Part – B

Answer the following questions in one or two sentences

Question 21.
Define Market.
Answer:
In economics, the term ‘Market’ refers to a system of exchange between the buyers and the sellers of a commodity. Exchange may be direct or indirect.

 

Question 22.
Who is price – taker?
Answer:
A large number of buyers’ implies that each individual buyer buys a very, very small quantum of a product as compared to that found in the market. This means that he has no power to fix the price of the product. He is only a price taker and not a price-maker.

Question 23.
Point out the essential features of pure competition.
Answer:

1.    The absence of any monopoly element.

2.    There is a large buyers and sellers.

3.    Homogenous product and uniform price.

4.    Free entry and exit.

Question 24.
What is selling costs?
Answer:

1.    Selling Cost is the discussion of “Product differentiation”.

2.    We can infer that the producer under monopolistic competition has to incur expenses to popularize his brand.

3.    This involved in selling the product is called selling cost.

4.    According to Prof Chamberlin, selling cost is “The cost incurred in order to alter the position or shape of the demand curve for a product”.

Question 25.
Draw demand curve of a firm for the following:
Answer:
(a) Perfect Competition
(b) Monopoly

A.



Under perfect competition, as uniform price prevails AR = MR and the demand curve (AR) is horizontal to X-axis.

Part – C

Answer the following questions in One Paragraph

Question 28.
What are the features of a market?
Answer:
A market has the following characteristic features:

1.    Buyers and sellers of a commodity or a service.

2.    A commodity to be bought and sold.

3.    Price agreeable to buyer and seller.

4.    Direct or indirect exchange.

Question 29.
Specify the nature of entry of competitors in perfect competition and monopoly.
Answer:
Perfect Competition:
Under perfect competition, there is the possibility of free entry and exit of the firm. In the short run, if an efficient producer produces supernormal profits, it attracts new firms to enter the industry. When a large number of firms enter, the supply would increase, resulting in lower price. An inefficient producer, disturbed by the loss, quit the market. It results in a decrease in supply so the price will go up.

Monopoly:
In a monopoly, there is a strict barrier for entry of any new firm.

 Question 31.

State the meaning of selling cost with an example.
Answer:
Under monopolistic competition as the products are differentiated, the producer has to incur expenses to make his brand popular. The expenditure involved in selling the product is called “selling cost”.

According to Prof.Chamberlin, selling cost is the cost incurred in order to alter the position or shape of the demand curve for a product.
Under perfect competition and monopoly there is soiling COM.
(Eg.) Advertisements, Free services, Home delivery etc.

Question 32.
Mention the similarities between perfect competition and monopolistic competition,
Answer:

1.    In both perfect competition and monopolistic competition number of firms are large.

2.    Competition exists between the firms.

3.    There are no barriers for entry and exit in both the markets.

4.    Equilibrium occurs at the point where MC curve intersects MR curve.

5.    In short run there is supernormal profit or loss and in long run there is only normal profits in both market structures.

Question 33.
Differentiate between ‘firm’ and ‘industry’.
Answer:
Firm:
A firm refers to a single production unit in an industry, producing a large or a small quantity of a commodity or service, and selling it at a price in the market. Its main objective is to earn a profit.

Industry:
An industry refers to a group of firms producing the same product or service in an economy.
(Eg.) A group of firms producing cement is called a cement industry.

 

Part – D

Answer the following questions in about a page

Question 35.
Bring out the features of perfect competition.
Answer:
According to Joan Robinson, “Perfect competition prevails when the demand for the output of each producer is perfectly elastic. It is an ideal but imaginary market. 100% of perfect competition cannot be seen.
Features of the perfect competition:

(a) Large number of buyers and sellers:
Each individual buyer buys a very small quantum of a product as compared to that found in the market. This means that he has no power to fix the price of the product. He is only a price-taker and not a price-maker. As the number of sellers is large the seller is also a price – taker.

(b) Homogenous product and uniform price:
The. Products are homogenous in nature and are perfectly substitutable. All the units of the product are identical. Therefore a uniform price prevails in the market.

