{"id":8901,"date":"2024-04-02T01:35:03","date_gmt":"2024-04-01T20:05:03","guid":{"rendered":"https:\/\/gstguntur.com\/?p=8901"},"modified":"2024-04-03T16:50:48","modified_gmt":"2024-04-03T11:20:48","slug":"ca-foundation-economics-notes-chapter-4","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/ca-foundation-economics-notes-chapter-4\/","title":{"rendered":"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4"},"content":{"rendered":"<p>Browsing through <a href=\"https:\/\/gstguntur.com\/ca-foundation-economics-notes\/\">CA Foundation Business Economics Notes<\/a> Chapter 4\u00a0Price Determination in Different Markets help students to revise the complete subject quickly.<\/p>\n<h2>Price Determination in Different Markets \u2013 Business Economics CA Foundation Notes Chapter 4<\/h2>\n<p><strong>Meaning of market:<br \/>\n\u2192 <\/strong>In ordinary language, a market refers to a place where the buyers and sellers of a commodity gather and strike bargains.<\/p>\n<p><strong>\u2192 <\/strong>In economics, however, the term \u201cMarket\u201d refers to a market for a commodity.<br \/>\nExample &#8211; Cloth market; furniture market; etc.<\/p>\n<p><strong>\u2192 <\/strong>According to Chapman, \u201cthe term market refers not necessarily to a place and always to a commodity and buyers and sellers who are in direct competition with one another&#8221;.<\/p>\n<p><strong>\u2192 <\/strong>According to the French economist Cournot, \u201cMarket is not any particular place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with each other that the prices of the same goods tend to equality easily and quickly\u201d.<\/p>\n<p><strong>\u2192 <\/strong>The above mentioned definitions reveals the following features of a market:<\/p>\n<ul>\n<li>A region. A market does not refer to a fixed place. It covers a region, which may be a town, state, country or even world.<\/li>\n<li>Existence of buyers and sellers. Market refers to the network of potential buyers and sellers who may be at different places.<\/li>\n<li>Existence of commodity or service. The exchange transactions between the buyers and sellers can take place only when there is a commodity or service to buy and sell.<\/li>\n<li>Bargaining for a price between potential buyers and sellers.<\/li>\n<li>Knowledge about market conditions. Buyers and sellers are aware of the prices offered or accepted by other buyers and sellers through any means of communication.<\/li>\n<li>One price for a commodity or service at a given time.<\/li>\n<\/ul>\n<p>Classification of Market:<br \/>\nMarkets may be classified on the basis of different criteria. In Economics, generally the classification is made as pointed out in the following chart &#8211;<\/p>\n<p><strong>Price Determination in Different Markets:<\/strong><br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8930\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-1-1.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 1\" width=\"807\" height=\"464\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-1-1.png 807w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-1-1-300x172.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-1-1-768x442.png 768w\" sizes=\"(max-width: 807px) 100vw, 807px\" \/><\/p>\n<p><strong>Types of market structures:<\/strong><br \/>\n\u2192 Market can be classified on the basis of area, volume of business, time, status of sellers, regulation and control.<\/p>\n<p>\u2192 The main types of markets can be summed up as follows :<br \/>\n1. Perfect Competition :<\/p>\n<ul>\n<li>Perfect competition market is one where there are many sellers selling identical products to many buyers at a uniform.<\/li>\n<\/ul>\n<p>2. Monopoly:<\/p>\n<ul>\n<li>Monopoly market structure is a market situation in which there is a single seller of a commodity selling to many buyers.<\/li>\n<li>The commodity has no close substitutes available.<\/li>\n<li>A monopolist therefore, has a considerable influence on the price and supply of his commodity.<\/li>\n<\/ul>\n<p>3. Monopolistic Competition :<br \/>\nMonopolistic competition is a market situation in which there are many sellers selling differentiated goods to many buyers.<\/p>\n<p>4. Oligopoly:<br \/>\nOligopoly is a market situation in which there are few sellers selling either homogeneous or differentiated goods.<\/p>\n<p>Table : Features of major types of markets<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8905\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-2.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 2\" width=\"806\" height=\"406\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-2.png 806w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-2-300x151.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-2-768x387.png 768w\" sizes=\"(max-width: 806px) 100vw, 806px\" \/><\/p>\n<p><strong>Concepts of total revenue, average revenue and marginal revenue:<\/strong><br \/>\nTotal Revenue : (TR)<\/p>\n<ul>\n<li>Total revenue may be defined as the total amount of money received by the firm by selling a certain units of a commodity.<\/li>\n<li>It is obtained by multiplying the price per unit of a commodity with the total number of units sold.<\/li>\n<li>Total Revenue = Price per unit X Total No. of units sold<br \/>\nTR = P X Q<\/li>\n<li>Example &#8211; A firm sells 100 units of a commodity @ \u20b9 15 each, then its total revenue is \u20b9 15 X 100 units = \u20b9 1,500<\/li>\n<\/ul>\n<p>Average Revenue : (AR)<br \/>\n\u2192 Average revenue is the revenue per unit of the commodity sold.<\/p>\n<p>\u2192 It is simply the total revenue divided by the number of units of output sold.<\/p>\n<p>\u2192 Average Revenue = \\(\\frac { Total Revenue }{ No.of units sold }\\)<br \/>\nAR = \\(\\frac { TR }{ Q }\\)<\/p>\n<p>\u2192 Example &#8211; A firm earns total revenue of \u20b9 2,000 by the sale of 100 units of a commodity, then its average revenue is \u20b9 20 (\u20b9 2000 \u00f7 100 units)<\/p>\n<p>\u2192 By definition average revenue is the price per unit of output. To prove it &#8211;<br \/>\n\u2234 AR = \\(\\frac { TR }{ Q }\\), since TR = P x Q<br \/>\nAR = \\(\\frac { P\u00d7Q }{ Q }\\)<br \/>\n\u2234 AR = P (Price)<\/p>\n<p>Marginal Revenue (MR):<br \/>\n\u2192 Marginal revenue refers to the addition to total revenue by selling one more unit of a commodity.<\/p>\n<p>\u2192 Marginal revenue may also be defined as the change in total revenue resulting from the sale of one more unit of a commodity<\/p>\n<p>\u2192 Example &#8211; If a firm sells 100 units of a commodity @ \u20b9 15 each, its TR is \u20b9 1,500. Now, if it increases the sale by ten units i.e. it sells 110 units @ \u20b9 14 each, its TR is \u20b9 1,540. Thus,<br \/>\nMR = \\(\\frac { \u2206 TR }{ \u2206 Q }\\)<\/p>\n<p>\u2192 Where &#8211; \u2206 TR is the change in total revenue<br \/>\n\u2206 Q is the change in the quantity sold<\/p>\n<p>\u2192 For one unit change &#8211; MRn = TRn &#8211; TRn-<sub>1<\/sub><br \/>\nWhere<br \/>\nMRn = Marginal Revenue from \u2018n\u2019 units<br \/>\nTRn = Total Revenue of &#8216;n&#8217; units<br \/>\nTRn-<sub>1<\/sub> = Total Revenue from &#8216;n-1&#8217; units<br \/>\nn = any give number<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Marginal revenue, average revenue, total revenue and elasticity of demand:<\/strong><br \/>\n\u2192 The relationship between AR, MR and price elasticity of demand can be examined with the formula &#8211;<br \/>\nMR = AR x \\(\\frac { e &#8211; 1 }{ e }\\)<br \/>\nWhere, e = price elasticity of demand.<br \/>\nIf e = 1, MR = 0<br \/>\nIf e &gt; 1, MR will be positive i.e. MR &gt; 0<br \/>\nIf e &lt; 1, MR will be negative i.e. MR &lt; 0<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8906\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-3.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 3\" width=\"393\" height=\"296\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-3.png 393w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-3-300x226.png 300w\" sizes=\"(max-width: 393px) 100vw, 393px\" \/><br \/>\nThe relationship between AR, MR, TR &amp; elasticity of demand.<\/p>\n<p>\u2192 The above figure reveals the following on a straight line demand curve (or AR curve):<\/p>\n<ul>\n<li>When e &gt; 1, marginal revenue is positive and therefore total revenue is rising,<\/li>\n<li>When e = 1, marginal revenue is zero and therefore total revenue is maximum, and<\/li>\n<li>When e &lt; 1, marginal revenue is negative and therefore total revenue is falling.<\/li>\n<\/ul>\n<p>Behavioural Principles:<\/p>\n<ul>\n<li>Principle 1 : A firm should not produce at all if its total revenue is either equal to or less than its I total variable cost.<\/li>\n<li>Principle 2 : It will be profitable for the firm to expand output so long as marginal revenue is more than marginal cost till the point where marginal revenue equals marginal cost.