HS –:: CLASS XI SEM – 2:: MICROECONOMICS :: UNIT –1

MARKET STRUCTURE

:: SYALLABUS ::

Subtopic – A :: Different forms of market,

Subtopic – B :: Review of Revenue & Cost
Subtopic – C :: Perfect Competition
Subtopic – D :: Monopoly
Subtopic – E :: Financing a firm
Subtopic – F :: Problem of Externality
Subtopic – E :: Public & Private Good

*** I will cover these subtopics by providing Relevant Theories, examples, diagrams &
mathematical expression at first, which you should thoroughly read & understand properly.

For any quarry / Doubt contact

Debasish Sir
Phone No : 6289435479
WhatsApp : 6289435479

Subtopic – A :: Different forms of market

Relevant Theories

Q1. Define Perfect Competition.

Ans.
The market structure where the firms are price takers & price of the good remain same due to the existence
of large number of buyers & sellers, production and sale of homogenous products, perfect knowledge of
buyers & sellers about the market etc. Here, the firms compete with each other at same price that is why
this market is also known as competitive market.

Q2. Write the Characteristics or Features or Conditions (& implications) of the perfect competition
market:
Ans. The Characteristics of the perfect competition market are as follows:
1. Existence of large number of buyers and sellers
It is one of the most important features of this market which leads to a perfectly competitive market
environment, and thus, no single buyer or seller can influence the market. The number is so large that there
arises a perfect degree of competition between the buyers to buyers, & sellers to sellers. That is why the
price of the good remains same at all levels of output.
2. Firms produce & sell homogenous products,
It is also an important condition of this market. By homogenous product we mean the goods which are
similar & identical. The firms are not able to discriminate their product to the consumers, & therefore the
market share of both sellers & buyers is considered as negligible. This enables the market to be more
competitive and the firms remain price-taker i.e. they can sell more output only at same price.
3. Free entry & exit of the firms
It is also one of the most important features of the market, as there is no artificial restriction for the firms to
make entry as well as exit. The emergence of abnormal profits attracts the firms to enter and the firms can
exit from the market if they incur loss. This feature induces the competitive environment and wipe out the
abnormal profits or losses in the long run that incurred in the short run, and thus, the firms earn only
normal profits in the long run.
4. Perfect knowledge about the market by the buyers & sellers
This is another feature of this market. Both the buyers & sellers have the knowledge about the market price
of the good and the availability of the firms who are dealing with this good in the market. Thus the
question of price discrimination does not arise.
5. Perfect mobility of the goods & factors of production
It is also considered as one of the condition of this market. The immobility of goods & factors lead to price
discrimination, and thus perfect mobility ensures the price to be same at all levels of output. Due to this
feature, there arises no scarcity in the supply of goods, & thus, the single seller or buyer cannot influence
the market.
6. Absence of transportation cost
This is another feature which is assumed to be in this market. This enables the price to be same. It is
assumed that no transportation cost is incurred or the firms pay same amount of transport cost so as to
make the analysis easy.

Q3. Explain the equilibrium conditions needed to be fulfilled by a perfectly competitive firm to
maximize its profits – by TR TC approach.
Ans. When the firm produces the profit maximizing output level, it is said to be in equilibrium. Under PC
firms are price taker, ie, they takes the price as given, so to reach maximum profit they try to determine
the output level where they will find the maximum profit.
We can find the equilibrium conditions needed to be fulfilled by a perfectly competitive firm to maximize
its profits – by TR TC approach, as follows
As we know that profit is the difference between total revenue and total cost, Profit ( π) = TR – TC profit
maximization through this approach states that the firm should produce that quantity of output at which the
difference between total revenue and total cost is the maximum (TR – TC is maximum)
In the figure above, the X-axis shows the levels of output and Y-axis shows total costs and total revenues. TC
is the Total Cost Curve and TR is the Total Revenue Curve. Also, C is the equilibrium point where the
distance between TR and TC is maximum.
Further, you can see that before the point A’ and after the point B”, TC>TR, ie, producer face loss. Between
point A & B, TR > TC ie, producer earns profit. Therefore, the producer must produce between A & B. At the
point C, a tangent drawn to TC is parallel to TR. In other words, at point C, the slope of TC is equal to the
slope of TR, here the distance between TR & TC is maximum, hence the profit is maximum here & the
corresponding output is OQ is the profit maximum level of output here.

