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SUCCESS MATERIAL FOR CLASS-XI

(ECONOMICS)

FORMS OF MARKET

BY:-
PRADEEP BANDHANI
A-4/214-215, IIND FLOOR, SECTOR-17, ROHINI, DELHI-110089
 MEANING OF MARKET:-“Market refers to a structure in which buyers and sellers of the
commodity interact with each other for making transactions.”
 MARKET STRUCTURE:- “A Market structure refers to number of firms operating in the
industry, nature of competition between them and the nature of the product”.
 FACTORS DETERMINING MARKET STRUCTURE:-
1. NUMBER OF BUYERS AND SELLERS:- Number of buyers and sellers of a commodity in
the market indicates the influence exercised by them on the price of the commodity. In case
of large number of buyers and sellers, an individual buyer or seller is not in the position to
influence the price of the commodity.
However, if there is a single seller of a commodity, then such a seller exercises great control
over the price.
2. NATURE OF THE COMMODITY:- If a commodity is of homogeneous nature, i.e. identical
in all respects, then it is sold at a uniform price.
However, if the commodity is of differentiated nature (like different brands of toothpaste),
then it may be sold at different prices.
Again, if the commodity has no close substitutes (like Railways), then the seller can charge
higher price from the buyers.
3. FREEDOM OF MOVEMENT OF FIRMS:- If there is freedom of entry and exit of firms,
then price will be stable in the market.
However, if there are restrictions on entry of new firms and exit of old firms, then a frim can
influence the price as it has no fear of competition from other or new firms.
4. KNOWLEDGE OF MARKET CONDITIONS:- If buyers and sellers have perfect
knowledge about the market conditions, then a uniform price prevails in the market.
However, in case of imperfect knowledge, sellers are in a position to charge different prices.
 MEANING OF PERFECT COMPETITION:- “Perfect competition is a market situation in
which there are a large number of buyers and sellers, firms sell a homogeneous product and
there is free entry and exit”. Product sells at a uniform price in the whole market. No seller can
influence the price in the market.
 FEATURES OF PERFECT COMPETITION:-
1. VERY LARGE NUMBER OF BUYER AND SELLER:- The number of buyers and sellers is so
large that none of them can influence the prevailing price in the market.
 Each buyer and seller buys or sells a very insignificant proportion of total supply of the
commodity in the market.
 It indicates ineffectiveness of a seller or a buyer in influencing the price. But once the price is
determined by the industry, each firm and buyer has to accept it.
 IMPLICATION:- “Very large number of sellers in the market” is that share of each seller in
total market supply is so small that no single seller can influence the price. Hence a firm has to
sell the product at the price given (determined) by the industry. It is because of this position
that each firm is said to be price taker in perfect competition.
 Similarly, large number of buyers has the same implication, i.e. buyers share in the total
market demand is so small that no buyer on his own can influence the price. So, buyer also
becomes simply a price-taker.
2. HOMOGENEOUS PRODUCT:- Product sold in the perfect market are homogeneous, i.e. they
are identical in all respects like quality, colour, size, weight, design etc. They are perfect
substitutes of one another.
 The products sold by different firms in the market are equal in the eyes of the buyers. The
buyers treat products of all the firms in the industry as identical and therefore, they are
willing to pay only the same price.
 The product being homogeneous, no individual seller can charge higher price otherwise he
is liable to lose his customers.
 IMPLICATION:- Homogeneous products are the undifferentiated products. Homogeneous
products are identical in size, colour, quality and weight. As such, they are perfect substitutes
of one another. As a result, a buyer is indifferent as to the firms from which he buys.
 This feature of perfect competition Compels all the firms to charge the same price for the
product i.e., no individual firm is in a position to charge higher price for its product.
 The implication of this feature of perfect competition is uniform price in the market.
3. FREE ENTRY AND EXIT OF FIRMS:- There is free entry of new firms and exit of existing
firms. New firms induced by large profits can enter the industry, whereas losses make the
inefficient firms to leave the industry.
 In case of abnormal profits at the profit maximizing level of output, new firms will be
attracted to the industry. This will lead to an increase in supply leading to fall in price and
profit thus entry process of firms will continue till there are no abnormal profits.
 On the other hand, the firms try to leave when they are facing losses due to low price. As
the firms start leaving, market supply falls. Thus, in the long run, all firms under perfect