<\/li>\n<\/ul>\n<p>Also the marginal cost curve should cut its marginal revenue curve from below.<\/p>\n<p><strong>Determination of prices:<\/strong><\/p>\n<p>Determination of equilibrium price:<br \/>\n\u2192 We know that law of demand reveals, if other conditions remain unchanged, more quantity | of a commodity is demanded in the market at a lower price and less quantity is demanded at a higher price. Therefore, demand curve slopes downward.<\/p>\n<p>\u2192 Similarly, the law of supply reveals, if other conditions remain unchanged, more quantity of a commodity is supplied in the market at a higher price and less quantity is supplied at a lower price. Therefore, supply curve slopes upward.<\/p>\n<p>\u2192 Demand and supply are the two main factors that determine the price of a commodity in the market. In other words, the price of a commodity is determined by the inter-action of the forces of demand and supply.<\/p>\n<p>\u2192 The price that will come to prevail in the market is one at which quantity demanded equals 1 quantity supplied.<\/p>\n<p>\u2192 This price at which quantity demand equals quantity supplied is called equilibrium price.<\/p>\n<p>\u2192 The quantity demanded and supplied at equilibrium price is called equilibrium quantity.<\/p>\n<p>\u2192 The process of price determination is illustrated with the help of following imaginary schedule and diagram.<\/p>\n<p>Table &#8211; Determination of Price:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8907\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-4.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 4\" width=\"775\" height=\"235\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-4.png 775w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-4-300x91.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-4-768x233.png 768w\" sizes=\"(max-width: 775px) 100vw, 775px\" \/>The The above table shows that at a price of \u20b9 3 per unit, the quantity demanded equals quantity supplied of the commodity. At \u20b9 3 two forces of demand and supply are balanced. Thus, \u20b9 3 is the equilibrium price and equilibrium quantity at \u20b9 3 is 300 units.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8908\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-5.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 5\" width=\"412\" height=\"321\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-5.png 412w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-5-300x234.png 300w\" sizes=\"(max-width: 412px) 100vw, 412px\" \/><br \/>\n\u2192 The equilibrium between demand and supply can also be explained graphically as in Fig.<\/p>\n<p>\u2192 In Fig &#8211; the market is at equilibrium at point \u2018E\u2019, where the demand curve and supply curve intersect each other. Here quantity demanded and supplied, are equal to each other.<\/p>\n<p>\u2192 At point \u2018E\u2019, the equilibrium price is \u20b9 3 per unit and equilibrium quantity is 300 units.<\/p>\n<p>\u2192 If the price rises to \u20b9 4 per unit, the supply rises to 400 units but demand falls to 200 units. Thus, there is excess supply of 200 units in the market.<\/p>\n<p>\u2192 In order to sell off excess supply of 200 units the sellers will compete among themselves and in doing so the price will fall.<\/p>\n<p>\u2192 As a result the quantity demand will rise and quantity supplied will fall and becoming equal to each other at the equilibrium price \u20b9 3.<\/p>\n<p>\u2192 Similarly, if the price falls to \u20b9 2 per unit, the demand rises to 400 units but supply falls to 200 units. Thus, there is excess demand of 200 units in the market.<\/p>\n<p>\u2192 As the price is less there is competition among the buyers to buy more and more. This competition among buyers increases with the entry of new buyers.<\/p>\n<p>\u2192 More demand and less supply and competition among buyers will push up the price.<\/p>\n<p>\u2192 As a result, quantity demanded will fall and quantity supplied will rise and become equal to each other at the equilibrium price of \u20b9 3.<\/p>\n<p><strong>Effects of shifts in demand and supply on equilibrium price:<\/strong><br \/>\n\u2192 While determining the equilibrium price, it was assumed that demand and supply conditions were constant. In reality however, the condition of demand and supply change continuously.<\/p>\n<p>\u2192 Thus, changes in income, taste and preferences, changes in the availability and prices of related goods, etc. brings changes in demand conditions and cause demand curve to shift either to right or left.<\/p>\n<p>\u2192 In the same way, changes in the technology, changes price of labour, raw materials, etc., changes in the number of firms, etc. brings changes in supply conditions and cause supply curve to shift either to right or left.<br \/>\n(a) Change (shift) in Demand and Supply remaining constant:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8909\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-6.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 6\" width=\"453\" height=\"365\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-6.png 453w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-6-300x242.png 300w\" sizes=\"(max-width: 453px) 100vw, 453px\" \/><br \/>\n\u2192 In Fig.- DD and SS are the original demand and supply curves respectively inter-secting each other at point E.<\/p>\n<p>\u2192 At point E, the equilibrium price is OP and the demand and supply (ie. equilibrium quantity) are equal at OQ.<\/p>\n<p>\u2192 When the demand increases, the demand curve shifts upwards from DD to D<sub>1<\/sub>D<sub>1<\/sub>, supply remaining the same.<\/p>\n<p>\u2192 As a result, the equilibrium price rises from OP to OP<sub>1<\/sub>, and the equilibrium quantity increases from OQ to OQ<sub>1<\/sub> as shown at point E<sub>1<\/sub>.<\/p>\n<p>\u2192 When the demand decreases, the demand curve shifts downwards from DD to D<sub>2<\/sub> D<sub>2<\/sub>, Supply remaining the same.<\/p>\n<p>\u2192 As a result, the equilibrium price falls from OP to OP<sub>2<\/sub> and the equilibrium quantity decreases from OQ to OQ<sub>2<\/sub> as shown at point E<sub>2<\/sub><\/p>\n<p>(b) Change (shift) in Supply and Demand remaining constant:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8910\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-7.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 7\" width=\"366\" height=\"299\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-7.png 366w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-7-300x245.png 300w\" sizes=\"(max-width: 366px) 100vw, 366px\" \/><br \/>\nEffects of Changes in Supply on Equilibrium Price.<br \/>\n\u2192 In Fig. &#8211; DD and SS are the original demand and supply curves respectively inter-sections each other at point E.<\/p>\n<p>\u2192 At point E, the equilibrium price is OP and the demand and supply (i.e. Equilibrium quantity) are equal at OQ.<\/p>\n<p>\u2192 When the supply increases, the supply curve shifts to the right from SS to S<sub>1<\/sub> S<sub>1<\/sub>, demand remaining the same.<\/p>\n<p>\u2192 As a result, the equilibrium price falls from OP to OP<sub>1<\/sub>, and the equilibrium quantity increases from OQ to OQ<sub>1<\/sub>, as shown at point E<sub>1<\/sub>.<\/p>\n<p>\u2192 When the supply decreases, the supply curve shifts to the left from SS to S<sub>2<\/sub> S<sub>2<\/sub>, demand remaining the same.<\/p>\n<p>\u2192 As a result, the equilibrium price rises from OP to OP<sub>2<\/sub> and the equilibrium quantity decreases from OQ to OQ<sub>2<\/sub> as shown at point E<sub>2<\/sub>.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Effects of simultaneous shifts in demand and supply on equilibrium price:<\/strong><br \/>\nSometimes demand and supply conditions may change at the same time changing the equilibrium price and quantity. The changes in both demand and supply simultaneously can be discussed with the help of following diagrams :<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8911\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-8.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 8\" width=\"802\" height=\"227\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-8.png 802w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-8-300x85.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-8-768x217.png 768w\" sizes=\"(max-width: 802px) 100vw, 802px\" \/><br \/>\nEffect of simultaneous changes in Demand &amp; Supply on Equilibrium Price.<br \/>\n\u2192 In Fig. &#8211; DD and SS are the original demand and supply respectively intersecting each other at point E at which the equilibrium price is OP and the equilibrium quantity is OQ.