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ECONOMICS
CHAPTER 5 : FORMS OF MARKET
Q. 1. A) Choose the correct option :
1) In economic sense, market includes following activities a) The place where goods are sold and purchased.

b) An arrangement through which buyers and sellers come in close contact with each other directly or indirectly.
c) A shop where goods are sold.
d) All of the above.
Options :

1) a and b 2) b and c 3) a, b and c 4) only d

2) Classification of markets on the basis of place

a) Local market, National market, International market
b) Very short period market, Local market, National market.
c) Short period market, National market, International market.
d) Local market Options :
1) a, b and c 2) b, c and d 3) only a 4) a and d

3) Homogeneous product is a feature of this market. a)

Monopoly

b) Monopolistic competition
c) Perfect competition
d) Oligopoly Options :
1) c and d 2) a, b and c 3) a, c and d 4) only c

4) Under Perfect competition, sellers are a) Price

makers

b) Price takers
c) Price discriminators
d) None of these Options :
1) a, b and c 2) only b 3) only c 4) a and c

Q. 2. Give economic terms :

1) The market where there are few sellers.
Ans: Oligopoly

2) The point where demand and supply curve intersect.

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Ans: Equilibrium Price

3) The cost incurred by the firm to promote sales.

Ans: Selling Cost

4) Number of firms producing identical product.

Ans: Industry

5) Charging different prices to different consumers for the same product or services. Ans: Price Discrimination

Q. 3. Complete the Correlation :

1) Perfect competition : Free entry and exit :: Monopoly: Barriers to entry.
2) Price taker : Perfect Competition :: Price maker :: Monopoly.
3) Single price : Perfect competition :: Discriminated prices : Monopoly

Q. 4. Find the odd word out :

1) Selling cost : Free gifts, Advertisement hoardings, Window displas, Patents.
2) Market sructure on the basis of competition : Monopoly, Oligopoly, Very Short Period market, Perfect competition.
3) Features of monopoly : Price maker, Entry barriers, Many sellers, Lack of substitutes.
4) Legal monopoly : Patent, OPEC, Copyright, Trade mark.

Q. 5. Answer the following :

1) Explain the features of Oligopoly.

Ans: The term oligopoly is derived from the Greek words ‘Oligo’ which means few and ‘poly’ which means sellers.

Following are the Features of oligopoly :

1) Few firms or sellers :

Under oligopoly market, there are few firms or sellers. These few firms dominate the market and enjoy a considerable
control over the price of a product.

2) Interdependence :
The seller has to be cautious with respect to any action taken by the competing firms. Since there are few sellers in the
market, if any firm makes the change in the price, all other firms in the industry also try to follow the same to remain in
the competition.

3) Advertising :
Advertising is a powerful instrument in the hands of oligopolist. A firm under oligopoly can start an aggressive and
attractive advertising campaign with the intention of capturing a large part of market.

4) Entry barriers :
The firm can easily exit from the industry whenever it wants. But has to face certain entry barriers such as Government
licence, patents etc.

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5) Lack of uniformity :
There is a lack of uniformity among the firms in terms of their size. Some firms may be small while others may be of
bigger size.

6) Uncertainty :
There is a considerable element of uncertainty in this type of market due to different behaviour patterns. Rivals may join
hands and co-operate or may try to fight each other.

2) Explain the types of Monopoly.

Ans: The term monopoly is derived from the Greek word ‘Mono’ which means single and ‘poly’ which means seller.

Following are the types of monopoly :

1) Private monopoly :
When an individual or private body controls a monopoly firm it is known as private monopoly. For example, Tata Group.

2) Public monopoly :
When the production is solely owned, controlled and operated by the Government, it is known as public monopoly. It is
usually welfare oriented. For example, Indian Railways.

3) Legal monopoly :
This monopoly emerges on account of legal provisions like patents, trade mark, copyrights etc. The law forbids the
potential competitors to imitate the design or form of the product registered under given branded names. For example,
Amul products.

4) Natural monopoly :
The monopoly created on the basis of natural conditions like climate, rainfall, specific location etc. is known as natural
monopoly. For example, wheat from Punjab.

5) Simple monopoly :
In simple monopoly, seller or a firm charges a uniform price for its product to all the buyers.

6) Discriminating monopoly :
In discriminating monopoly, firm charges different prices to different buyers for the same product. For example, doctor
charges different fees to different patients.

7) Voluntary monopoly :
To avoid cut throat competition, some monopolists voluntarily come together and form a group of monopolists. This
facilitates them to maximise the profit. For example, Organisation of Petroleum Exporting Countries (OPEC).