competition will earn only normal profits.
 IMPLICATION:- “The feature ‘freedom of entry and exit of firms’ means that firms are free to
enter or leave the market at any time they like.
 ‘Freedom of Entry’ signifies that there are no barriers to the entry of new firms into
industry. In case of abnormal profits at the profit maximizing level of output, new firms will
be attracted to the industry. This will lead to an increase in supply leading to fall in price
and profit thus entry process of firms will continue till there are no abnormal profits.
 ‘Freedom of Exit’ signifies that there are no barriers which restrict the existing firms from
leaving the industry. The firms try to leave when they are facing losses due to low price. As
the firms start leaving, market supply falls. Thus, in the long run, all firms under perfect
competition will earn only normal profits.
4. PERFECT KNOWLEDGE:- The buyers and sellers have perfect knowledge about the prices
and costs prevailing in the different parts of the market. All firms have equal access to
technology and inputs resulting in the same per unit cost of production.
 IMPLICATION:- “Perfect knowledge about the market, no seller can afford to charge a price
higher than the prevailing price.
 The buyers and sellers have perfect knowledge about the prices and costs prevailing in the
different parts of the market. All firms have equal access to technology and inputs resulting
in the same per unit cost of production.
 If the tries to charge the price more than prevailing price, he will lose all his customers to his
competitors. This will lead to emergence of uniform price of the product in the market.
5. ABSENCE OF TRANSPORT COST:- In perfect competition, it is assumed that there is no
transport cost for consumers who may buy from any firm. Thus ensures existence of a single
uniform price of the product.
6. PERFECT MOBILITY OF FACTORS OF PRODUCTION:- The factors of production (land,
labour, capital and entrepreneurship) are perfectly mobile. There is no geographical or
occupational restriction on their movement. The factors are free to move to the industry in
which they get the best price.
 PERFECT COMPETITION AND PURE COMPETITION:- Perfect Competition is used in
wider sense as compared to Pure Competition. The competition is said to be ‘Pure
Competition’ when the following 3 fundamental conditions exist:-
1. Very Large number of buyers and sellers;
2. Homogeneous product;
3. Freedom of entry and exit.
Perfect competition is a wider concept. For the market to be perfectly competitive, in addition
to three fundamental conditions, four additional conditions must be satisfied:-
1. Perfect Knowledge among buyers and sellers;
2. Perfect mobility of factors of production;
3. Absence of transportation costs;
4. Absence of selling costs.
 MEANING OF MONOPOLY:- “Monopoly is a market situation where there is a single firm
selling a product which has no close substitute”. For example, Railway in India.
 MEANING OF MONOPOLISTIC:-“Monopolistic competition refers to a market situation in
which there are many firms which sell closely related but differentiated products.” Markets
of products like soap, toothpaste, AC, etc. are examples of monopolistic competition.
 MEANING OF OLIGOPOLY:- “Oligopoly refers to a market situation in which there are a
few firms selling homogeneous or differentiated products”. It is a market situation in
between that monopolistic and monopoly competition. Each firm produces a substantial
portion of total output and can influence the market price. When there are only two firms it is
called “DUOPOLY”.
 EXTRA QUESTIONS:-
Ques.1 Explain the demand curve under perfect competition.
Ans. In case of perfect competition, there are very large number of buyers and sellers selling a
homogeneous product at a price fixed by the market. Therefore, “each firm is the price-taker and
faces a perfectly elastic demand curve”.
 In the diagram, output is represented along the X-axis and price and revenue along the Y-axis.
Firm's demand curve is indicated by the horizontal straight line parallel to the X-axis.
As each firm has to accept the price fixed by the industry, the price is determined at OP. At OP
price, a seller can sell OQ1, OQ2 or any other quantity. However, a firm is not in a position to
change the price
Ques.2 “A firm under perfect competition is a price –taker”. Explain and state the nature of
average revenue and marginal revenue curves of a perfectly competitive firm.
Ans. Price taker means that an individual firm has to sell the produce at the price determined by
the industry. Under perfect competition, no seller can influence the price in the market.
Therefore, a firm plays no role in price determination. It can affect neither the supply nor the
demand in the market. So, 'Firm is a price-taker and Industry is the Price-maker'. Price is
determined at the point where market demand curve intersects market supply curve.