<\/p>\n<p>\u2192 Fig. (a) shows that the increase in demand is equal to increase in supply. The new curves D<sub>1<\/sub>, D<sub>1<\/sub>, and S<sub>1<\/sub>, S<sub>1<\/sub>, intersect at E<sub>1<\/sub>. Therefore, the new equilibrium price is equal to old equilibrium price OP. But equilibrium quantity increases.<\/p>\n<p>\u2192 Fig. (b) shows that the increase in demand is more than increase in supply. The new curves D<sub>1<\/sub>, D<sub>1<\/sub>, and S<sub>1<\/sub>, S<sub>1<\/sub>, intersect each other at point E<sub>1<\/sub>, which shows that new equilibrium price OP<sub>1<\/sub>, is higher than old equilibrium price OP. But equilibrium quantity increases.<\/p>\n<p>\u2192 Fig. (c) shows that the increase in supply is more than increase in demand. The new curves D<sub>1<\/sub>D<sub>1<\/sub>, and S<sub>1<\/sub>S<sub>1<\/sub> intersect each other at point E<sub>1<\/sub> which shows that new equilibrium price OP<sub>1<\/sub> is lower than old equilibrium price OP. But equilibrium quantity increases.<\/p>\n<p><strong>Perfect competition:<\/strong><br \/>\nIntroduction :<br \/>\n\u2192 Perfect competition is a market structure where there are large number of firms (seller) which produce and sell homogeneous product. Individual firm produces only a small portion of the total market supply.<\/p>\n<p>\u2192 Therefore, a single firm cannot affect the price.<\/p>\n<ul>\n<li>Price is fixed by industry.<\/li>\n<li>Firm is only a price taker.<\/li>\n<li>So the price of the commodity is uniform.<\/li>\n<\/ul>\n<p>Features of perfect competition.<br \/>\n\u2192 Following are the main features of perfect competition :<br \/>\n(1) Large number of buyers and sellers :<\/p>\n<ul>\n<li>The number of buyers and sellers is so large that none of them can influence the price in the market individually.<\/li>\n<li>Price of the commodity is determined by the forces of market demand and market supply.<\/li>\n<\/ul>\n<p>(2) Homogeneous Product:<br \/>\nThe product produced by all the firms in the industry are homogeneous.<\/p>\n<ul>\n<li>They are identical in every respect like colour, size, etc.<\/li>\n<li>Products are perfect substitutes of each other.<\/li>\n<\/ul>\n<p>(3) Free entry and exit of the firms from the markets :<\/p>\n<ul>\n<li>New firms are free to enter the industry any time.<\/li>\n<li>Old firms or loss incurring firms can leave industry any time.<\/li>\n<li>The condition of free entry and exit applies only to the long run equilibrium of the industry.<\/li>\n<\/ul>\n<p>(4) Perfect knowledge of the market:<\/p>\n<ul>\n<li>Under perfect competition, all firms (sellers) and buyers have perfect knowledge about the market.<\/li>\n<li>Both have perfect information about prices at which commodities can be sold and bought.<\/li>\n<\/ul>\n<p>(5) Perfect mobility :<br \/>\nThe factors of production can move freely from one occupation to another and from one place to another.<\/p>\n<p>(6) No transport cost:<br \/>\nTransport cost is ignored as all the firms have equal access to the market.<\/p>\n<p>(7) No selling cost:<\/p>\n<ul>\n<li>Under perfect competition commodities traded are homogeneous and have uniform price.<\/li>\n<li>Therefore, firm need not make any expenditure on publicity and advertisement.<\/li>\n<\/ul>\n<p>Equilibrium of the Industry :<br \/>\n\u2192 Industry is a group of firms producing identical commodities.<\/p>\n<p>\u2192 Under perfect competition, price of a commodity is determined by the interaction between market demand and market supply of the whole industry.<\/p>\n<p>\u2192 The equilibrium price is determined at a point where demand for and supply of the whole industry are equal to each other.<\/p>\n<p>\u2192 No individual firm can influence the price.<\/p>\n<p>\u2192 Firm has to accept the price determined by the industry.<\/p>\n<p>\u2192 Therefore, the firm is said to be price taker and industry, the price maker.<\/p>\n<p>\u2192 Equilibrium of the industry is illustrated as follows :<br \/>\nTable &#8211; Price Determination:<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td style=\"text-align: center;\" colspan=\"3\">Industry<\/td>\n<\/tr>\n<tr>\n<td>Price \u20b9 Per unit<\/td>\n<td>Demand (Units)<\/td>\n<td>Supply (units)<\/td>\n<\/tr>\n<tr>\n<td>10<br \/>\n8642<\/td>\n<td>20<br \/>\n40<br \/>\n60<br \/>\n80<br \/>\n100<\/td>\n<td>100<br \/>\n80<br \/>\n60<br \/>\n40<br \/>\n20<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8912\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-9.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 9\" width=\"280\" height=\"209\" \/><br \/>\nFigure : Equilibrium Price (Industry)<br \/>\n\u2192 The above table and fig. shows that at a price of \u20b9 6 per unit, the quantity demanded equals quantity supplied.<\/p>\n<p>\u2192 The industry is at equilibrium at point \u2018E\u2019, where the equilibrium price is \u20b9 6 and equilibrium quantity is 60 units.<\/p>\n<p>Equilibrium of a firm:<br \/>\n\u2192 We have already seen that under the perfect competition, the price of the commodity is determined by the forces of market demand and market supply i.e. price is determined by industry.<\/p>\n<p>\u2192 Individual firm has to accept the price determined by the industry. Hence, firm is a Price taker.<br \/>\nTable &#8211; Equilibrium price (Industry)<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8913\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-10.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 10\" width=\"804\" height=\"334\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-10.png 804w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-10-300x125.png 300w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-10-768x319.png 768w\" sizes=\"(max-width: 804px) 100vw, 804px\" \/>\u2192 In the table &#8211; the equilibrium price for the industry has been fixed at \u20b9 6 per unit through the inter-action of market demand and supply.<\/p>\n<p>\u2192 Table &#8211; shows that the firm has no choice but to accept and sell their commodity at a price that has been determined by the industry i.e. \u20b9 6 per unit.<\/p>\n<p>\u2192 The firm cannot charge higher price than the market price of \u20b9 6 per unit because of fear of loosing customers to rival firms.<\/p>\n<p>\u2192 There is no incentive for the firm to lower the price also.<\/p>\n<p>\u2192 Firm will try to sell as much as it can at the price of \u20b9 6 per unit.<\/p>\n<p>\u2192 Table &#8211; shows that firm\u2019s AR = MR = Price.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8914\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 11\" width=\"565\" height=\"218\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11.png 565w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11-300x116.png 300w\" sizes=\"(max-width: 565px) 100vw, 565px\" \/><\/p>\n<p>Figure : The firm\u2019s demand curve, AR and MR curves under perfect competition.<\/p>\n<p>\u2192 Fig. shows that being a price taker firm, it has to sell at a given price i.e. 16 per unit.<\/p>\n<p>\u2192 Therefore, firm&#8217;s demand curve is a horizontal straight line parallel to X-axis i.e. a perfectly elastic demand curve.<\/p>\n<p>\u2192 We know that price of a commodity is also the AR for the firm.<\/p>\n<p>\u2192 Therefore, demand curve also shows the AR for different quantities sold by the firm.<\/p>\n<p>\u2192 As every additional unit is sold at a given price i.e. \u20b9 6 per unit, the MR = AR and the two curves coincides.<\/p>\n<p>\u2192 Thus, in a perfectly competitive market a firm&#8217;s<br \/>\nAR = MR = Price = Demand Curve<\/p>\n<p>Conditions for equilibrium of a firm :<br \/>\n\u2192 In perfect competition, the firms are price takers and output adjusters.<\/p>\n<p>\u2192 This is because the price of the commodity is determined by the forces of market demand and market supply i.e. by whole industry and individual firm has to accept it.<\/p>\n<p>\u2192 Therefore firm has to simply choose that level of output which yields maximum profit at the prevailing prices.<\/p>\n<p>\u2192 The firm is at equilibrium when it maximises its profit.<\/p>\n<p>\u2192 The output which helps the firm to maximise its profit is called equilibrium output.<\/p>\n<p>\u2192 There are two conditions for the equilibrium of a firm.<br \/>\nThey are &#8211;<\/p>\n<ul>\n<li>Marginal Revenue should be equal to the marginal cost i.e. MR = MC. (First order condition)<\/li>\n<li>Firm\u2019s marginal cost curve should cut its marginal revenue curve from below i.e. marginal cost curve should have positive slope at the point of equilibrium. (Second order condition)<\/li>\n<\/ul>\n<p>\u2192 If MR &gt; MC, there is incentive to produce more and add to profits.<\/p>\n<p>\u2192 If MR &lt; MC, the firm will have to decrease the output as cost of production of additional units is high.<\/p>\n<p>\u2192 When MR = MC, it is equilibrium output which maximises the profits.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8931\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11a.