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Forms of Market: AHSEC Class 11 Economics notes
Get summaries, questions, answers, solutions, notes, extras, PDF and guide of Class 11 (first year) Economics textbook, chapter 10 Forms of Market which is part of the syllabus of students studying under AHSEC/ASSEB (Assam Board). These solutions, however, should only be treated as references and can be modified/changed.
If you notice any errors in the notes, please mention them in the comments
Summary
The chapter explains the different forms of markets in economics, focusing on how buyers and sellers interact. It begins by defining what a market means in economics. A market isn’t just a physical place where goods are bought and sold, but a concept where buyers and sellers come into contact. This contact can be direct or through communication tools like emails or phones. To form a market, certain conditions must be met, such as competition, a commodity to be sold, and the ability of buyers and sellers to interact under accepted rules.
There are four types of markets based on competition: perfect competition, monopoly, monopolistic competition, and oligopoly.
In a perfectly competitive market, there are many buyers and sellers offering identical products. No single buyer or seller can influence the price, so they are all price takers. Entry and exit from this market are free, and everyone has complete information about prices. There are no additional costs except production costs. An example of such a market is agricultural products where many sellers sell the same type of goods like wheat or rice.
A monopoly exists when there is only one seller for a product. The monopolist can influence the price because there is no competition. The product does not have any close substitutes, and no new sellers can enter the market. For example, Indian Railways is a monopoly in providing railway services in India. A monopolist can either sell fewer goods at a higher price or more goods at a lower price. Monopolies often charge different prices to different customers for the same product.
Monopolistic competition is a mix of perfect competition and monopoly. There are many sellers, but each one offers a slightly different product. For instance, the toothpaste market has many brands like Colgate and Pepsodent, but each has small differences in taste or packaging. Sellers in this market are like monopolists because they offer a unique product, but they also face competition because other brands are close substitutes.
Oligopoly is when a few sellers control a market. They may sell identical or different products, and each firm has significant control over the market price. The actions of one seller affect the others, so they carefully watch each other. Examples of oligopoly markets in India include cement and automobile industries.
These market forms show how different levels of competition shape the pricing and availability of goods and services.
Textbook solutions
Very Short Answer Type Questions
1. Define perfect competition.
Answer: Perfect competition is a market characterized by the presence of a very large number of sellers selling homogeneous products.
2. State two features of a perfectly competitive market.
Answer:
- Large number of buyers and sellers.
- Homogeneous product.
3. State two features of monopoly.
Answer:
- Single seller of a commodity.
- No close substitutes.
4. State two features of monopolistic competition.
Answer:
- Large number of buyers and sellers.
- Differentiated products.
5. What is the shape of demand curve under monopolistic competition?
Answer: The demand curve under monopolistic competition is downward sloping.
6. What will you call that market which has characteristics both of monopoly and perfect competition?
Answer: Monopolistic competition.
7. Why are AR and MR equal under perfect competition?
Answer: AR and MR are equal under perfect competition because price remains constant, so the additional revenue from selling one more unit is equal to the price.
8. In which market form are average revenue and marginal revenue of a firm always equal?
Answer: Perfect competition.
9. Define homogeneous product.
Answer: A homogeneous product is one where every unit of the product sold in the market is identical in size, shape, color, and other attributes in the eyes of buyers.
10. What is meant by differentiated product?
Answer: A differentiated product is one that is similar to other products but has distinguishing features such as brand name, color, size, or quality, which make it slightly different from others.
Short Answer Type Questions
1. “A firm under perfect competition is a price taker.” – Explain.
Answer: Under perfect competition, a firm is a price taker because it cannot influence the price of the product it sells. The price is determined by the overall supply and demand in the market, and each individual firm produces such a small part of the total market output that any change in its output will not affect the market price. Hence, the firm has no choice but to accept the price set by the market.
2. Why are patents granted?
Answer: Patents are granted to give exclusive rights to an individual or a firm to produce a particular product or use a specific technology. This exclusivity is provided for a certain period to encourage innovation by protecting the discoverer’s rights over their product or technology.
