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Economics – Class XII

For class xii eco…. read IV unit –  Market forms and price determination

UNIT IV

FORMS OF MARKET AND PRICE DETERMINATION

Ø  Perfect Competition

Ø  Monopoly

Ø  Monopolistic competition

Ø  Oligopoly

 

Perfect Competition: A market with very large number of buyers and sellers, selling homogenous products at uniform price.

 Monopoly: A market with single seller selling products with no close substitutes

Monopolistic Competition: A market with large number of sellers selling differentiated products.

 Oligopoly: A market with few sellers selling homogenous or differentiated products

                

FEATURES AND IMPLICATIONS OF DIFFERENT FORMS OF MARKETS

FORM OF MARKET FEATURES IMPLICATIONS/CONSEQUENCES
 

1.       Perfect competition

 

 

 

 

 

 

 

 

 

 

 

 

 

2.       Monopoly

 

 

 

 

 

 

 

 

3.       Monopolistic Competition

 

 

 

 

 

 

 

 

 

 

4.       Oligopoly

 

a. Very large number of buyers and sellers

b. Homogenous products

c.  Free entry and exit of firms

d. Perfect Knowledge of market

e. Price taker

 

 

 

 

 

 

a.    Single seller

b.    No close substitutes

c.     Barriers to entry

d.    Practice price discrimination

 

 

 

 

a.    Large number of buyers and sellers

b.   Freedom of entry and exit.

c.    Product differentiation

d.   Selling Costs

 

 

 

 

 

 

a.    Few sellers

b.   Differentiated or homogenous products

c.    Barriers to entry

d.   Rigid price

 

a.    A single seller cannot influence the market.

b.    Commodities are perfect substitutes and so they have same price.

c.     Depending on the profit or loss firms may enter or exit the market.

d.    No firm can charge a price higher than or less than market price

e.    A single firm cannot influence the price.

 

a.    Can influence the market

b.   Enjoys monopoly and can practice price discrimination

c.    Can prevent other firms from entering the market

d.   Can charge different prices for the same product in different markets.

 

a.    The activities of one firm do not affect other firms.

b.   Firms can enter and exit the market depending on the profit.

c.    Gives partial control over the market

d.   Makes consumers buy their product in preference over others.

 

 

a.    Mutual interdependence of firms

b.   Firms selling differentiated products are imperfect oligopoly and firms selling homogenous products are perfect oligopoly

c.    Prevent new firms from entering the market

d.   Use other strategies like advertisements to compete other than price

 COMPARISON OF DIFFERENT MARKETS

Basis Perfect competition Monopoly Oligopoly a. A market with single seller selling commodities with no close substitutes
b. No close substitutes. The firm is a price maker
c. Prohibited entry of new firms
d. Buyers have no knowledge about market situation

Monopolistic Competition

a.      Meaning

 

 

 

 

 

b.      Products

 

 

c.       Entry and Exit

 

 

 

d.      Knowledge

 

 

 

 

 

 

 

 

 

 

a.      A market with very large number of buyers and sellers selling homogenous products at uniform price

 

b.     Similar or identical products are sold at uniform price

 

c.      Free entry and exit.  Any firm can join or leave the industry

 

d.     Perfect knowledge about market situations

 

 

 

Y

 

 

 

 

 

 

 

 

 

         A market with single seller selling commodities with no close substitutes

 

 

  1. No close substitutes. The firm is a price maker

 

 

  1. Prohibited entry of new firms

 

 

  1. Buyers have no knowledge about market situation

 

a.       A market with few sellers selling homogenous or differentiated products.

 

 

b.      Products are homogenous or differentiated

 

c.       Barriers to entry and exit

 

 

 

d.      Sellers are mutually interdependent

 

 

 

e.      Demand curve is indeterminate

 

EQUILIBRIUM PRICE AND EFFECT OF CHANGE IN DEMAND AND SUPPLY ON EQUILIBRIUM PRICE

 

Meaning of Equilibrium price: It is a price at which market demand and market supply is equal.  It is also called market equilibrium.

 

EQUILIBRIUM PRICE SCHEDULE

Price

Market Demand

Market supply

1

2

3

4

500

400

300

200

100

200

300

400

 

Equilibrium Price                                       =               i.e. Rs. 3

Equilibrium Quantity Demanded        =              i.e. Rs.300

Equilibrium Quantity Supplied            =                i.e. Rs.500

 

 

EFFECT OF CHANGE IN DEMAND ON EQUILIBRIUM PRICE/ MARKET PRICE

 

Effect of Increase in Demand:

When demand increases due to the following reasons the demand curve shifts upward to the right.

 

Causes for Increase in Demand: 

  1. increase in income
  2. increase in price of substitute goods
  3. decrease in price of complementary goods
  4. strong taste and preference for the good

 

 

Due to the above reasons the demand curve shifts upward and equilibrium condition changes

Consequences:

Therefore as a result of increase in demand equilibrium price rises and equilibrium quantity demanded and supplied increases.

 

When Demand Decreases:

When demand decreases due to the following reasons demand curve shifts down:

  1. Decrease in income
  2. Decrease in price of substitute goods
  3. Increase in price of complementary goods
  4. No strong preference for commodities.

 

 FREQUENTLY ASKED QUESTIONS – CBSE BOARD EXAMINATION

One Mark Questions (1M)

  • In which market form can a firm not influence the price of the product?
  • What is equilibrium price?
  • Under which market form a firm is a price a price taker?
  • Define market equilibrium.
  • Define Monopoly
  • State one feature of Oligopoly

 

Three Marks Questions (3M)

  • Why is the number of firms small in an Oligopoly Market? Explain.
  • Explain three features of Monopoly.
  • How is equilibrium price of a commodity affected by a decrease in demand?
  • Why is the demand curve more elastic under monopolistic competition than under monopoly? Explain.
  • Explain the feature ‘differentiated product’ of a market with monopolistic competition.
  • Explain the effect of ‘large number of buyers and sellers” in a perfectly competitive firm.

 

Four Marks Questions (4 M)

  • Distinguish between Monopoly and Perfect Competition.
  • Draw the Average Revenue Curve of a firm under a) Monopoly and b) Perfect Competition. Explain the difference in these curves, if any.
  • Show with the help of a diagram the effects of an increase in demand for a commodity on its equilibrium price and quantity.
  • Explain with the help of a diagram the determination of price of a commodity under perfect competition.
  • Explain the concept of equilibrium price with the help of market demand and supply schedules.

 

Six Marks Questions (6 M)

  1. Given the market equilibrium of a good. What are the effects of Simultaneous increase in both demand and supply of that good on its equilibrium price and quantity?
  2. Distinguish between perfect competition and monopoly. Why is the demand curve facing a firm under perfect competition perfectly elastic?
  1. Explain briefly the three feature of perfect competition.
  2. Explain the chain of effects on demand, supply and price of a commodity     caused by a leftward shift of the demand curve. Use diagram.
  3. Explain three feature of Monopolistic Competition.

 

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