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 11a\" width=\"584\" height=\"271\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11a.png 584w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-11a-300x139.png 300w\" sizes=\"(max-width: 584px) 100vw, 584px\" \/><br \/>\n\u2192 Fig. shows that OP is the price determined the industry and firm has to accept it.<\/p>\n<p>\u2192 At prevailing price OP the firm faces horizontal demand curve or average revenue curve.<\/p>\n<p>\u2192 Since the firm sells every additional unit at the same price, marginal revenue curve coincides with average revenue curve.<\/p>\n<p>\u2192 In the fig. at point \u2018A\u2019,<br \/>\nMR = MC<br \/>\nbut second condition is not fulfilled.<\/p>\n<p>\u2192 Therefore, OQ<sub>1<\/sub> is not equilibrium output. Firm should expand output beyond OQ<sub>1<\/sub> because<\/p>\n<ul>\n<li>it will result in the fall of marginal cost, and<\/li>\n<li>add to firm\u2019s profits.<\/li>\n<\/ul>\n<p>\u2192 In the fig. at point &#8216;B\u2019 not only<br \/>\nMR = MC<br \/>\nbut MC curve cuts the MR curve from below Le. it has positive slope.<\/p>\n<p>\u2192 Therefore, OQ<sub>2<\/sub> is the equilibrium level of output and point \u2018B\u2019 represents equilibrium of firm.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Supply curve of the firm in a competitive market:<\/strong><br \/>\nIn a perfectly competitive industry, the MC curve of the firm is also its supply curve. This can be explained with the help of following figure.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-8915 alignnone\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-12.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 12\" width=\"764\" height=\"306\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-12.png 764w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-12-300x120.png 300w\" sizes=\"(max-width: 764px) 100vw, 764px\" \/><br \/>\nFigure : Marginal Cost and Supply curve of a competitive firm<\/p>\n<ul>\n<li>The fig. shows that at the market price OP<sub>1<\/sub>, the firm faces demand curve D<sub>1<\/sub>.<\/li>\n<li>At OP<sub>1<\/sub>, price the firm supplies OQ<sub>1<\/sub>, quantity because here MC = MR.<\/li>\n<li>If the price rises to OP<sub>2<\/sub> the firm faces demand curve D<sub>2<\/sub>.<\/li>\n<li>At OP<sub>2<\/sub> price the firm supplies OQ<sub>2<\/sub> quantity.<\/li>\n<li>Similarly at OP<sub>3<\/sub> and OP<sub>4<\/sub> price corresponding supplies are OQ<sub>3<\/sub> and OQ<sub>4<\/sub> respectively.<\/li>\n<li>Thus, the firm\u2019s marginal cost curve indicates the quantities of output which it will supply at different prices.<\/li>\n<li>It can be observed that the competitive firm&#8217;s short run supply curve is identical only with that portion of<\/li>\n<li>MC curve, which lies above the AVC.<\/li>\n<li>Hence, price \u2265 AVC.<\/li>\n<\/ul>\n<p><strong>Short Run Equilibrium of a Competitive Firm. (Price &#8211; Output Equilibrium):<\/strong><br \/>\n\u2192 A competitive firm in the short run attains equilibrium at a level of output which satisfies the following two conditions:<\/p>\n<ul>\n<li>MC = MR, and<\/li>\n<li>MC curve cuts the MR curve from below.<\/li>\n<\/ul>\n<p>\u2192 When a competitive firm, is in short run equilibrium, it may find itself in any of the following situations &#8211;<\/p>\n<ul>\n<li>it break evens i.e. earn NORMAL PROFITS where Average Revenue = Average Cost i.e. AR = AC.<\/li>\n<li>it earns profit i.e. earn SUPER NORMAL PROFITS where Average Revenue &gt; Average Cost i.e. AR &gt; AC.<\/li>\n<li>it suffer LOSSES where Average Revenue &lt; Average Cost i.e. AR &lt; AC.<\/li>\n<\/ul>\n<p>Normal Profits (AR = AC):<br \/>\nA firm would earn normal profits if at the equilibrium output AR=AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8916\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-13.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 13\" width=\"441\" height=\"338\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-13.png 441w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-13-300x230.png 300w\" sizes=\"(max-width: 441px) 100vw, 441px\" \/><br \/>\nShort Run Equilibrium of a competitive firm : Normal Profits<br \/>\nEquilibrium point : E (MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QE (= OP)<br \/>\nAverage Cost : QE<br \/>\nTherefore, AR = AC. Hence, Normal Profits.<\/p>\n<p>Super Normal Profits (AR &gt; AC):<br \/>\nA firm would earn super normal profits if at the equilibrium output AR &gt; AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8917\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-14.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 14\" width=\"389\" height=\"259\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-14.png 389w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-14-300x200.png 300w\" sizes=\"(max-width: 389px) 100vw, 389px\" \/><br \/>\nFigure : Short Run Equilibrium of a competitive firm : Super Normal Profits<br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QE(= OP)<br \/>\nAverage Cost : QF<br \/>\n\u2234 Profit Per unit : Average Revenue &#8211; Average Cost<br \/>\n= QE &#8211; QF = EF<br \/>\nTotal Profits : Total output x profit per unit<br \/>\n= OQ X EF<br \/>\nArea PEFG.<\/p>\n<p>Losses (AR &lt; AC):<br \/>\nA firm suffer losses, if at the equilibrium level of output, its AR &lt; AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8918\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-15.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 15\" width=\"387\" height=\"256\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-15.png 387w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-15-300x198.png 300w\" sizes=\"(max-width: 387px) 100vw, 387px\" \/><br \/>\nFigure : Short Run Equilibrium of Competitive Firm : Losses<br \/>\nEquilibrium Point : E (where MR MC)<br \/>\nEquilibrium Output : OQ<br \/>\nAverage Revenue : QE<br \/>\nAverage Cost : QF<br \/>\n\u2234 Loss per unit : Average cost &#8211; Average Revenue<br \/>\n= QF &#8211; QE = EF<br \/>\nTotal Loss : Total output x loss per unit<br \/>\n= OQ x EF<br \/>\n= Area PEFG<\/p>\n<p>\u2192 When the firm incur losses, a question arises whether it should continue to produce or should it shut down ?<\/p>\n<p>\u2192 The answer to this lies in the cost structure of the firm. \u2192 Total cost of a firm = Total Fixed Costs + Total Variable Costs<\/p>\n<p>\u2192 Fixed costs once incurred cannot be recovered even if the firm shuts down.<\/p>\n<p>\u2192 Therefore, whether to shut down or not depends on variable costs alone.<\/p>\n<p>\u2192 If AR (Price) &gt; AVC or AR = AVC, the firm can continue to produce even though it suffer losses at the equilibrium level of output.<\/p>\n<p>\u2192 If AR (Price) &lt; AVC, the firm should shut down.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Long run Equilibrium of a Competitive Firm:<\/strong><br \/>\n\u2192 In a perfectly competitive market there is no restriction on the entry or exit of firms.<\/p>\n<p>\u2192 Therefore, if existing firms are earning super normal profits in the short run, they will attract new firms to enter the industry.<\/p>\n<p>\u2192 As a result of this, the supply of the commodity increases. This brings down the price per unit.<\/p>\n<p>\u2192 On the other hand, the demand for factors of productions rises which pushes up their prices and so the cost of production rises.<\/p>\n<p>\u2192 Thus, the price line or AR curve will go down and cost curves will go up.<\/p>\n<p>\u2192 As a result of this, price line or AR curve becomes tangent to long run average cost curve. This wipes out super normal profit.<\/p>\n<p>\u2192 Hence, in long run firms earn only normal profits.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8919\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-16.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 16\" width=\"414\" height=\"260\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-16.png 414w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-16-300x188.png 300w\" sizes=\"(max-width: 414px) 100vw, 414px\" \/><br \/>\nFigure : Long run equilibrium of a cofnpetitive industry and its firms.<\/p>\n<p>\u2192 Fig. Shows that long run LMR = LMC = LAC = LAR = Price<\/p>\n<p>\u2192 The firm is at equilibrium at point Er<\/p>\n<p>\u2192 E<sub>1<\/sub> is the minimum point of LAC curve. Thus firm produces equilibrium output OQ<sub>1<\/sub> at the minimum or optimum cost.<\/p>\n<p>\u2192 In the long run under competitive market &#8211;<\/p>\n<ul>\n<li>Firms earn just normal profits, and<\/li>\n<li>competitive firms are of optimum size because they produce at optimum cost Le. at the lowest point of long run average cost curve.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Monopoly<\/strong><\/p>\n<p>Introduction :<br \/>\n\u2192 \u2018Mono\u2019 means single and \u2018Poly\u2019 means seller.