3. Mention three features of perfect competition.
Answer:
- Large number of buyers and sellers: There are many buyers and sellers in the market, so no single buyer or seller can influence the price.
- Homogeneous products: All firms produce identical products, so consumers have no preference between products from different firms.
- Free entry and exit: Firms can enter or exit the market freely, ensuring that firms only make normal profits in the long run.
4. What is a cartel? Give an example.
Answer: A cartel is a group of firms that agree to jointly set output and price policies to behave like a single monopolist and maximize joint profits. An example of a cartel is the Organization of Petroleum Exporting Countries (OPEC), where member countries coordinate to control oil production and pricing.
5. Draw total revenue curve of a monopoly firm and explain its slope.
Answer: (Refer to the relevant section in the document for the diagram.) The total revenue (TR) curve of a monopoly firm rises at a decreasing rate. Initially, TR increases as the quantity sold increases, but after a certain point, TR rises at a diminishing rate as the firm must lower the price to sell more units. Eventually, TR may reach a maximum and start to decline if the price reduction required to sell additional units outweighs the gain from increased sales.
6. Explain the shape of demand curve of a firm under monopolistic competition.
Answer: The demand curve under monopolistic competition is downward sloping, meaning that the firm can sell more only by lowering its price. Unlike perfect competition, where the demand curve is perfectly elastic, firms under monopolistic competition face a more elastic demand due to product differentiation. This allows them to have some control over the price but not as much as a monopolist.
7. Mention three features of monopoly.
Answer:
- Single seller: There is only one seller in the market, with no competition.
- No close substitutes: The product sold by the monopolist has no close substitutes.
- Barriers to entry: Strong barriers prevent new firms from entering the market, allowing the monopolist to maintain control.
8. Differentiate between product differentiation and price discrimination.
Answer:
- Product differentiation: This occurs when firms sell products that are similar but not identical, allowing them to charge different prices based on brand, quality, or other features.
- Price discrimination: This occurs when a firm charges different prices for the same product to different consumers, based on their willingness to pay.
9. Why is demand curve of a monopoly firm less elastic?
Answer: The demand curve of a monopoly firm is less elastic because there are no close substitutes for the monopolist’s product. Consumers have fewer alternatives, so a change in price leads to a smaller change in quantity demanded compared to more competitive markets.
10. Giving reasons, distinguish between the behaviour of demand curves under perfect competition and monopolistic competition.
Answer:
- Perfect competition: The demand curve is perfectly elastic, meaning that the firm can sell any quantity at the market price but cannot influence the price.
- Monopolistic competition: The demand curve is downward sloping and relatively more elastic because the products are differentiated, giving firms some control over the price, though not as much as in monopoly.
11. Why can a firm not earn abnormal profits under perfect competition in the long run? Explain.
Answer: In the long run, firms in perfect competition cannot earn abnormal profits because there is free entry and exit of firms in the market. If firms earn abnormal profits, new firms will enter the market, increasing supply and driving down prices until only normal profits are made. Similarly, if firms incur losses, some will exit the market, reducing supply and raising prices back to a level where firms earn normal profits.
Long Answer Type Questions
1. State main features of perfect competition.
Answer: The main features of perfect competition are as follows:
- Very Large number of Buyers and Sellers: There are a very large number of buyers and sellers of the commodity under perfect competition. Each seller produces an insignificant part of the total market output, so that a change in its output will have no effect on the market price.
- Homogeneous Product: In a perfectly competitive market, all sellers (or firms) sell a homogeneous product. A product is said to be homogeneous when each unit of it (sold in the market) is identical in size, shape, color, weight, or in any other respect in the eyes of buyers.
- Freedom of Entry and Exit: In a perfectly competitive market, there is free entry and free exit of firms. This means that any firm may start the production of the commodity and in this way can enter the market.
- Perfect knowledge: In perfect competition, buyers and sellers 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.
