2nd PUC Economics Question Bank Chapter 6 Imperfect Competitive Markets

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Karnataka 2nd PUC Economics Question Bank Chapter 6 Imperfect Competitive Markets (Non-Competitive Markets)

2nd PUC Economics Perfect Competitive Markets One Mark Questions and Answers

Question 1.
What is monopoly?
Answer:
It is the market where a single seller or a firm controls the supply of the commodity.

Question 2.
What is monopolistic competition?
Answer:
Monopolistic competition is one of the types of imperfect competition, where there are many sellers selling heterogeneous (differentiated) products, which are not perfect substitutes.

Question 3.
What is oligopoly?
Answer:
It is one of the types of imperfect competitive market in which there are a few firms or sellers selling homogenous or differentiated goods.

Question 4.
Write the meaning of product differentiation.
Answer:
Product differentiation is one of the important features of Monopolistic competition. It refers to real differentiation in size, design, colour, shape of a product, or imaginary like brand name, trade mark, packaging, advertisement etc. Here, the products are heterogeneous.

Question 5.
Define Profit.
Answer:
Profit is the difference between Total Revenue and Total Cost. When Total Revenue is greater than Total cost, we get profit.

Question 6.
What is abnormal profit?
Answer:
When Price is greater than minimum point of Average Cost curve, we get abnormal profit.

Question 7.
Define normal profit.
Answer:
When price (Average Revenue) is equal to the minimum of Average Cost curve, we get normal profit.

Question 8.
What do you mean by price rigidity?
Answer:
It means that the prices are difficult to change. It is one of the features of Oligopoly market in which the prices do not move according to the changes in demand.

Question 9.
Where do you buy electricity for home? What are the characteristics of that market?
Answer:
We buy electricity from local Electricity Company .(i.e., BESCOM- Bangalore Electricity Supply Company). The characteristics are, it is a single seller, it has control over its supply, it is price maker, no close substitutes etc.

Question 10.
Who developed the concept of Imperfect competition?
Answer:
Mrs. Joan Robinson developed the concept of imperfect competition.

Question 11.
Who popularized the concept of Monopolistic Competition?
Answer:
Prof.E.H.Chamberlin popularized the concept of monopolistic competition.

Question 12.
Give an example for selling costs.
Answer:
Advertisement costs, publicity costs, packaging costs etc.

2nd PUC Economics Perfect Competitive Markets Two Marks Questions and Answers

Question 1.
What is imperfect market? Mention its forms.
Answer:
Imperfect market is a market where we see either less competition or no competition. The forms of imperfectly competitive market are Monopoly, Duopoly, Oligopoly and Monopolistic.

Question 2.
How is monopoly different from a competitive firm?

Monopoly	Competitive Firm
(i) Existence of single seller.	(i) Existence of large number of sellers.
(ii) No close substitutes.	(ii) Existence of close substitutes.
(iii) Control over market price	(iii) No control over market price
(iv) Super-normal profit	(iv) Normal profit.

Question 3.
What are selling costs? What is their main objective?
Answer:
Selling costs are those expenses of the producer incurred on marketing of goods produced. The main objective of selling cost is to attach particular consumer to a particular brand.

Question 4.
Give two examples of monopolistic competitive industry.
Answer:
The main examples of monopolistic competitive industry are soaps, toothpaste Electronic industry etc.

Question 5.
Why is the demand curve of monopolistic competitive firm more elastic than that of a monopoly?
Answer:
The demand curve of monopolistic competitive firm is more elastic than monopoly market because of the presence of close substitutes in monopolistic competition. In monopoly market there are no close substitutes.

Question 6.
Can a monopolist incur loss in the short run?
Answer:
In monopoly market, the monopolist may incur losses in the short run. The firm incurs loss when its Total cost is greater than Total revenue.

Question 7.
What is Duopoly? Give an example.
Answer:
Duopoly is the market situation where there are only two sellers or firms in the market. Example – Private firm and public firm.