<\/p>\n<p>\u2192 So monopoly refers to that market structure where there is a single firm producing and selling a commodity which has no close substitute.<\/p>\n<p>\u2192 As there is no rival firms producing close substitute,<\/p>\n<ul>\n<li>the monopoly firm itself is industry, and<\/li>\n<li>its output constitutes the total market supply.<\/li>\n<\/ul>\n<p>Features of Monopoly Market:<br \/>\nFollowing are the main features of the monopoly market:<br \/>\n1. Single seller and Large number of buyers.<\/p>\n<ul>\n<li>There is only one seller or producer of a commodity in the market but there are many buyers.<\/li>\n<li>As a result, the monopoly firm has full control over the supply of the commodity.<\/li>\n<\/ul>\n<p>2. No close substitutes.<\/p>\n<ul>\n<li>The commodity sold by the monopolist generally has no close substitutes.<\/li>\n<li>Therefore, the cross elasticity of demand between monopolist\u2019s commodity and other commodity is zero or less than one.<\/li>\n<li>As a result monopoly firm faces a downward sloping demand curve.<\/li>\n<\/ul>\n<p>3. Restrictions to entry for new firms.<\/p>\n<ul>\n<li>The monopoly firm controls the situation in such a way that it becomes difficult for new firms to enter the monopoly market and compete with monopoly firm.<\/li>\n<li>There are many barriers to the entry of new firm which can be economic, institutional or artificial in nature.<\/li>\n<\/ul>\n<p>4. Price maker.<\/p>\n<ul>\n<li>A monopoly firm has full control over the supply of the commodity<\/li>\n<li>Price is solely fixed by the monopoly firm.<\/li>\n<li>So, a monopoly firm is a \u201cprice maker\u201d.<\/li>\n<\/ul>\n<p>Sources of Monopoly:<br \/>\nThe sources of monopoly may be listed as follows :<br \/>\n1. Patents, copyrights and trade marks.<br \/>\nLegal support provided by the government to promote inventions, to produce a particular commodity, etc. by granting patents, copyrights, trademarks, etc. creates monopoly.<\/p>\n<p>2. Control of raw materials.<br \/>\nIf one firm acquires the sole ownership or control of essential raw materials, then the other firms cannot compete.<\/p>\n<p>3. Economies of large scale.<\/p>\n<ul>\n<li>The monopoly firm may be very big and enjoy economies of large scale of production.<\/li>\n<li>The cost of production is therefore low, hence it may supply goods at low prices.<\/li>\n<li>This leaves no scope for new firms to enter the market.<\/li>\n<\/ul>\n<p>4. Government control on entry:<br \/>\nExample &#8211; In defense production; public utility services like water, transportation, electricity, etc.<\/p>\n<p>5. Business combines.<br \/>\nMonopolies are created by forming cartels, pools, syndicates, etc. by the firms producing the same goods to control price and output.<\/p>\n<p>Average Revenue and Marginal Revenue Curves under Monopoly:<\/p>\n<ul>\n<li>Monopoly firm constitutes industry.<\/li>\n<li>Therefore, the entire demand of the consumers faces the monopolist<\/li>\n<li>The demand curve of a monopoly firm is the same as the market demand curve of the commodity.<\/li>\n<li>As the demand curve of the consumers for a commodity slopes downward, the monopolist faces a downward sloping demand curve.<\/li>\n<li>This means that monopolist can sell more quantity only by lowering the price of the commodity<\/li>\n<li>The demand curve facing the monopolist is also his average revenue curve. Thus, average revenue curve of the monopolist slopes downwards<\/li>\n<li>As the demand curve i.e. average revenue curve slopes downwards, marginal revenue curve will be below it.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p>Table : Revenue Schedule of a Monopoly Firm.<\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Units Sold<\/td>\n<td>Price (\u20b9) (AR)<\/td>\n<td>Total Revenue \u20b9 \u00a0(TR)<\/td>\n<td>Marginal Revenue \u20b9 (MR)<\/td>\n<\/tr>\n<tr>\n<td>1<\/td>\n<td>10<\/td>\n<td>10<\/td>\n<td>10<\/td>\n<\/tr>\n<tr>\n<td>2<\/td>\n<td>9<\/td>\n<td>18<\/td>\n<td>8<\/td>\n<\/tr>\n<tr>\n<td>3<\/td>\n<td>8<\/td>\n<td>24<\/td>\n<td>6<\/td>\n<\/tr>\n<tr>\n<td>4<\/td>\n<td>7<\/td>\n<td>28<\/td>\n<td>4<\/td>\n<\/tr>\n<tr>\n<td>5<\/td>\n<td>6<\/td>\n<td>30<\/td>\n<td>2<\/td>\n<\/tr>\n<tr>\n<td>6<\/td>\n<td>5<\/td>\n<td>30<\/td>\n<td>0<\/td>\n<\/tr>\n<tr>\n<td>7<\/td>\n<td>4<\/td>\n<td>28<\/td>\n<td>-2<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8920\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-17.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 17\" width=\"341\" height=\"310\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-17.png 341w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-17-300x273.png 300w\" sizes=\"(max-width: 341px) 100vw, 341px\" \/><br \/>\n\u2192 In the figure above, AR curve of the monopolist slopes downward and MR curve lies below it.<\/p>\n<p>\u2192 At a quantity OQ, average revenue i.e. price is OP (=QT) and marginal revenue is QK which is less than average revenue OP (=QT).<\/p>\n<p>\u2192 Thus, in case of monopoly &#8211;<\/p>\n<ul>\n<li>AR and MR are both negatively sloped curves,<\/li>\n<li>MR curve lies half way between the AR curve and the Y-axis,<\/li>\n<li>AR cannot be zero i.e. AR curve cannot&#8217;touch X-axis,<\/li>\n<li>MR can be zero or even negative i.e. MR curve can touch or cut the X-axis.<\/li>\n<\/ul>\n<p>Short Run Equilibrium of the Monopoly Firm (Price &#8211; Output Equilibrium):<br \/>\n\u2192 A monopolist will produce an output that maximizes his total profits.<\/p>\n<p>\u2192 A monopolist will maximize his total profits when &#8211;<\/p>\n<ul>\n<li>Marginal Cost = Marginal Revenue (MC = MR), and<\/li>\n<li>Marginal cost curve cuts the marginal revenue curve from below.<\/li>\n<\/ul>\n<p>\u2192 When a monopoly firm is in the short run equilibrium, it may find itself in the following situations &#8211;<\/p>\n<ul>\n<li>Firm will earn SUPER NORMAL PROFITS if its AR &gt; AC;<\/li>\n<li>Firm will earn NORMAL PROFITS if its AR = AC, and<\/li>\n<li>Firm will suffer LOSSES if its AR &lt; AC.<\/li>\n<\/ul>\n<p>1. Super Normal Profits (AR &gt; AC) :<br \/>\nThe monopoly firm would earn super normal profits if at the equilibrium output AR &gt; AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8921\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-18.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 18\" width=\"310\" height=\"248\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-18.png 310w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-18-300x240.png 300w\" sizes=\"(max-width: 310px) 100vw, 310px\" \/><br \/>\nFigure : Short Run Equilibrium of a Monopoly Firm : Super Normal Profits.<br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL(= OP)<br \/>\nAverage Cost : QM<br \/>\n\u2234 Profit Per unit : Average Revenue &#8211; Average Cost<br \/>\n= QL &#8211; QM = LM<br \/>\nTotal Profits : Total Output x Profit per unit<br \/>\n= OQ x ML<br \/>\n= Area PLMR<\/p>\n<p>2. Normal Profits (AR = AC) :<br \/>\nThe monopoly firm would earn normal profits if at the equilibrium output AR = AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8922\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-19.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 19\" width=\"509\" height=\"292\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-19.png 509w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-19-300x172.png 300w\" sizes=\"(max-width: 509px) 100vw, 509px\" \/><br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL<br \/>\nAverage Cost : QL<br \/>\nTherefore, AR=AC.<br \/>\nHence, normal profits.<\/p>\n<p>3. Losses (AR &lt; AC) :<br \/>\nThe monopoly firm would suffer losses, if at the equilibrium output its AR &lt; AC.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8923\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-20.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 20\" width=\"393\" height=\"303\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-20.png 393w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-20-300x231.png 300w\" sizes=\"(max-width: 393px) 100vw, 393px\" \/><br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL(= OP)<br \/>\nAverage Cost : QM<br \/>\n\u2234 Loss Per unit : Average Cost &#8211; Average Revenue<br \/>\n= QM &#8211; QL<br \/>\n= ML<br \/>\nTotal Loss : Total output x Loss per unit<br \/>\n= OQ x ML<br \/>\n= Area PLMR<br \/>\n\u2192 If monopoly firm\u2019s AR &gt; AVC or AR = AVC, it can continue to produce though it suffer losses at the equilibrium level of output.<\/p>\n<p>Long Run Equilibrium of a Monopoly Firm:<br \/>\n\u2192 The long run equilibrium of the monopoly firm is attained where its MARGINAL COST = MARGINAL REVENUE i.e. MC = MR.<\/p>\n<p>\u2192 The monopoly firm can continue to earn super normal profits even in the long run.