- Perfect Mobility: In a perfectly competitive market, the factors of production are perfectly mobile. Mobility of factors of production means that the factors of production can be transferred from one place to another or from one use to another.
- No other costs except production costs: In a perfectly competitive market, the production cost is the only cost. There are no other costs such as advertisement cost, transport cost, storage cost, insurance cost, etc.
2. Under perfect competition, the seller is a price-taker, under monopoly he is the price maker. Explain.
Answer: In a perfectly competitive market, the seller is a price-taker because the market consists of a large number of buyers and sellers selling homogeneous products. No individual seller can influence the market price. The price is determined by the forces of demand and supply in the market. Each seller accepts this price as given and sells the product at that price.
In monopoly, there is only one seller, and the product has no close substitutes. This gives the monopolist the power to set the price of the product. The monopolist can control either the price or the quantity supplied. Thus, the monopolist is considered a price maker as they can influence the market price based on the quantity of the product supplied.
3. Describe main features of monopolistic competition.
Answer: The main features of monopolistic competition are as follows:
- Large Numbers of Sellers (firms) and Buyers: Like perfect competition, there are a large number of buyers and firms. Also, the size of each firm under monopolistic competition is small. Each firm supplies a small portion of the total market supply.
- Product Differentiation: This is a key feature of monopolistic competition. Product of various firms are similar in nature but are differentiated in terms of brand name, shape and size, color, quality, type of service, etc.
- Free entry and exit of firms: New firms can enter the market if found profitable. Similarly, inefficient firms already operating in the market are free to quit the market if they incur losses.
- Non-Price Competition: Much of the competition under monopolistic competition takes place in the form of non-price competitions. Firms here compete not merely by price-cutting but also on the basis of non-price competition.
- Lack of Perfect Mobility: Goods and factors of production lack perfect mobility. Accordingly, different prices prevail for the same factor or for the same product.
- Lack of Perfect Knowledge: Sellers and buyers of the products (as well as owners of factors of production) also lack perfect knowledge about the market. Because of product differentiation, it is not even possible to have perfect knowledge about a variety of products in the market.
4. Distinguish between perfect competition and monopolistic competition.
Answer:
- Number of sellers:
- Perfect competition: There are a very large number of sellers (or firms).
- Monopolistic competition: There are a large number of firms.
- Nature of products:
- Perfect competition: The products of all the sellers are homogeneous.
- Monopolistic competition: Firms produce closely differentiated products.
- Entry or Exit:
- Perfect competition: There is freedom to enter or to leave the industry.
- Monopolistic competition: There is free entry and exit of firms.
- Firm’s influence over price:
- Perfect competition: An individual firm is price taker. It cannot influence the market price.
- Monopolistic competition: An individual firm has some influence over the market price of the product it produces.
- Demand curve:
- Perfect competition: The demand curve faced by each firm is perfectly elastic as price is given for the firm.
- Monopolistic competition: The demand curve is downward sloping. The demand is highly elastic due to availability of close substitutes in the market.
5. Bring out the various points of difference between monopoly and monopolistic competition.
Answer:
- Number of sellers:
- Monopoly: There is only a single seller of a commodity.
- Monopolistic competition: There are a large number of sellers of closely differentiated products.
- Nature of product:
- Monopoly: The monopolist sells a product that has no close substitutes.
- Monopolistic competition: Firms produce closely related but differentiated products.
- Entry or exit of firms:
- Monopoly: There are restrictions that prevent new firms from entering the market.
- Monopolistic competition: There is free entry and exit of firms.
- Firm’s influence over price:
- Monopoly: A monopolist is a price-maker because they have complete control over the industry’s output (or market supply).
- Monopolistic competition: An individual firm has some influence over the market price of the product it produces.
- Demand curve:
- Monopoly: The demand curve is downward sloping and less elastic as there are no close substitutes.
- Monopolistic competition: The demand curve is downward sloping and more elastic due to the availability of close substitutes.