Q. 6. Observe the table and answer the questions :

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Price of Demand (in Supply (in Relation

Banana (Per dozen) dozen) between DD
dozon) in ₹ and SS
10 500 100 DD>SS
20 400 ___ DD>SS
30 ___ 300 DD=SS
40 200 ___ DD<SS
50 ___ 500 DD<SS

1) Fill in the blanks in the above schedule. Ans:

Price of Demand (in Supply (in Relation
Banana (Per dozen) dozen) between DD
dozon) in ₹ and SS
10 500 100 DD>SS
20 400 200 DD>SS
30 300 300 DD=SS
40 200 400 DD<SS
50 100 500 DD<SS

2) Derive the equilibrium price from the above schedule with the help of a sutiable
diagram.
Ans:
1) When price rises from ₹ 10 to ₹ 20 quantity demanded falls from 500 dozen to 400 dozen. whereas supply
increases from 100 dozen to 200 dozen. This is because demand falls with rise in price and supply rises with a rise in
price. This is the stage where demand is greater than supply (DD > SS).
2) When price rises to ₹ 30, quantity demanded and quantity supplied become equal that is 300 dozen. This is the
stage of equilibrium where demand and supply become equal (DD = SS). Hence, ₹ 30 becomes the equilibrium price.
3) When price further rises from ₹ 40 to ₹ 50, demand falls from 200 Dozen to 100 Dozen and supply rises from 400
Dozen to 500 Dozen. Thus, supply is greater than demand. (SS > DD).

The process of price determination is explained in the following figure . In this diagram, X axis represents quantity
demanded and quantity supplied, whereas Y axis represents the price. DD is the downward sloping demand curve which
shows inverse relationship between price and quantity demanded. SS is the upward sloping supply curve which shows
direct relationship between price and quantity supplied. E is the equilibrium point where DD and SS curve intersect each
other. Accordingly ₹ 30 is the equilibrium price and 300 Dozen is the equilibrium quantity demanded and supplied. This
equilibrium price is determined by market demand and market supply.

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Q. 7. Answer in detail :
1) Explain the meaning of Monopolistic competition with its features.

Ans:
Monopolistic competition is very realistic in nature. In this market there are some features of perfect competition and
some features of monopoly acting together.

Following are the main features of monopolistic competition :

1) Fairly large number of sellers :

In monopolistic competition, the number of sellers is large but comparatively it is less than that of perfect competition.
Due to this reason sellers’ behaviour is like monopoly.

2) Fairly large number of buyers :

In this market there are fairly large number of buyers. Consequently, no single buyer can influence the price of the
product by changing his individual demand.

3) Product differentiation :
Product differentiation is the main feature of monopolistic competition. In this market, there are many firms producing
a particular product, but the product of each firm is in some way differentiated from the product of every other firm in
the market. This is known as product differentiation. Product differentiation may take the form of brand names, trade
marks, peculiarity of package or container, shape, quality, cover, design, colour etc.
This means that the product of a firm may find close substitutes and its cross elasticity of demand is very high. For
example, mobile handsets, cold drinks etc.

4) Free entry and exit :

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Under monopolistic competition there is freedom of entry and exit, that is new firms are free to enter the market if there
is profit. Similarly, they can leave the market, if they find it difficult to survive.

5) Selling Cost :
Selling cost are peculiar to monopolistic competition only. It refers to the cost incurred by the firm to create more
demand for its product and thus increase the volume of sales. It includes expenditure on advertisements, readio and
television broadcasts, hoardings, exhibitions, window display, free gifts, free samples etc.

6) Close substitutes :
In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps,
toothpastes etc.

7) Concept of group :
Under monopolistic competition, Chamberlin introduced the concept of ‘Group’ in place of industry. Industry means the
number of firms producing identical products. A ‘Group’ means a number of firms producing differentiated products
which are closely related. For example, group of firms producing medicines, automobiles etc.

2) Explain the meaning of Perfect competition with its features.

Ans:
Perfect competition is an ideal and imaginary concept of market rather than an actual market. According to Mrs. Joan
Robinson, “Perfect competition prevails when the demand for the output of each producer is perfectly elastic.”

Following are the features of Perfect Competition : (SHORT CODE: PLANS FREE HO)1) Perfect
knowledge of market :
The buyers and sellers possess a perfect knowledge about the market conditions. Every seller and buyer has the
knowledge about price, quality, source of supply of products etc.

2) Perfect mobility of factors of production :

There is perfect mobility of factors of production under perfect competition. Labour and capital are mobile not only
geographically but also occupationally.

3) Large number of sellers and buyers :

Under perfect competitions, there are large number of sellers and buyers. As mentioned earlier, each seller forms a
negligible part in the total market. Hence, none of them is in a position to influence the price and supply in the
market. Thus, sellers are price takers under perfect competition. The number of buyers is also large. The share of
each buyer is so negligible that none of them is in a position to influence the price in the market.

4) Absence of transport cost :

In perfect competition, price is uniform because we assume that transport cost does not exist. This assumption will lead
to uniformity in price.

5) No government intervention :
Laissezfaire policy is an important feature of perfect competition. It means there is absence of Government intervention
in economic activities.

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6) Single price :
A single uniform price prevails under perfect competition which is determined by the interaction of demand and supply.

7) Free entry and exit :

There are no barriers to the entry and exit of firms. Any firm can enter or quit the industry at its own will. If there is hope
of profit, the firm will enter the market and if there is possibility of loss the firm will leave the market.

8) Homogeneous product :
An important feature of a perfectly competitive market is that the product sold is homogeneous or identical in respect of
size, design, colour, taste etc. All the products are perfect substitutes to each other.

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