product. 
iv) Free entry and exit of firm: Under perfect competition any firm can enter or exit in the 
market at any time. This ensures that the firms are neither earning abnormal profits nor 
incurring abnormal losses. 
 
 
 
 
 
 
 
50 
 
2. Explain briefly why a firm under perfect competition is a price taker not a price 
maker? 
Ans:- A firm under perfect competition is a price taker not a price maker because the price is 
determined by the market forces of demand of supply. This price is known as equilibrium 
price. All the firms in the industry have to sell their outputs at this equilibrium price. The 
reason is that, number of firms under perfect competition is so large. So no firm can influence 
the price by its supply. All firms produce homogeneous product. 
 
 
 
 
 
 
 
                     
  
3. Distinguish between monopoly and perfect competition. 
Ans:- 
Perfect Competition Monopoly 
Very large number of buyers and sellers. Single seller of the product. 
Products are homogenous Product has no close substitute 
Firm is the price taker and not a maker Firm is price maker not price taker 
Price is uniform in the market (price =AR) Due to price discrimination price is 
not uniform. 
Free entry and exit of firms. Very difficult entry of new firms. 
 
4. Which features of monopolistic competition are monopolistic in nature? 
Ans:-   i)         Product differentiation 
ii) Control over price 
iii) Downward sloping demand curve 
5. What are the reasons which give emergence to the monopoly market? 
Ans:-i) Patent Rights: Patent rights are the authority given by the government to a particular 
firm to produce a particular product for a specific time period. 
ii) Formation of Cartel: Cartel refers to a collective decision taken by a group of firms to 
avoid outside competition and securing monopoly right. 
iii) Government licensing: Government provides the license to a particular firm to produce a 
particular commodity exclusively. 
Industry 
Firm 
Price 
D
D
S 
S 
E 
P 
P 
AR/MR 
y 
y 
x 
O 
Output 
X 
Q 
O 
 Demand & Supply