6. Distinguish between perfect competition and monopolistic competition.
Answer: Perfect competition and monopolistic competition differ in various aspects:
| Basis | Perfect Competition | Monopolistic Competition |
|---|---|---|
| 1. Number of sellers | There are very large number of sellers (or firms). | There are large number of sellers (or firms). |
| 2. Nature of products | The products of all the sellers are homogeneous. | Firms produce closely differentiated products. |
| 3. Entry or Exit | There is freedom to enter or leave the industry for the firms. | There is free entry and exit of firms. |
| 4. Firm’s influence over price | An individual firm is price taker. It cannot influence the market price. | A monopolist is a price-maker because he has complete control over the industry’s output (or market supply). |
| 5. Demand curve | The demand curve faced by each firm is perfectly elastic as price is given for the firm. | The demand curve is downward sloping. The demand is highly elastic due to availability of close substitutes in the market. |
7. Bring out the various points of difference between monopoly and monopolistic competition.
Answer: The following table illustrates the differences between monopoly and monopolistic competition:
| Basis | Monopoly | Monopolistic Competition |
|---|---|---|
| 1. Number of sellers | There is only a single seller of a commodity. | There are a large number of firms (sellers). |
| 2. Nature of products | There are no close substitutes for the product sold by the monopoly firm. | Firms produce closely differentiated products. |
| 3. Entry or Exit | There are restrictions which prevent new firms to enter the market. | There is free entry and exit of firms. |
| 4. Firm’s influence over price | A monopolist is a price-maker because he has complete control over the industry’s output (or market supply). | An individual firm has some influence over the market price of the product it produces. |
| 5. Demand curve | The demand curve is downward sloping. Demand is inelastic since there are no substitutes. | The demand curve is downward sloping. The demand is highly elastic due to availability of close substitutes in the market. |
8. Differentiate between perfect competition and monopoly.
Answer: The differences between perfect competition and monopoly are as follows:
| Basis | Perfect Competition | Monopoly |
|---|---|---|
| 1. Number of sellers | There are a very large number of sellers (or firms). | There is only a single seller of a commodity. |
| 2. Nature of products | The products of all the sellers are homogeneous. | There are no close substitutes for the product sold by the monopoly firm. |
| 3. Entry or Exit | There is freedom to enter or leave the industry for the firms. | There are restrictions which prevent new firms to enter the market. |
| 4. Firm’s influence over price | An individual firm is price taker. It cannot influence the market price. | A monopolist is a price-maker because he has complete control over the industry’s output (or market supply). |
| 5. Demand curve | The demand curve faced by each firm is perfectly elastic as price is given for the firm. | The demand curve is downward sloping. Demand is inelastic since there are no substitutes. |
9. Explain the nature of demand curve under: (a) Perfect competition and (b) Monopoly.
Answer: (a) Perfect competition: In a perfectly competitive market, the demand curve faced by a firm is perfectly elastic, i.e., a horizontal line parallel to the X-axis. The price of the commodity is constant, and the firm can sell any quantity at this price. Therefore, the firm is a price taker.
(b) Monopoly: In a monopoly, the demand curve is downward sloping, indicating that a larger quantity of the product can only be sold at a lower price. This shows that the monopolist has the power to influence the price by controlling the quantity supplied in the market.
10. Explain the following: (i) ‘Free entry and exit’ feature of perfect competition; (ii) ‘Differentiated products’ feature of monopolistic competition.
Answer: (i) Free entry and exit feature of perfect competition: In a perfectly competitive market, firms can freely enter or exit the market. If firms in the market are earning supernormal profits, new firms will enter, increasing supply and reducing the market price. On the other hand, if firms are incurring losses, they will exit the market. Thus, in the long run, firms in a perfectly competitive market can only earn normal profits.
(ii) Differentiated products feature of monopolistic competition: In monopolistic competition, firms produce differentiated products. Although these products are similar in nature, they vary in terms of brand name, shape, size, colour, quality, etc. This allows each firm to create its own market niche and charge slightly different prices for its product.