2nd PUC Economics Perfect Competitive Markets Five Marks Questions and Answers

Question 1.
Briefly explain the features of monopoly.
Answer:
i. One seller and large number of buyers: Monopoly is said to exist when there is only one seller of a product. A monopolist may be the only person, a few partners or in the form of joint stock company. The demand for the monopolist is the market demand. In simple monopoly the number of buyers is assumed to be large. No single buyer can influence the price by his individual actions.

ii. No close substitute: The second condition of monopoly is that there should not be any close substitute of the product sold by the monopolist. If it is not so, the monopolist cannot charge a price according to his own desire. So he cannot be a price maker. That means, monopoly cannot exist when there is competition.

iii. Restriction on the entry of new firms: In a monopoly market, there is a strict barrier on the entry of new firms. Monopolist faces no competition. For example, in India, production of atomic energy is to be done only by Government. The private entrepreneurs are restricted from entering that market.

iv. Nature of Demand Curve: The aggregate demand of all buyers of the product of a monopolist is the demand of monopolist. We also know that the demand curve of an individual slopes downward from left to right. Since the demand curve of a monopolist is the summation of the demand curves of all the buyer of the product sold by the monopolist, demand curve of a monopolist slopes downward, it means that a monopolist can sell more of his output only at a lower price. On the contrary, if he raises the price of this product, his sales will be reduced.

v. No difference between Firm and Industry: The existence of single seller of one product rules out or eliminates the difference between the firm and the industry. The monopolist is a firm as well as an industry.

vi. Price Maker: The monopolist is a price maker which means that he sets price for his own goods agd services without any external pressure. His fixation of price is not influenced by any other factors which do not fall in his purview.

vii. Perfect knowledge: In monopoly market, the monopolists will be having perfect knowledge about the market conditions. So, they have control over the price and the quantities supplied. They also know about the demand in the market.

viii. Price discrimination or Uniform price: As the monopolist has complete control over the market supply, he can charge either different prices or uniform prices for different groups of consumers.

Question 2.
Draw the demand curve of monopoly market.
Answer:
The demand curve in monopoly market is the average revenue curve. A monopolist is a price maker. Here, the firm’s demand and market demand curves are same as there is no difference between a firm and industry. The monopolist can sell less quantity at higher prices and more quantity at lower prices. So, the monopolist faces downward sloping demand curve.

In the above diagram, DD is the demand curve of monopoly market. It is negatively sloped. As the monopolist rises the price from OP to OP₁, the quantities demanded reduces from OQ to OQ₁ and vice versa.

Question 3.
What is total revenue? Draw a sketch of a TR curve for a monopoly firm.
Answer:
Total Revenue refers to the revenue or income received by the firm from the sale of its entire output. It is obtained by multiplying the total quantities sold with the price. The shape of TR . in Monopoly market is not a straight line. It is an inverted parabola. So, TR = pq (p × q).

Question 4.
Define Average Revenue. Draw a sketch of AR curve for a monopoly firm.
Answer:
The AR is the revenue per unit of the output received by the monopolist firm. It is obtained by
dividing the Total Revenue from the quantities sold. So AR=TR/q where AR is the Average Revenue and TR is Total Revenue and ‘q’ is quantity sold.

When the price of a product decreases, the sales get increased and when price increases, the sales decrease. So the demand slopes downwards and the same represent AR. The AR curve may be represented as follows:

In the above diagram, DD is the monopoly demand curve. The monopolist can influence the price. But the monopolist cannot control both price and quantity supplied at the same time. If the monopolist determines the price, the quantity of demand is determined by the market.

Question 5.
What is MR (Marginal Revenue)? Draw a sketch of MR curve for a monopoly firm.
Answer:
The MR is the Marginal Revenue, which is additional revenue received from the sale of additional unit of output. It also refers to the change in Total Revenue due to the sale of an additional unit of output. So, it may be written as MR = ∆TR/∆q where = ∆TR is change in Total Revenue and Aq is change in quantity sold.

In the above diagram, MR is marginal revenue which has negative slope. When the sales increase in monopoly market, the MR starts decreasing.

Question 7.
What are the features of Monopolistic Competition? Explain briefly.
Answer:
The main features of monopolistic competition are as follows:
a) Large number of buyers and sellers: The number of sellers in the monopolistic competition is large but when compared to perfect competition it is less. Every firm decides its own price and quantities to be produced. The number of buyers is also large.

b) Product differentiation: Product differentiation is the main feature of monopolistic competition. Product differentiation means, the products in monopolistic competition are different in quality, size, shape, colour, packaging, odour etc. So, the products sold in this market are not heterogenous.

c) Existence of selling costs: Selling costs are the unique feature of monopolistic competition. Selling costs are those costs which are incurred by the producer on marketing of products. The selling costs include advertisement, salesmanship, publicity, attracting packaging etc. The intention of incurring selling costs is to attract the consumers.

d) Free entry and exit: There is no restriction on entry of new firms and exit of old firms. The product differentiation attracts new firms into the industry.

e) Downward sloping demand curve: The demand curve in a monopolistic competition which, represents Average Revenue line, slopes downwards. Here, a single firm cannot control the entire market supply. A reduction in price leads to increase in demand and increase in Average Revenue and rise in price leads to fall in demand and decrease in Average Revenue.

f) Price Maker: As the products produced by each firm is differentiated in brand, shape, size, package, quality etc., the firms in monopolistic competition fix their own price. Therefore, every firm enjoys monopoly power on its own product.