(c) Free entry and exit:
In the short run, if the very efficient producer earns super normal profits, new firms enter into the industry. When large number of firms enter, the supply would increase, resulting in lower price. If an inefficient producer incurs loss, the loss incurring firms quit the market. So the existing firms could earn more profit as supply decreases.

(d) Absence of transport cost:
The prevalence of the uniform price is also due to the absence of the transport cost. . e) Perfect mobility of factors of production:
As there is perfect mobility of the factors of production, uniform price exists. As they enjoy perfect freedom of mobility the price gets adjusted.

(f) Perfect knowledge of the market:
All buyers and sellers have a thorough knowledge of the quality of the product, prevailing price etc.

(g) No government intervention:
There is no government regulation on supply of raw materials and in the determination of price etc.

 

Question 36.
How price and output are determined under the perfect competition?
Answer:
In the short run at least a few factors of production are fixed. The firms under perfect .competition take the price (10) from the industry and start adjusting their quantities produced.
For example
Qd = 100 -5P and
Qs = 5p
at equilibrium Qd = Qs
100 – 5p = 5p
100 = 5p + 5p
p = 10
Qd = 100 – 5(10)
= 50
Qs = 5(10) = 50
Qd = Qs
50 = 50

SS – market supply, DD – market demand, AR – Average Revenue, AC – Average Cost, MR – Marginal Revenue, MC – Marginal Cost This diagram consists of three panels.
First part:
The equilibrium of an industry is explained. The demand and supply forces of the firms interact and the price is fixed as Rs.10. The equilibrium of an industry is obtained at 50 units of output.

Second part:
AC curve is lower than the price line. Equilibrium is achieved where
MC = MR. Equilibrium quantity is 50. With price Rs. 10, it experiences supernormal profit
AC = Rs. 8
AR = Rs. 10
TR – 50 x 10 = 500
TC = 50 x 8 = 400
Profit = 500-400= 100.

Third part:
Firm’s cost curve is above the price line. Equilibrium MC = MR. Quantity is 50 with price Rs. 10, it experiences loss (AC > AR)
TR = 50 x 10 = 500
TC = 50 x 12 = 600
Loss = 600-500= 100
If profit prevails in the market, new firms emerge results in declining price and if loss occurs the existing loss making firm exits results in increasing price consequent upon the entry and exit of new firms into the industry, firms always earn ‘normal profit’ in the long run.

Price and output determination in long run:
Long run equilibrium of the firm is illustrated in the diagram. Under perfect competition, long run equilibrium is only at minimum point of LAC. At point E,
LMC = MR = AR = LAC


In the diagram AR = AC. Equilibrium is at point E where price is 8 and output is 500. At this point, the profit of the firm is only normal. Thus condition for long run equilibrium of the firm is
Price = AR = MR = Minimum AC

At equilibrium SAC > LAC. Hence in the long run equilibrium price is lower and quantity is larger compared to the short run equilibrium price and quantity.

Question 39.

Explain price and output determined under monopolistic competition with help of diagram.
Answer:
Monopolistic competition refers to a market situation where there are many firms selling a differentiated product.

Price and output determination:
Nature of cost and revenue Curves:
The monopolistic firm sell large quantity at less price. So, it faces a downward sloping demand curve. AR curve is fairly elastic. MR curve falls below AR. AC curve will be ‘U’ shaped.

Condition for equilibrium:
MC = MR, MC curve should cut MR from below. If MC is less than MR, the sellers will find it profitable to expand their output.

Short – run equilibrium:


Profit is maximised when MC = MR. From the diagram.
OM – Equilibrium output OP – Equilibrium price
TR – OMQP TC – OMRS
Profit = OMQP-OMRS
= PQRS
this is super normal profit under short-run.
A monopolistic competitive firm may also incur loss in the short-run.


As shown in the diagram, the AR and MR curves are fairly elastic.
At equilibrium output is OM, price is OP
TR – OMQP
TC-OMLK
Total loss = TR-TC
= OMQP – OMLK
= PQLK

Long – run equilibrium:
In the long run AR curve is more elastic or flatter. Hence, the firms will only earn normal profit.