<\/p>\n<p>\u2192 This is because entry to the market for new firms is blocked.<\/p>\n<p>\u2192 All costs are variable costs in the long run and these must be recovered.<\/p>\n<p>\u2192 This means that monopoly firm does not suffer loss in the long run.<\/p>\n<p>\u2192 However, if it is unable to recover variable costs, it should shut down.<\/p>\n<p>\u2192 Fig. Shows the long run equilibrium of a monopoly firm.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8924\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-21.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 21\" width=\"361\" height=\"297\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-21.png 361w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-21-300x247.png 300w\" sizes=\"(max-width: 361px) 100vw, 361px\" \/><br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL(= OP)<br \/>\nAverage Cost : QM<br \/>\n\u2234 Profit per unit : Average Cost &#8211; Average Revenue<br \/>\n= QL &#8211; QM = LM<br \/>\nTotal Profits : Total Output x Profit per unit<br \/>\n= OQ x LM<br \/>\n= Area PLMR<br \/>\n\u2192 Thus, we find that monopoly firm continue to earn super normal profits in long run.<\/p>\n<p>\u2192 A monopoly firm does not produce at the lowest point of LAC curve i.. does not produce at optimum level because of absence of competition.<\/p>\n<p>\u2192 In other words, it operates at sub-optimum level and therefore, does not produce optimum output.<\/p>\n<p>Price Discrimination:<\/p>\n<ul>\n<li>A monopoly firm is also the industry.<\/li>\n<li>A single firm controls the entire supply.<\/li>\n<li>Therefore, the firm has the power to sell the same commodity to different buyers at different prices.<\/li>\n<li>When the firm charge different prices to different customers for the same commodity, it is engaged in price discrimination.<\/li>\n<li>Example &#8211; Electricity supplying firm charge higher rate per unit of electricity from industrial units than domestic consumers.<\/li>\n<\/ul>\n<p>Conditions for price discrimination:<br \/>\nPrice discrimination is possible under the following conditions :<br \/>\n1. Existence of two or more than two sub-markets.<\/p>\n<ul>\n<li>The monopolist should be able to divide the total market for his commodity into two or more sub-markets.<\/li>\n<li>Such division of market may be on the basis of income, geographic location, age, sex, etc.<\/li>\n<li>Example &#8211; on the basis of income, a doctor may charge high fees from rich patients than from poor.<\/li>\n<\/ul>\n<p>2. Different markets should have different price elasticity of demand.<\/p>\n<ul>\n<li>The difference in price elasticity of demand in different markets enables the monopolist to discriminate among customers.<\/li>\n<li>He can charge higher price in inelastic market and lower price in elastic market.<\/li>\n<\/ul>\n<p>3. No possibility of resale.<\/p>\n<ul>\n<li>It should not be possible for buyers to purchase the commodity from a cheaper market and sell it in the costlier markets.<\/li>\n<li>In other words, there should be no contact among the buyers of the two markets.<\/li>\n<\/ul>\n<p>4. Control over supply.<br \/>\nThe supply should be in full control of the monopolist.<\/p>\n<p>Price-output determination under price discrimination:<br \/>\n\u2192 Suppose a discriminating monopolist sell his output in market \u2018A&#8217; and market &#8216;B&#8217;.<\/p>\n<p>\u2192 Market \u2018A\u2019 has less elastic demand and market \u2018B\u2019 has more elastic demand.<\/p>\n<p>\u2192 Suppose the monopolist has only one production facility then he is faced with the questions<\/p>\n<ul>\n<li>How much to produce?<\/li>\n<li>How much to sell in each market?<\/li>\n<li>How much price to charge in each market?<\/li>\n<\/ul>\n<p>\u2192 The monopolist will first decide profitable level of total output (ie. where MR = MC) and then allocate the quantity between two markets.<\/p>\n<p>\u2192 The condition for equilibrium here would be &#8211;<\/p>\n<ul>\n<li>MC = MR<sub>a<\/sub> = MR<sub>b<\/sub>. It means that MC must be equal to MR in individual markets separately.<\/li>\n<li>MC = AMR (aggregate marginal revenue). It means that the monopolist must be in equilibrium not only in individual markets but also when the two markets are treated as one.<\/li>\n<\/ul>\n<p>\u2192 The process of price determination under price discrimination is shown in the following figure<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8925\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-22.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 22\" width=\"690\" height=\"320\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-22.png 690w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-22-300x139.png 300w\" sizes=\"(max-width: 690px) 100vw, 690px\" \/><br \/>\n\u2192 In the fig. &#8211; MC curve intersect the AMR curve at point E<\/p>\n<p>\u2192 Point E shows the total output is OQ.<\/p>\n<p>\u2192 When a perpendicular EH is drawn, it intersect MR<sub>a<\/sub> at E<sub>1<\/sub> and MR<sub>b<\/sub> at E<sub>2<\/sub>. These are the equilibrium point of market A and B<\/p>\n<p>\u2192 Point E<sub>1<\/sub> shows that quantity sold in market A is OQ<sub>1<\/sub> and the price charged is OP<sub>1<\/sub>.<\/p>\n<p>\u2192 Point E<sub>2<\/sub> shows that quantity sold in market B is OQ<sub>2<\/sub> and the price charged is OP<sub>2<\/sub><\/p>\n<p>\u2192 Price charged in market &#8216;A&#8217; is higher than in market &#8216;B&#8217;.<\/p>\n<p>\u2192 Thus, a discriminating monopolist chargers a higher price in the market \u2018A&#8217; having less elastic demand and a lower price in the market \u2018B\u2019 having more elastic demand.<\/p>\n<p>\u2192 The marginal revenue is different in different markets.<br \/>\nExample &#8211; Suppose the single monopoly price is \u20b9 40 and elasticity of demand in market A and B is 2 and 4 respectively.<br \/>\nMR in market A = AR<sub>a<\/sub>(\\(\\frac { e-1 }{ e }\\))<br \/>\n= 40(\\(\\frac { 2-1 }{ 2 }\\))<br \/>\n= \u20b9 20<br \/>\nMR in market B = AR<sub>a<\/sub>(\\(\\frac { e-1 }{ e }\\))<br \/>\n= 40(\\(\\frac { 4-1 }{ 4 }\\))<br \/>\n= \u20b9 30<br \/>\n\u2192 It is clear from the above example that the marginal revenue is different in different markets when elasticity of demand at the single price is different.<\/p>\n<p>\u2192 MR is higher in the market having high elasticity and vice versa.<\/p>\n<p>\u2192 In the above example, since marginal revenue in market \u2018B\u2019 is more, it will be profitable for monopolist to transfer some units of the commodity from market &#8216;A&#8217; to \u2018B\u2019.<\/p>\n<p>\u2192 When monopolist transfers the commodity from market A to B, he is practicing price discrimination.<\/p>\n<p>\u2192 As a result, the price of commodity will increase in market A and will decrease in market B.<\/p>\n<p>\u2192 Ultimately the marginal revenue in the two market will become equal.<\/p>\n<p>\u2192 When marginal revenue becomes equal in the two markets, it will no longer be profitable to transfer the units of commodity from market A to B.<\/p>\n<p>Objectives of Price discrimination:<br \/>\nTo earn maximum profit; to dispose off surplus stock; to enjoy economies of scale; to capture for\u00aceign markets etc.<\/p>\n<p>Degrees of price discrimination:<br \/>\nPigou classified price discrimination as follows:<br \/>\n(1) first degree price discrimination where the monopolist fix a price which take away the entire consumer&#8217;s surplus,<\/p>\n<p>(2) second degree price discrimination where the monopolist take away only some part of consumer\u2019s surplus. Here price changes according to the quantity sold.<\/p>\n<p>Example &#8211; large quantity sold at a lower price, third degree price discrimination where the monopolist charges the price according to location customer segment, income level, time of purchase etc.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Imperfect competition : monopolistic competition:<\/strong><\/p>\n<p>Introduction:<\/p>\n<ul>\n<li>We have studied two models that represent the two extremes of market structures namely perfect competition and monopoly.<\/li>\n<li>The two extremes of market structures are not seen in real world.<\/li>\n<li>In reality we find only imperfect competition which fall between the two extremes of perfect competition and monopoly.<\/li>\n<li>The two main forms of imperfect competition are &#8211;<br \/>\n\u2192 Monopolistic Competition and<br \/>\n\u2192 Oligopoly<\/li>\n<\/ul>\n<p>Meaning and features of Monopolistic Competition:<\/p>\n<ul>\n<li>As the name implies, monopolistic competition is a blend of competitive market and monopoly elements.<\/li>\n<li>There is competition because of large number of firms with easy entry into the industry selling similar product.<\/li>\n<li>The monopoly element is due to the fact that firms produce differentiated products. The products are similar but not identical.