Question 8.
What is Oligopoly? Write the features of Oligopoly.
Answer:
Oligopoly is one of the forms of imperfect market in which there are a few firms selling either differentiated of homogeneous products. Here, a few big firms will be controlling the market by producing significant portion of market demand. The example for oligopoly market are the industries which are producing mobiles, cars, cigarettes, tyres etc.

The features of Oligopoly market are as follows:
a) Existence of few firms: There will be small number of sellers in oligopoly market. These few sellers control the entire market supply. They may be dealing with differentiated or homogeneous products.

b) Interdependence: There will be interdependency among the firms in oligopoly market. The oligopolists depend on other firms while taking decisions in respect of price and quantities to be supplied. The sellers have to consider each others’ price and output.

c) Group Behaviour: It is one of the common features of oligopoly market. The firms recognise their interdependency and realize the importance of mutual cooperation. There is always a tendency of collusion among the firms.

d) Advertisement: In oligopoly market, advertisement plays a major role in increasing the sales. The oligopolists undertake intensive marketing strategies to increase the sale of goods. Advertisement cost is used as an effective tool to shift the demand in favour of their product.

e) Existence of homogenous or differentiated products: The firms will be dealing in similar or differentiated products in an oligopoly market. The products may be different like mobiles produced by different firms or similar like steel industry or cotton textile industries.

f) Price Rigidity: In oligopoly market, prices do not change much though there is change in quantities demanded. Generally, the firms do not change the price of their product even though other firms are changing their prices.

g) Kinked demand curve: It is the unique feature of oligopoly market. The demand curve in the oligopoly market has a kink at the level of the prevailing price. The kink is formed at the prevailing price level. It is because the segment of the demand curve above the prevailing price level is highly elastic and the segment of the demand curve below the prevailing price level is inelastic. A kinked demand curve DD with a kink at point P is given below:

Question 9.
Write a note on Price rigidity in Oligopoly market.
Answer:
Price rigidity the important feature of oligopoly market. Here, price rigidity implies that prices are difficult to change. If any firm increases the price of its product to earn more profit, the other firms may not follow the same. As other firms do not follow, the firm which has increased the price loses its customers. On the other hand, if a firm reduces its price, the rival firms also reduce their price. This leads to price war and consequently, there will be increase in market demand and the firms do not get expected level of profit. So, the oligopolists not change their prices due to the fear of rivals reaction.

Reasons for Price Rigidity (Price Stability)
There are many reasons for price rigidity in oligopoly market, they are as follows:

• Individual sellers in oligopoly market know that there may be price war.
• The firms want to avoid any involvement in unnecessary insecurity and uncertainity.
• The firms may stick to the present price level to prevent new firms from entering the
• The firms may prefer non-price competition rather than price war.
• It is the kinked demand curve analysis which is responsible for price rigidity in oligopolistic markets.

It is also seen that, if a stable price has been set through agreement or collusion, no seller would like to disturb it, for fear of unleashing a price war and thus engulfing himself into an era of uncertainty and insecurity.

2nd PUC Economics Perfect Competitive Markets Ten Marks Questions and Answers

Question 1.
Describe the short-run equilibrium of a monopolistic firm with a diagram.
Answer:
Monopolistic competition is one of the types of imperfect competition in which we can see many sellers selling differentiated products, which are not perfect substitutes. Here, each seller’s market is separate from that of his rivals to some extent. The firms are limited by three factors viz., price, the nature of product and advertising costs.

Short-run Equilibrium of a Monopolistic Firm.
Under monopolistic competition, a firm is said to be in equilibrium if its Marginal Cost is equal to its Marginal Revenue, Marginal curve cuts Marginal Revenue from below and Price should be greater than or equal to minimum of AVC curve.
The short run equilibrium situations in monopolistic competition are as follows:

• Abnormal profit or super normal profit when the Price is greater than AC.
• Normal profit when the Price is equal to AC.
• Losses when the Price is less than AC.

