5 Marks Each

Question 15 Marks

Explain: Characteristics of Oligopoly.

Answer

Characteristics of oligopoly:
$1.$ Few sellers and numerous buyers:
Under oligopoly, the number of sellers and producers is less in the market.

There exists about two to less than ten or twenty firms in the market.
Owing to these circumstances, a few number of sellers have a monopoly control over the market.
On the other hand, there are numerous buyers in such market. So, neither these buyers have much influence on the market price nor they are given much importance.

$2.$ Similar or substitutable products:

Firms sell identical or substitute products in oligopoly. This also means that when the firms in a market, produce and sell identical or substitute products, it is Oligopoly market. For example, products like salt, crude oil, tea, etc.
When producers produce identical products there exists imperfect oligopoly in the market. For example, oligopoly exists for products like cold drinks, motorcycle, etc.

$3.$ Admittance of firms:

In the market of oligopoly, the entry and exit of firms is free or regulated according to the type of oligopoly followed.
If there is free oligopoly in the market, the firms can freely enter or exit the market, whereas if the oligopoly is restricted, then the entry and exit of firms is regulated.

$4.$ Selling cost:

Expense incurred to sell a product is called the selling cost of that product.
Selling cost includes expense incurred on packing, making the product attractive, sales tax, transportation, showroom expenses, money spent for selling, prizes, gifts, advertisement cost, etc.
There is extreme competition in oligopoly. So, the selling cost becomes an important factor of the market.
The seller tries to attract the consumers by incurring various selling expenses.
Selling cost creates product difference in the market which then gives a particular identity to a product.
For example, companies manufacturing mobile phones, television, cars, soaps, etc. try to create unique identity through selling costs.

$5.$ Interdependence:

Under oligopoly the number of setters or producers is very few so they strive to gather information about other setters or producers. Setters compete on the basis of price or product, they decide price or variety based on the actions of their competitors. This is called interdependence In oligopoly market there are very few sellers and producers. So, the sellers or producers can easily gain important information about other sellers or producers.
The sellers and producers then pay special attention on the quality and type of the product to compete with other similar products and attract consumers. For example, producers and sellers of television, car, etc. follow similar practices of discount, features, etc.
The firms decide price, quality or type of its product, based on the behaviour of the competitors and so they are interdependent.

$6.$ Price stickiness $($Kinked Demand Curve$):$

There are a number of theories o Oligopoly. The Kinked-domand theory is one of them.
Price stickiness is a situation where in the firm would tend to stick to the price of its product and not increase or decrease it even if he wish to.
In oligopoly market, the number of firms is less and they are interdependent on each other.
Even if onc of the firm decreases the price of a product, its product
Even if on of the firm decreases the price of a product, its product will become cheaper than other products. So, according to the law of demand due to comparatively cheaper price of the product its demand will be more compared to the product of other firms. This will result in decroaseing the demand of the products sold by other firms.
In order to avoid such situation, the competitive firms will also have to decrease ihe price of their product in order to stay in the competition.
At the end, the price of the product reaches at a nominal level and ¡t becomes impossible to reduce the price lurther.
Sticky prices, therefore, are prices in an economy which are resistant to change.
On the other hand, if the firm increases the price of the product then the demand of that product decreases, and the competitive firms are profited. Thus, as the nominal price is resistant to change, the demand curve hecomes kinked.

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Question 25 Marks

Explain Characteristics of Monopoly.

Answer

Characteristics of monopoly:
$1. $ Only one producer or seller and numerous buyers:

In a monopoly, there is only one seller or producer of the product and , goods. He controls the entire supply of the product.
Since there is only one seller, there is no competition in the market. As a result, the seller or the producer controls the price of the product.
The producer or seller can decide the price of the product and is known as the ‘Price Maker’ of the market.
When there are countless buyers in the market, the importance of a single buyer becomes negligible.
Under such circumstances, customers compete with each other to buy the product. Since buyers have no choice but to buy from the only seller, they cannot affect the price of the product.

$2.$ Absence of substitute goods:

In monopoly there are no close substitute goods available. However, the way there is imperfect monopoly and not perfect, close substitutes are present but buyers are ignorant about them.
There may be a very rare possibility for similar product to be available in market. For example, if while buying a railway ticket from a specific company, for a specific time, to a specific location the ticket is unavailable then there is no possibility of having a similar or substitute ticket to the location. However, alternatively one can try by travelling through airplane on the same time to the same location.