<\/li>\n<li>This gives an individual firm some degree of monopoly of its own differentiated product.<\/li>\n<li>Example &#8211; MIT and APTECH supply similar products, but not identical.<\/li>\n<\/ul>\n<p>Similarly, bathing soaps, detergents, shoes, shampoos, tooth pastes, mineral water, fitness and health centers, ready made garments, etc. all Operate in a monopolistic competitive market.<\/p>\n<p>The characteristics of monopolistic competitive market can be summed up as follows :<br \/>\n1. Large number of buyers and sellers<br \/>\n\u2192 There are large number of firms.<\/p>\n<ul>\n<li>So each individual firms can not influence the market.<\/li>\n<li>Each individual firm share relatively small fraction of the total market.<\/li>\n<\/ul>\n<p>\u2192 The number of buyers is also very large and so single buyer cannot influence the market by demanding more or less.<\/p>\n<p>2. Product Differentiation:<\/p>\n<ul>\n<li>The product produced by various firms are not identical but are somewhat different from each other but are close substitutes of each other.<\/li>\n<li>Therefore, the products are differentiated by brand names.<\/li>\n<li>Example &#8211; Colgate, Close-Up, Pepsodent, etc.<\/li>\n<li>Brand loyalty of customers gives rise to an element of monopoly to the firm.<\/li>\n<\/ul>\n<p>3. Freedom of entry and exit:<br \/>\nNew firms are free to enter into the market and existing firms are free to quit the market.<\/p>\n<p>4. Non-Price Competition<\/p>\n<ul>\n<li>Firms under monopolistic competitive market do not compete with each other on the basis of price of product.<\/li>\n<li>They compete with each other through advertisements, better product development, better after sales services, etc.<\/li>\n<li>Thus, firms incur heavy expenditure on publicity advertisement, etc.<\/li>\n<\/ul>\n<p>Short Run Equilibrium of a Firm in Monopolistic Competition. (Price-Output Equilibrium):<br \/>\n\u2192 Each firm in a monopolistic competitive market is a price maker and determines the price of its own product.<\/p>\n<p>\u2192 As many close substitutes for the product are available in the market, the demand curve (average revenue curve) for the product of individual firm is relatively more elastic.<\/p>\n<p>\u2192 The conditions of equilibrium of a firm are same as they are in perfect competition and mo-nopoly ie.<\/p>\n<ul>\n<li>MR = MC, and<\/li>\n<li>MC curve cuts the MR curve from below.<\/li>\n<\/ul>\n<p>\u2192 The following figures show the equilibrium conditions and price-output determination of a firm under monopolistic competition.<\/p>\n<p>\u2192 When a firm in a monopolistic competition is in the short run equilibrium, it may find itself in the following situations &#8211;<\/p>\n<ul>\n<li>Firm will earn SUPER NORMAL PROFITS if its AR &gt; AC;<\/li>\n<li>Firm will earn NORMAL PROFITS if its AR = AC; and<\/li>\n<li>Firm will suffer LOSSES if its AR &lt; AC<\/li>\n<\/ul>\n<p>1. Super Normal Profits (AR &gt; AC):<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8926\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-23.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 23\" width=\"362\" height=\"284\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-23.png 362w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-23-300x235.png 300w\" sizes=\"(max-width: 362px) 100vw, 362px\" \/><br \/>\nFigure : Firm&#8217;s Equilibrium under Monopolistic Competition Super Normal Profits.<br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL(= OP)<br \/>\nAverage Cost : QM<br \/>\n\u2234 Profit per unit : Average Revenue &#8211; Average Cost<br \/>\nQL &#8211; QM = LM<br \/>\nTotal Profits : Total Output x Profit per unit<br \/>\n= OQ X LM<br \/>\n= Area PLMR<br \/>\nThe firm will earn Normal Profits if AC curve is tangent to AR curve i.e. when AR = AC<\/p>\n<p>2. Losses (AR &lt; AC):<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8927\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-24.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 24\" width=\"381\" height=\"267\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-24.png 381w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-24-300x210.png 300w\" sizes=\"(max-width: 381px) 100vw, 381px\" \/><br \/>\nFigure : Firm\u2019s Equilibrium under Monopolistic Competition : Losses<br \/>\nEquilibrium point : E (where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QL<br \/>\nAverage Cost : QM<br \/>\n\u2234 Loss Per unit : Average Cost &#8211; Average Revenue<br \/>\n= QM &#8211; QL = ML<br \/>\nTotal Loss : Total Output x Loss per unit<br \/>\n= OQ x ML<br \/>\n= Area PLMR<br \/>\nThe firm may continue to produce even if incurring losses if its AR \u2265 AVC.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Long Run Equilibrium of a Firm in Monopolistic Competition:<\/strong><br \/>\n\u2192 If the firms in a monopolistic competitive market earn super normal profits, it attracts new firms to enter the industry.<\/p>\n<p>\u2192 With the entry of new firms market will be shared by more firms.<\/p>\n<p>\u2192 As a result, profits per firm will go on falling.<\/p>\n<p>\u2192 This will go on till super normal profits are wiped out and all the firms earn only normal profits.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8928\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-25.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 25\" width=\"364\" height=\"285\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-25.png 364w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-25-300x235.png 300w\" sizes=\"(max-width: 364px) 100vw, 364px\" \/><br \/>\nFigure : Long Run Equilibrium of a firm in Monopolistic Competition<br \/>\nEquilibrium Point : E(where MR = MC)<br \/>\nEquilibrium output : OQ<br \/>\nAverage Revenue : QR<br \/>\nAverage Cost : QR<br \/>\nTherefore, AC=AR. Hence, Normal Profits.<br \/>\n\u2192 In the long run firms in a monopolistic competitive market just earn Normal profits.<\/p>\n<p>\u2192 Firms operate at sub-optimal level as shown by point \u2018R\u2019 where the falling portion AC curve is tangent to AR curve.<\/p>\n<p>\u2192 In other words firms do not operate at the minimum point of LAC curve \u2018L\u2019.<\/p>\n<p>\u2192 Therefore, production capacity equal to QQ<sub>1<\/sub>, remains idle or unused called excess capacity.<\/p>\n<p>\u2192 This implies that in monopolistic competitive market &#8211;<\/p>\n<p>Firms are not of optimum size and each firm has excess production capacity:<\/p>\n<ul>\n<li>The firm can expand its output from Q to Q<sub>1<\/sub>, and reduce its average cost.<\/li>\n<li>But it will not do so because to sell more it will have to reduce its average revenue even more than average costs.<\/li>\n<li>Hence, firms will operate at sub-optimal level only in the long run.<\/li>\n<\/ul>\n<p><strong>Oligopoly<\/strong><\/p>\n<p>Introduction:<\/p>\n<ul>\n<li>\u2018Oligo&#8217; means few and &#8216;Poly&#8217; means seller. Thus, oligopoly refers to the market structure where there are few sellers or firms.<\/li>\n<li>They produce and sell such goods which are either differentiated or homogeneous products.<\/li>\n<li>Oligopoly is an important form of imperfect\/competition.<\/li>\n<li>Example &#8211; Cold drinks industry; automobile industry; Idea; Airtel. Hutch, BSNL mobile services in Nagpur; tea industry; etc.<\/li>\n<\/ul>\n<p>Types of Oligopoly:<\/p>\n<ul>\n<li>Pure or perfect oligopoly occurs when the product is homogeneous in nature, Example &#8211; Aluminum industry.<\/li>\n<li>Differentiated or imperfect oligopoly where products are differentiated. Example &#8211; toilet products.<\/li>\n<li>Open oligopoly where new firms can enter the market and compete with already existing firm.<\/li>\n<li>Closed oligopoly where entry of new firm is restricted.<\/li>\n<li>Collusive oligopoly when some firms come together with some common understanding and act in collusion with each other in fixing price and output.<\/li>\n<li>Competitive oligopoly where there is no understanding or collusion among the firms.<\/li>\n<li>Partial oligopoly where the industry is dominated by one large firm which is looked upon by other firms as the leader of the group. The dominating firm will be the price leader.<\/li>\n<li>Full oligopoly where there is absence of price leadership.<\/li>\n<li>Syndicated oligopoly where the firms sell their products through a centralized syndicate.<\/li>\n<li>Organized oligopoly where the firms organize themselves into a central association for fixing prices, output, quotas, etc.<\/li>\n<\/ul>\n<p>Characteristics of Oligopoly Market:<br \/>\nFollowing are the special features of oligopoly market:<br \/>\n1. Interdependence<\/p>\n<ul>\n<li>In an oligopoly market, there is interdependence among firms.