Q4. Explain the equilibrium conditions needed to be fulfilled by a perfectly competitive firm to
maximize its profits – by MR MC approach.
Ans : When the firm produces the profit maximizing output level, it is said to be in equilibrium. Under PC
firms are price taker, ie, they takes the price as given, so to reach maximum profit they try to determine
the output level where they will find the maximum profit.
We can find the equilibrium conditions needed to be fulfilled by a perfectly competitive firm to maximize
its profits – by MR MC approach, as follows.
The conditions required for this are
1. The Marginal Cost (MC) of the firm must be equal to its Marginal Revenue (MR).
The firm attains equilibrium when its MC is equal to its MR. As we know that the MC initially declines &
reaches to its minimum, & finally it rises. Now, when it intersects the MR i.e. MC is equal to MR, the firm
maximizes its profits. It is an essential condition since when MC<MR, the firm still expects to get more
profits; & when MC>MR, the firm gets loss as it spends more than what it earns from the extra unit.
2. The Marginal Cost (MC) must be less than Marginal Revenue (MR) before the equilibrium point
& MC must be greater than MR after the equilibrium point.
MC must intersect MR from below but not from above. If the MC intersects from above of the MC curve
i.e. MC>MR, then it implies that the firm was already facing loss & further production will accrue profits
to the firm.
In the figure above, the X-axis shows the levels of output and Y-axis shows marginal cost and marginal
revenue. MC is the Marginal Cost Curve and MR is the Marginal Revenue Curve.
MR=MC occurs at point E & F. At point F, the first condition for profit maximization fulfill buy the second
condition doesn’t – hence point F doesn’t provide equilibrium. At point E both the condition for profit
maximization fulfilled, so point E provides equilibrium level of output.
At the left side of F & at the right side of E MC > MR, so firm face loss. In between E & F MR > MC so firm
makes profit. At point E firm make maximum profit, hence the profit is maximum here & the corresponding
output is OQ is the profit maximum level of output here.

Q5. How to derive short run supply curve of a firm under perfect competition.
Ans : In a perfectly competitive market, the short-run supply curve for a firm is the part of its marginal cost
(MC) curve that's above its average variable cost (AVC) curve
As long as the market price is at or above the firm’s average variable cost, the firm will continue to
produce, even if it incurs losses.
However, if the market price falls below the average variable cost, the firm will stop production in the
short run. Thus, a perfectly competitive firm’s horizontal short run supply curve demonstrates its
responsiveness to market conditions, with output levels adjusting to match the marginal cost to the market
price.
The firm’s short run supply curve slopes upward, indicating that as the product price increases, the firm is
willing to produce and supply more output to the market.

Case A : P = minimum of AVC:

Breakeven Point: When the market price equals the minimum AVC, the firm is at its breakeven point for
variable costs. This means that the revenue from sales is just enough to cover the variable production costs.
 Continue Production: The firm can continue producing in the short term because it covers its
variable costs, although it makes no profit. By doing so, the firm partially contributes to covering
its fixed costs.
 No Profit, No Loss on Variable Costs: The firm is not making a profit but also not incurring a
loss on variable costs. Any contribution towards fixed costs helps reduce overall losses.
  Operational Decisions: The firm should continue operating in the short term while seeking ways
to increase efficiency or reduce costs to improve profitability.

Case B : P > minimum of AVC:

 Profitability: When the market price is above the minimum AVC, the firm is not only covering its
variable costs but also contributing towards its fixed costs, leading to profitability.
 Increase Production: The firm should increase production to maximise profits, as each unit sold
contributes to covering fixed costs and generating profit.

Case C : P < minimum of AVC:

In this scenario, the market price of a product is below its minimum Average Variable Cost (AVC). When
the market price is less than the minimum AVC, the firm cannot cover its variable costs, let alone fixed
costs. Here’s how this impacts the business:
Shutdown Point: The firm reaches its shutdown point if the market price falls below the minimum AVC.
This means the firm would incur greater losses by continuing production than halting operations.
 Loss Minimization: To minimise losses, the firm should cease production in the short term. Doing
so incurs only fixed costs rather than the sum of fixed and variable costs.