$3.$ Restriction over the entry of new firms:

Monopoly means that there is only one firm in the market owing to several restrictions for new firms to enter. Some of these restrictions could be
1. Government license
2. Owning specific natural resource
3. patents and copyrights
4. Having specific specialized skills, etc.
Monopoly can be ended but it is quite difficult and so the seller can sustain his monopoly for a longer duration.
Due to absence of competition, the seller controls the price and gains super normal profits. In spite of the super normal profits earned in monopoly, other firms cannot easily enter the market due to reasons mentioned above.
Thus monopoly restricts entry of newer firms with factors such as nature, laws, skills and experience.

$4.$ Control over the price or sales:

In order to gain maximum profits, the seller controls the supply of the products.
On the other hand, the seller cannot control both the price and the sales of the products.
In order to sell less products, the firm sets higher prices. At the same time, the firm must set lower price of product in order to sell them in large number.
Moreover, it is not possible to sell a large number of units with high price.

$5.$ Super normal profit:

In a market, when a firm’s average cost is less than it’s average revenue, i.e. $(AC < AR)$ it is a situation of supernormal profits.
In a monopoly market, the producer and seller are the same.
So, the seller can charge high price and earn super normal profits without any competition in both short and long time periods.

$6.$ Price-discrimination:

The policy of a monopolist to charge different prices from customers of different categories/types in order to increase his demand is called price discrimination.
Due to absence of competition, the seller can charge different prices on the same product, depending on its use or form.
Thus, the seller adopts the concept of price discrimination and earns higher profit. For example, doctor, lawyer, etc. can charge different fees for similar problems.

$7.$ Firm is industry:

A firm is an independent unit of production, whereas an industry is the collection of the firms producing same products.
However in monopoly, the producer and the seller are same. So, the concept of collection of firms does not exist and single firm behaves as a whole industry.

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Question 35 Marks

Explain Characteristics of Perfect Competition.

Answer

Characteristics of perfect competition:
$1.$ Numerous buyers and sellers:

A market with perfect competition has numerous a very large indefinite number of buyers and sellers.
Of these numerous sellers, a single seller is a very small part of the market.
So, neither he can control or monopolize the wholesale market, nor he can influence the market price.

Example:

In a wheat farm, the increase or decrease in production of a single farm will not affect the total production of the wheat. This means the owner of the farm is a very small part of the huge market and so he cannot influence the market price.
In such market, the buyers are also numerous. Hence, even they cannot . influence market price. Thus, in perfect competition market, the market ’ price depends only on the factors like demand and supply.

$2.$ Identical products:

Products that have similar features, form, shape, colour, taste, weight, quality, etc. are called identical products. Since these products have a lot of similarity they are called as identical or similar products. Identical products can be used as substitutes of each other.
In perfect competition market, the producers or sellers cannot set different prices for identical products because the buyers are not ready to pay different prices for products having similar characteristics and quality.

$3.$ Free entry and exit of firms:

In this market, there is no restriction on the entry and exit of the firms. When the firms are gaining abnormal profits, new firms may freely enter the market. Similarly, when the firms are suffering from abnormal losses, they are free to exit the market.
The free entry and exit of the firms is seen for a temporary time period. The firms get attracted by the profits and enter such markets for a very short period. As soon as they witness loss, they exit from the market.
In case of a longer time period, if the market is such that it gives normal profits, there is less movement of firms. The reason for this is that when the industry reaches at a normal profit, new firms or sellers do not get attracted as the profits are not high. Similarly the firms also do not exit the markets because they are getting normal profit and are not suffering any losses.

$4.$ Perfect knowledge of the market:

In such market, the producers, buyers, sellers all have the complete knowledge of the market including product availability, product price, etc.
The producers or sellers have the knowledge of the price at which the other producers or sellers are selling the product.
They are also aware about the quality of the identical or substitute products.
Thus in this market a seller cannot charge different prices for identical products.
The buyers also know the price of the products and their quality. Hence, the seller cannot demand different prices from the buyers.
Owing to all these reasons, the perfect competition market has perfectly elastic demand curve.

$5.$ Mobility of factors of production:

The four factors of production, namely land, capital, labour and entrepreneur are dynamic and mobile in both physical forms as well as in terms of profession and usage.
The price (compensation) of the factors of production remains same.
In order to prevent from shifting of compensation from low to high due to dynamic and mobile nature of the factors of production, the firms are uniformly compensated.