<\/li>\n<li>A firm cannot take independent price and output decisions.<\/li>\n<li>This is because each firm treats other firms as rivals.<\/li>\n<li>Therefore, it has to consider the possible reaction to its rivals price-output decisions.<\/li>\n<\/ul>\n<p>2. Importance of advertising and selling costs:<\/p>\n<ul>\n<li>Due to interdependence, the various firms have to use aggressive and defensive marketing tools to achieve larger market share.<\/li>\n<li>For this the firms spend heavily on advertisement, publicity, sales promotion, etc. to attract large number of customers.<\/li>\n<li>Firms avoid price-wars but are engaged in non-price competition. Example &#8211; free set of tea mugs with a packet of Duncan&#8217;s Double Diamond Tea.<\/li>\n<\/ul>\n<p>3. Indeterminate Demand Curve:<\/p>\n<ul>\n<li>The nature and position of the demand curve of the oligopoly firm cannot be determined.<\/li>\n<li>This is because it cannot predict its sales correctly due to indeterminate reaction patterns of rival firms.<\/li>\n<li>Demand curve goes on shifting as rivals too change their prices in reaction to price changes by the firm.<\/li>\n<\/ul>\n<p>4. Group behaviour:<\/p>\n<ul>\n<li>The theory of oligopoly is a theory of group behaviour.<\/li>\n<li>The members of the group may agree to pull together to promote their mutual interest or fight for individual interests or to follow the group leader or not.<\/li>\n<li>Thus the behaviour of the members is very uncertain.<\/li>\n<\/ul>\n<p>Price and output decisions in an Oligopolistic Market:<br \/>\n\u2192 As seen earlier, an oligopolistic firm does not know how rival firms react to each other decisions. Therefore, it has to be very careful when it makes decision about its price. Rival firms retaliate to price change by an oligopolistic firm.<\/p>\n<p>Hence, its demand curve indeterminate. Price and output cannot be fixed. Some of the important oligopoly models are:<br \/>\n1. Some economists assume that oligopolistic firms make their decisions independently. Therefore, the demand curve becomes definite and hence equilibrium level of output can be determined.<\/p>\n<p>2. Some believe that oligopolistic can predict the reaction of rivals on the basis of which he makes decisions about price and quantity.<\/p>\n<p>3. Cornet considers OUTPUT is the firm\u2019s controlled variable and not price.<\/p>\n<p>4. In a model given by Stackelberg, the leader firm commits to an output before all other firms. The rest of firms follow it and choose their own level of output.<\/p>\n<p>5. Bertrand model states PRICE is the control variable for firms and therefore each firm sets the price independently.<\/p>\n<p>6. In order to pursue common interests, oligopolistic enter into enter into agreement and jointly act as monopoly to fix quantity and price.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4\" width=\"123\" height=\"13\" \/><\/p>\n<p>Price Leadership:<br \/>\n\u2192 A large or dominant firm may be surrounded by many small firms. The dominant firm takes the lead to set the price taking into account of the small firms. Dominant firm may adopt any one of the following strategies &#8211;<br \/>\n1. \u2018Live and let live\u2019 strategy where dominant firm accepts the presence of small firms and set the price. This is called price-leadership,<\/p>\n<p>2. In another strategy, the price leader sets the price in such a way that it allows some profits to the follower firms.<\/p>\n<p>3. Barometric price leadership where an old, experienced, respectful, largest acts as a leader and sets the price. It makes changes in price which are beneficial from all firm\u2019s and industry\u2019s view point. Price charged by leader is accepted by follower firms.<\/p>\n<p>Kinked Demand Curve :<br \/>\n\u2192 In many oligopolistic industries there is price rigidity or stability.<\/p>\n<p>\u2192 The prices remains sticky or inflexible for a long time.<\/p>\n<p>\u2192 Oligopolists do not change the price even if economic conditions change.<\/p>\n<p>\u2192 Out of many theories explaining price rigidity, the theory of kinked demand curve hypothesis given by American economist Paul M. Sweezy is most popular.<\/p>\n<p>\u2192 According to kinked demand curve 4 hypothesis, the demand curve faced by an oligopolist have a \u2018Kink\u2019 at the prevailing price level.<\/p>\n<p>\u2192 A kink is formed at the prevailing price because &#8211;<\/p>\n<ul>\n<li>the portion of the demand curve above the prevailing price is elastic, and<\/li>\n<li>the portion of the demand curve below the prevailing price is inelastic<\/li>\n<\/ul>\n<p>\u2192 Consider the following figure.<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-8929\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-26.png\" alt=\"Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4 26\" width=\"360\" height=\"313\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-26.png 360w, https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4-26-300x261.png 300w\" sizes=\"(max-width: 360px) 100vw, 360px\" \/><br \/>\n\u2192 In the fig., OP is the prevailing price at which the firm is producing and selling OQ output.<\/p>\n<p>\u2192 At prevailing price OP, the upper portion of demand curve dK is elastic and lower portion of demand curve KD is inelastic.<\/p>\n<p>\u2192 This difference in elasticities is due to the assumption of particular reactions by kinked demand curve theory.<\/p>\n<p>\u2192 The assumed reaction pattern are &#8211;<br \/>\n1. If the oligopolist raises the price above the prevailing price OP, he fears that none of his rivals will follow him.<\/p>\n<ul>\n<li>Therefore, he will loose customers to them and there will be substantial fall in his sales.<\/li>\n<li>Thus, the demand with respect to price rise above the prevailing price is highly elastic as indicated by the upper portion of demand curve dK.<\/li>\n<li>The oligopolist will therefore, stick to the prevailing prices.<\/li>\n<\/ul>\n<p>2. If the oligopolist reduces the price below the prevailing price OP to increase his sales, his rivals too will quickly reduce the price.<\/p>\n<ul>\n<li>This is because the rivals fear that their customers will get diverted to price cutting oligopolist\u2019s product.<\/li>\n<li>Thus, the price cutting oligopolist will not be able to increase his sales very much.<\/li>\n<li>Hence, the demand with respect to price reduction below the prevailing price is inelastic as indicated by the lower portion of demand curve KD.<\/li>\n<li>The oligopolist will therefore, stick to the prevailing prices.<\/li>\n<li>Each oligopolist will, thus, stick to the prevailing price realising no gain in changing the price.<\/li>\n<li>A kink will, therefore, be formed at the prevailing price which remains rigid or sticky or stable at this level.<\/li>\n<\/ul>\n<p>Other Important Market Forms:<\/p>\n<ul>\n<li>Duopoly in which there are only TWO firms in the market. It is subset of oligopoly.<\/li>\n<li>Monopoly is a market where there is a single buyer. It is generally in factor market.<\/li>\n<li>Oligopsony market where there are small number of large buyers in factor market.<\/li>\n<li>Bilateral monopoly market where there is a single buyer and a single seller.<\/li>\n<li>It is mix of monopoly and monopsony markets.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Browsing through CA Foundation Business Economics Notes Chapter 4\u00a0Price Determination in Different Markets help students to revise the complete subject quickly. Price Determination in Different Markets \u2013 Business Economics CA Foundation Notes Chapter 4 Meaning of market: \u2192 In ordinary language, a market refers to a place where the buyers and sellers of a commodity &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/gstguntur.com\/ca-foundation-economics-notes-chapter-4\/\"> <span class=\"screen-reader-text\">Price Determination in Different Markets \u2013 CA Foundation Economics Notes Chapter 4<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":14391,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[160],"tags":[],"jetpack_featured_media_url":"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/11\/Price-Determination-in-Different-Markets-\u2013-CA-Foundation-Economics-Notes-Chapter-4.png","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/8901"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=8901"}],"version-history":[{"count":7,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/8901\/revisions"}],"predecessor-version":[{"id":14390,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/8901\/revisions\/14390"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media\/14391"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=8901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=8901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=8901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}