Extras
Additional MCQs
1. What is the key feature of a monopoly market?
A. Large number of sellers
B. Homogeneous products
C. Single seller
D. Free entry of firms
Answer: C. Single seller
Q. In a perfectly competitive market, firms are described as?
A. Price-makers
B. Price-takers
C. Monopolists
D. Cartels
Answer: B. Price-takers
Q. In a monopoly, the demand curve is?
A. Upward sloping
B. Downward sloping
C. Horizontal
D. Perfectly elastic
Answer: B. Downward sloping
Q. Which market type features product differentiation?
A. Perfect competition
B. Monopoly
C. Monopolistic competition
D. Oligopoly
Answer: C. Monopolistic competition
Q. What is a key characteristic of perfect competition?
A. Few sellers
B. Large number of buyers and sellers
C. Homogeneous and differentiated products
D. Single seller with no close substitutes
Answer: B. Large number of buyers and sellers
Q. Which of the following is an example of a monopoly?
A. Toothpaste market
B. Indian Railways
C. Automobile market
D. Cement industry
Answer: B. Indian Railways
Q. In which market structure are firms considered price-makers?
A. Perfect competition
B. Monopoly
C. Monopolistic competition
D. Oligopoly
Answer: B. Monopoly
Q. What characterizes a perfectly competitive market’s products?
A. Differentiated products
B. Homogeneous products
C. Luxury goods
D. Branded goods
Answer: B. Homogeneous products
Q. Which of the following allows free entry and exit of firms?
A. Monopoly
B. Oligopoly
C. Monopolistic competition
D. Cartels
Answer: C. Monopolistic competition
Q. In which market structure does the firm’s demand curve slope downward and is highly elastic?
A. Monopoly
B. Perfect competition
C. Oligopoly
D. Monopolistic competition
Answer: D. Monopolistic competition
Q. What type of market has only a few sellers and significant power to influence market price?
A. Oligopoly
B. Monopoly
C. Perfect competition
D. Monopolistic competition
Answer: A. Oligopoly
Q. Which of the following is NOT a feature of perfect competition?
A. Large number of buyers and sellers
B. Homogeneous products
C. Free entry and exit
D. Price discrimination
Answer: D. Price discrimination
Q. Which of the following markets represents oligopoly in India?
A. Railways
B. Steel industry
C. Toothpaste market
D. Soap industry
Answer: B. Steel industry
14. What is the key difference between monopolistic competition and perfect competition?
A. Number of sellers
B. Entry and exit of firms
C. Product differentiation
D. Full market control
Answer: C. Product differentiation
Additional questions and answers
1. What is a market in economics?
Answer: In economics, the term market is used in a somewhat wider sense. The market here need not mean a marketplace. We have one market for one product or one factor of production. Thus, it refers to the market for a commodity containing buyers and sellers of this commodity.
Q. What are the four essentials of a market?
Answer: The definition of market highlights four essentials of a market:
- Area: Market is not related to any particular place. It spreads over an area that may be large or small depending on the spread of buyers and sellers. The area becomes the point of contact between buyers and sellers.
- Buyers and sellers: Buyers and sellers should be in contact with each other. However, contact does not necessarily mean physical presence.
- Commodity: For the existence of a market, there must be a commodity that will be bought and sold by buyers and sellers. We have one market for each product or factor service.
- Competition: The existence of competition among buyers and sellers is also an essential condition for the existence of a market; otherwise, different prices may be charged for the same commodity.
Q. What are the two main functions of a market for a product or factor of production?
Answer: A market for a product or factor of production performs the following two main functions:
- The market acts as a bridge between the buyers and the sellers and thereby narrows the gap between production and consumption.
- The market determines the price. In the market, the buyers demand the commodity and the sellers supply the commodity. The price of the commodity is determined by the interaction of demand and supply.