$6.$ No transportation expense:

There are numerous buyers and sellers in perfect competition.
The expenses of transportation are so nominal as compared to the total expense that they are not counted.
Thus zero transportation expense is an important characteristic of the perfect competition.

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Question 45 Marks

Explain Classification of Market – According to location and quantity.

Answer

$1.$ Markets based on location:
Here, markets are. classified according to their geographical location.
$(a)$ Local market:
A market where the products and services are produced and sold at the same place is called a local market. Local market is limited to the respective city or village.Example:
Market for clay utensils.
$(b) $ Regional market:

A market where in selling of the products and services is limited to a. region or a state is called regional market.
Markets that exist in the various parts of the state fall under the category of regional market.

Example:
Kite market of Ahmedabad, a publisher selling his books only in Gujarat, Regional movies, etc.
$(c)$ National market:
A market wherein selling of the products and services takes place throughout the country is called a national market. This market is spread across various states of nation.
Example:
The shoe company, Saree market, Hindi novels, national newspapers like The Times of India, etc.
$(d)$ International market:
A market where in selling of the products and services takes place among several countries is called an international market or global market.
The sales and purchase in this market is generally referred to as ‘Import- export’.
Example:
Market of mobiles phones, English novels, English movies, cars, etc.
$2 .$ Market based on quantity:
$(a)$ Wholesale market:

Market in which sales and purchase of goods\services is done on a large scale is called a wholesale market.
The wholesale traders buy the goods in wholesale from the market and sell it to the retail traders. So, the retail traders become buyers while the wholesale traders, sellers.
Wholesalers are an important link between the buyers and the producers.

Example:
Wholesale grain market, vegetable market, etc.
$(b)$ Retail market:

Market in which sales and purchase of goods\services takes place at a small scale is called a retail market.
The retailers buy products\services from the wholesalers and sell them to the consumers. So, the retail traders are an important link between the wholesalers and the consumers.

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Question 55 Marks

Explain: Market and its characteristics.

Answer

Market:

The system through which the buyers and sellers come in contact with each other directly or indirectly for the sale or purchase of goods or services is called market.
According to Professor Samuel, “Market is the functional system where the buyers and sellers contact each other to decide the price and the quantity of goods or services.”

Characteristics of a market:
$1.$ Numerous sellers and buyers:

For a market to exist, it is mandatory to have buyers and sellers of goods and services.
The exchange of goods or services done by them with a specific purpose is called the process of purchase and sale. This process allows the sellers to gain maximum profit and the buyers to gain satisfaction from the product.

$2.$ Goods and services:

It is essential that market offers goods and services to fulfill the demand and necessity of the market.
In market, the producers and sellers provide various types of products and services in order to attract the buyers towards them and maximize the profit. On the other hand, the buyers try to buy products and services that they feel are ideal for them.

$3.$ Contact:
The buyers and sellers come in contact through various means. The contact can be either direct or indirect.
In modern times the buyers and sellers come in contact through the following ways:
$(a)$ Tele-shopping:
In Tele-shopping, the buyers themselves order the services or products through a telephone. This means indirect contact takes place via. telephone.
$(b)$ Online shopping:
In online shopping the buyers order the services or products which they select on websites via. internet. This means indirect contact takes place via. online shopping.
$4.$ Price:

The price of the product or service must be decided in the market at a given time. The price is decided according to the demand and the factors related to its supply.
The price of products and services depends on the demand made by the buyers and the ability of the producers and sellers to supply them.

$5.$ Information about the market situation:

It is important that the buyers and sellers are well-informed about the current market situation.
This helps to take proper decisions related to production, distribution and purchase during the times of recession, inflation, natural and man-made calamities.

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Question 65 Marks

State the Characteristic of Monopolistic Competition.

Answer

Introduction :

- Perfect competition and monopoly are two extremes of the market which are theoretical.
- The condition prevailing between these two extremes is imperfect competition.
- The concept of imperfect competition has been presented by Mrs. John Robinson.
- The scope of imperfect competition is very wide.
- Monopolistic competition is one of the concept of imperfect competition.
- This concept is similar to imperfect competition.
- This concept has been presented by Prof. Chamberlin.
Meaning of Monopolistic Competition: According to Chamberlin :
- "Perfect Competition and Perfect Monopoly co-exist in market known as monopolistic market."
- According to Smt. Robinson : "If each firm establishes monopoly and also competes at the same time, the market is called imperfect competition.
- " In general meaning, monopolistic competition means the competition prevailing among a large group of producers producing close substitutes, not perfect substitutes.
- " Such markets have two characteristics :

There are many producers.
They produce close substitutes.