In the diagram, the market demand curve DD and market supply curve SS intersects at point E, at
which OP price is determined. The price of OP is adopted by the price-taker firm and firm has to
accept the price which means with sale of every additional unit, additional revenue (MR) and
average revenue (AR) will be equal to the price and thus equal to each other (MR = AR). This
makes the AR curve perfectly elastic and thus parallel to the X-axis.
 MULTIPLE CHOICE QUESTIONS (MCQs):-
Ques.1 A firm is a price-taker under:-
(a) Monopoly; (b) Monopolistic Competition; (c) Perfect Competition; (d) Oligopoly.
Ques.2 How much selling costs are incurred in case of perfect competition?
(a) Very High; (b) Very Less; (c) Negligible; (d) Zero.
Ques.3 Demand curve of perfectly competitive market from is a horizontal straight line parallel to
X-axis. It happens because:-
(a) Selling costs are zero; (b) There is freedom of entry and exit;
(c) Firm is a price-taker; (d) None of these.
Ques.4 If the demand curve of an individual firm is perfectly elastic, then:-
(a) Firm is a price-taker; (b) Firm can influence the price;
(c) Firm is a price-maker; (d) Firm has partial control over price.
Ques.5 Which of the following is not a condition of the perfect market?
(a) Homogeneous Product; (b) Very large number of sellers;
(c) Perfect knowledge among buyer; (d) Downward sloping demand curve.
Ques.6 In case of perfect competition, AR curve is:-
(a) Downward sloping; (b) Positively sloped;
(c) Horizontal straight line parallel to the X-axis; (d) Vertical straight line parallel to the Y-axis.
Ques.7 In which market form, there is perfect knowledge among buyers and sellers?
(a) Oligopoly; (b) Monopolistic competition; (c) Monopoly; (d) None of the above.
Ques.8 Under Perfect Competition, each firm is a:-
(a) Price-maker; (b) Neither Price-maker nor Price-taker; (c) Price-taker; (d) None of these.
Ques.9 Under Perfect competition, the firm earns normal profit in the long-run because of:-
(a) Large number of buyers and seller; (b) Absence of selling cost;
(c) Free entry and exit; (d) Homogeneous commodity.
Ques.10 Freedom of entry and exit is possible in the:-
(a) Short-run; (b) Long-run; (c) Both (a) and (b); (d) Neither (a) nor (b).
Ques.11 Railways is an example of:-
(a) Perfect Competition; (b) Monopoly; (c) Monopolistic Competition; (d) Oligopoly.
Ques.12 In perfect competition, since the firm is a price-taker, _____________ curve is a horizontal
straight line parallel to the X-axis.
(a) Marginal Cost; (b) Total Revenue; (c) Total Cost; (d) Marginal Revenue.
Ques.13 Which of the following is not a characteristic of a price taker firm?
(a) TR = P x Q; (b) AR = Price; (c) Negatively sloped demand curve; (d) Marginal Revenue = Price.
Ques.14 If a perfectly competitive firm doubles its output, then its total revenue:-
(a) Doubles; (b) More than doubles; (c) Less than doubles; (d) Cannot be determined.
Ques.15 ‘Homogeneous Products’ is a characteristic of:-
(a) Perfect Competition only; (b) Perfect Oligopoly only; (c) Both (a) and (b); (d) None of the above.
Ques.16 Demand curve of a firm is Perfectly Elastic under:-
(a) Perfect Competition; (b) Monopoly; (c) Monopolistic Competition; (d) Oligopoly.
Ques.17 Average revenue and price are always equal under:-
(a) Perfect competition only; (b) Monopolistic competition only;
(c) Monopoly only; (d) All market forms.
Ques.18 A seller cannot influence the market price under:-
(a) Perfect Competition; (b) Monopoly; (c) Monopolistic Competition; (d) All of the above.
Ques.19 A perfectly competitive firm faces:-
(a) Constant price; (b) Constant average revenue; (c) Constant marginal revenue; (d) All the above.
Ques.20 There are large number of buyers and sellers in:-
(a) Perfect Competition only; (b) Monopolistic Competition only;
(c) Both in (a) and (b); (d) Oligopoly.
[Ans. 1 (c); 2 (d); 3 (c); 4 (a); 5 (d); 6 (c); 7 (d); 8 (a); 9 (c); 10 (b); 11 (c); 12 (d); 13 (c); 14 (a); 15 (c); 16
(a); 17 (d); 18 (a); 19 (d); 20 (c)]
 DISTINGUISH BETWEEN MONOPOLY AND PERFECT COMPETITION:-
BASIS PERFECT COMPETITION MONOPOLY
NUMBER OF There are very large number of There is only one seller of the
SELLERS sellers in the perfect competition. commodity in monopoly.
INFLUENCE A firm is a price-taker and cannot A firm himself determines the price of
ON PRICE influence the price of the the commodity and has complete
commodity. influence on price.
NATURE OF Products sold in the market are Product sold in the market has no
PRODUCT homogeneous and are perfect close substitutes.
substitutes of one another.
ENTRY OF Firms are free to enter the market at It is very difficult to a new firm to
NEW FIRM any time they like. enter the market.

 DISTINGUISH BETWEEN PERFECT COMPETITION AND MONOPOLISTIC

COMPETITION:-
BASIS PERFECT COMPETITION MONOPOLISTIC COMPETITION
STATUS OF A firm is a price-taker and a firm A firm can influence the price in a
FIRM cannot influence the price. limited way.
PRICE Price is uniform. All firms charge Prices are different from firm to firm.
same price.
SELLING COST There are no selling costs. There are significant selling costs.
NATURE OF Products sold in the market are Products sold in the market are
PRODUCT homogeneous and are perfect heterogeneous in the nature.
substitutes of one another.