Abnormal or Super normal Profit:
In monopolistic competition, the AR and MR curves are more elastic when compared to monopoly firm. The equilibrium of a Monopolistic firm may be explained with the help of a

In the above diagram output is measured along ‘X’ axis and cost, revenue and price are measured along ‘ Y’ axis. MC is the marginal cost curve, AC is the Average cost curve, AVC is the Average Variable Cost curve, AR is the Average Revenue line and MR is the Marginal Revenue Line. The firm is at equilibrium at point E, where MC=MR. The firm is earning super normal profit as follows:

Profit = II = TR – TC
= P x q – AC x q
= OP x OQ – OP₁ x OQ
= OPRQ – OP₁SQ
= P₁PRS
So, the firm is getting P₁PRS as profit.

Normal Profit under Monopolistic competition:
The normal profit is that profit which a firm earns when its price is equal to its Average cost. It is also called as economic profit. This can be explained with the help of following diagram.

In the above diagram, the equilibrium point is at E where MC = MR. The equilibrium price is OP and equilibrium output is OQ. The price OP is equal to the point where AC is at minimum point. So, the firm is earning normal profit, which is represented as follows:
Profit = II = TR – TC
= P x Q – AC x Q
= OP x OQ – OP x OQ
= OPRQ – OPRQ
= O

Losses in Monopolistic Competition :
In monopolistic competition, a firm incurs losses when its price is less than AC. The losses under monopolistic competition can be explained with the help of diagram given below:

In the above diagram, the firm is in equilibrium when its MC = MR. The equilibrium price is OP and the equilibrium output is OQ. The price is less than the minimum of AC. When the price is lesser than the minimum of AVC, it is called Shut down point. This shows that the firm is incurring losses as shown below.

Profit = II = TR – TC
=P x q – AC x q
=OP₁ x OQ – OP₁ x OQ
TC=OPRQ
TR=OP₁ SQ
i.e., TC > TR

So the firm is incurring loss of P₁ PRS.
The above are the equilibrium situations of firms monopolistic competition during short period of time.

Question 3.
Explain the short-run equilibrium under monopoly when the cost of production is positive by total revenue and total cost approach.
Answer:
A monopoly market is one of the forms of imperfect market where we see a single seller. The monopolist achieves equilibrium when his MC = MR. Monopolist, like a perfect competitive firm, tries to maximize his profit. It is also assumed that monopoly firm does not hold any stock of output produced.

The short run equilibrium of a monopoly market can be analysed under the following two different situations.

•  When the cost of production is zero and
•  When the cost of production is positive.

Generally production cost is positive in a monopoly market situation. Let us consider the short run equilibrium for a monopolist facing positive cost of production. This can be studied using the following two methods viz.,
(a) Total revenue and Total cost Approach.
(b) Marginal revenue and Marginal cost Approach.

Total revenue and Total cost Approach: Total revenue is nothing but the total sales receipts received by the monopolist after selling his entire output. Total cost refers to the total expenditure incurred by the producer to produce the output. According to this approach, a monopoly firm attains its equilibrium at the point where the difference between the Total revenue (TR) and the Total cost (TC) is maximum. At this point monopoly firm reaches equilibrium with maximum profit. The short run equilibrium situation using TR – TC approach can be explained with the help of the following Diagram.

In the above Diagram, we measure quantity along ‘X’ axis and TR, TC and Profit are measured along ‘Y’ axis. Total revenue and Total cost curves of a monopolist firm are depicted by TR and TC curves. The profit for the monopoly firm is given by TR – TC. In the Diagram we find BD distance is the maximum. So the firm attains equilibrium at point B. The profit earned by the monopolist at this point equals the vertical distance between BD and equilibrium level of output is OQ.

When the producer producers Q₁ and Q₂ quantities, TR is equal TC. Here A and C are the break even points where TR = TC.

TR curve and TC curve intersect at points A and C. At these output levels of Q₁ and Q₂, profit is zero. Profit curve intersects the x-axis at Q₁ and Q₂ points. If the monopolist produces less than OQ₁ and more than OQ₂ levels of output, he suffers losses as his TC becomes greater than TR.

When the monopolist is between the production levels Q₁ and Q₂ his total revenue is greater than total cost. Then the profit curve is the difference between TR and TC and is at the maximum level. This can be stated as equilibrium of monopolist under short run when the cost of production is positive by total revenue and total cost approach.