- Example :

The company producing LUX is the example of monopolistic competition, there are many companies in the market producing bathing soaps like Hamam, Dove, Pears, Life boy etc.
They are close substitutes of one another.
There is competition among them but all soaps are not the same.
They are not 100% homogeneous.
There is product differentiation among them but each company has a special customer group that uses certain brand of soaps and to that extent, there is an element of monopoly in it.
Thus, there is mixture of competition and monopoly in it.

Characteristics of Monopolistic Competition :
- A Large number of Sellers and Numerable Buyers :

In perfect competition , sellers are innumerable. In monopoly, there is only one seller firm, while in monopolistic competition, there is a large number of producers.
In this market, decision taken by other firms regarding production and price affect the firm because all firms produce near substitute, slightly different from each other.
Yet, the decision of producer about production is distributed among many firms and therefore its effect quite limited.
In this market there are unlimited buyers so they can't affect the market decision individually.

- Product Differentiation :

Product of monopolistic competition is a special characteristics of monopolistic competitive market.
Product differentiation is also known as Product Difference.
In the perfect competition, goods sold by firms are homogeneous, while in monopolistic competition there is product differentiation in goods sold by each firm.
This means that each firm in the group produces near substitutes to other firm.
Such product differentiation is brought by making some physical changes or by ancillary services.
A firm makes product differentiation possible by changing the form. colour, size, volume or packing of a product or by changing the decisions of sale or circumstances of sale.

- Free entry- exit of the firms:

In monopoly, there are restrictions over the entry of the firms.
While in monopolistic competition like perfect competition, there is free entry and exit for other firms.
If from production or selling of any goods or product, abnormal profit is obtained in short- run $($term$)$ then in production of this product or goods entry of new firms are seen.
And if the abnormal loss situation creates then firms are exit from this industry.
It means that they change the profession.
Thus, as per perfect competition, free entry- exit is possible in this market.
At long run firm gets equilibrium at normal.
Profit in long run, after obtaining normal profit entry-exit of firm is stopped and firm of industry gets equilibrium.

- Selling Cost :

In perfect competition, firms produce homogeneous products and therefore, selling cost is not necessary while in monopoly.
As there is only one firm and no near substitute available, there is no need for selling cost.
In monopolistic competition as there is a large number of producers, producing near substitutes to each other, selling cost become inevitable.
Each producer tries to convince the customers of the superiority of his product over that of the other with the help of the selling cost.
In monopolistic competition firm get benefit of market by changing place and size of demand curve through selling cost.
Selling cost means cost for increasing the sale.
Selling cost includes. advertisement cost, useful packing, attractive product, transportation cost, sales tax, commission paid to wholesaler and retailer, allowances and expenditure behind salesman.
Because of product differentiation is possible in this market, firm get better place for its product.
And to obtained this benefit selling cost is necessary.
In present time, selling cost also affect the price of product.

- Competition other than Price :

In monopolistic competition, we see competition other than price also with price competition.
In this market producer try to increase the demand of product $($goods$)$ by keeping fixed price, changing quality of goods or through medium of advertisement.
According to the Chamberlin, "Actually customer not purchasing the product but purchasing quantity of utility or satisfaction.
In this quality of satisfaction, contribution of goods along with different services provided by sellers are included. e.g. Credit facility, free home delivery, behaviour of seller, facility of goods return, prestige of trader, distance of selling place etc. factors are performing important role to attract the buyers $($customers / consumers$)$.

- Imperfect knowledge regarding market :

In this market, buyers and sellers do not have the complete knowledge regarding market.
If consumer or buyers don't know the features or quality or near substitute products $($goods$)$ then producer or seller can keep difference in price of goods or services provided by them.
It means that the price V/S differentiation is seen in close substitute products or goods in the market.

- Control over price :

In perfect competition, the control over price is zero while in monopoly, there is only one seller and there is no near substitute available, a firm has a control over price.
In monopolistic competition , there is a large number of firms and near substitute are available, the control of the firm over price is limited.

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