Q. What are the four main types of markets based on the degree of competition?
Answer: On the basis of the degree of competition, markets may be classified into four main types:
- Perfect competition (or competitive market)
- Monopoly
- Monopolistic competition
- Oligopoly
Q. What are the main features of a perfectly competitive market?
Answer: A perfectly competitive market has the following essential features:
- Very large number of buyers and sellers: There are a very large number of buyers and sellers of the commodity under perfect competition. Each seller produces an insignificant part of the total market output so that a change in its output will have no effect on the market price.
- Homogeneous product: In a perfectly competitive market, all sellers (or firms) sell a homogeneous product. A product is said to be homogeneous when each unit of it (sold in the market) is identical in size, shape, colour, weight, or in any other respect in the eyes of buyers.
- Freedom of entry and exit: In a perfectly competitive market, there is free entry and free exit of firms.
- Perfect knowledge: In perfect competition, buyers and sellers have perfect knowledge about the market conditions.
- Perfect mobility: In a perfectly competitive market, the factors of production are perfectly mobile.
- No other costs except production costs: In a perfectly competitive market, the production cost is the only cost. There are no other costs such as advertisement costs, transport costs, storage costs, insurance costs, etc.
Q. What are the main features of monopoly?
Answer: The main features of monopoly are given below:
- Single seller of a commodity: In monopoly, there is a single seller (called monopolist) of a particular commodity. There is no competition. Example: Indian Railways.
- No close substitutes: There are no close substitutes for the commodity.
- Restrictions on entry and exit: There exist strong barriers to the entry of new firms and exit of existing firms.
- Monopolist is a price-maker: A monopolist is a price-maker because he has complete control over the industry.
- Price discrimination: When a monopoly firm charges different prices from different customers for the same product, it is called price discrimination.
Q. What are the causes behind the emergence of monopoly?
Answer: Monopoly market structure may arise in any of the following ways:
- Government Licensing and Government Control: The government may grant a license for the production of a particular commodity only to one producer.
- Patent rights: Sometimes, a firm enjoys patent rights over the production process of a specific commodity or service, and other firms are legally banned from producing that commodity or service.
- Cartels: Sometimes, a group of firms agrees to work together and create a monopoly market.
- Natural restrictions: Monopoly may exist as a natural phenomenon in industries where economies of scale are so great that only a single firm can achieve minimum efficient scale.
Q. What is monopolistic competition?
Answer: Monopolistic competition refers to a market situation in which there are many firms, but each sells closely related yet differentiated products. It is a mixture of perfect competition and monopoly, where there is competition among a large number of firms. At the same time, each firm enjoys some measure of monopoly due to brand name, colour, size, or shape of its product. This type of market is common in real life and can be seen in products like toothpaste, shoes, TV sets, and pens.
Q. What are the main features of monopolistic competition?
Answer: The main features of monopolistic competition are:
- Large Numbers of Sellers (firms) and Buyers: Like perfect competition, there are a large number of buyers and firms. Each firm is small and supplies a small portion of the total market supply.
- Product Differentiation: Products from different firms are similar but differentiated in terms of brand name, shape, size, colour, quality, and service. These differentiated products are close substitutes and allow firms to adopt independent pricing policies.
- Free Entry and Exit of Firms: New firms can enter the market if profitable, and inefficient firms can exit if they incur losses. This feature leads to normal profit in monopolistic competition.
- Non-Price Competition: Competition often occurs through non-price factors such as product variation and advertising. Firms may compete by changing product quality, design, or services, and they spend on advertising to promote sales.
- Lack of Perfect Mobility: Goods and factors of production do not have perfect mobility, leading to different prices for the same product or factor.
- Lack of Perfect Knowledge: Both buyers and sellers lack perfect knowledge of the market due to product differentiation. This makes it difficult to have complete knowledge of all available products.
10. What is the nature of the demand curve under monopolistic competition?
Answer: The demand curve faced by a firm under monopolistic competition is negatively sloped, meaning more can be sold only at a lower price. The demand curve is also highly elastic, indicating that a change in demand is proportionally larger than the change in price. The demand curve is similar to the one in monopoly markets, where the marginal revenue (MR) curve lies below the average revenue (AR) curve, as the AR declines with price.
