Forms of Market Class 12 Economics Notes and Questions

Please refer to Economics Forms of Market Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Forms of Market Class 12 Economics Notes and Questions

The below Class 12 Forms of Market notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Question. What is Market?
Ans. Market is an arrangement where buyers and sellers are in contact of each other.

Question. Define Perfect Competition. Explain its features.
Ans. Perfect Competition refers to that form of market structure where large number of buyers and sellers buying and selling homogenous products with free entry and exit.

Features-
1. Large number of buyers and sellers: There are very large number of buyers and sellers in perfect competition. The number of buyers and sellers are so large so that market share of each one become very small. Therefore, no individual buyer or seller can affect the market by their decisions.

2. Homogenous products: Under perfect competition, each firm produces homogenous products. It means product produced by perfect competitive firm in an industry are identical on the basis of quality, size, design, packaging, etc. Thus, products are perfect substitutes of each other. So, it results uniformity in the prices.

3. Free entry and exit: There is complete freedom for any firm either to enter or exit perfect competitive market. Any new firm attracted by super profits can enter freely and similarly any existing firm can easily exit from the market in case of losses without any barriers. As a result, each perfect competitive firm earns only normal profits in the long run.

4. Perfect knowledge: Under perfect competition, buyers and sellers are assumed to have complete knowledge of market conditions related price and quality of the product.

5. Perfect mobility: There is perfect mobility among factors of production in perfect competition. It means any factor input employed in a perfect competitive firm can easily move from one firm to another.

6. Price determination: In perfect competitive market, price of the product is determined by the industry using market forces of demand and supply. Each firm accept the same price and can sell any quantity at the price given by the industry. Therefore, industry is called price maker and firm is called price taker.

7. No selling cost or transportation cost: There is absence of selling cost in perfect competition. It means expenditure by a firm on sales promotion activities are zero because each firm produces homogenous product with the same price. Transportation cost is also assumed to be zero because there are large number of buyers and sellers. So, there is local sale and purchase of goods.

8. Average Revenue and Marginal Revenue: Under perfect competition, value of Average Revenue and Marginal Revenue is always equal and constant. Therefore, both Average Revenue and Marginal Revenue curves are parallel to x-axis.

9. Nature of demand curve: Demand curve of a perfect competition firm is perfectly elastic. It indicates that a firm can sell any quantity at a given price.
E_d=∞
Example, agriculture and milk industry

Question. Under perfect competition, industry is the price maker and firm is the price taker. Explain.
Ans. Under perfect competition, price of the product is determined by the industry using market forces of demand and supply. Industry decides equilibrium price where market demand is equal to market supply. Each individual firm can’t influence the price as each one has very small share in market. So, firm have zero control over price. Therefore, industry is called price maker and firm is called price taker.
Since, price of the product is constant, therefore, addition in Total Revenue by selling one more unit, i.e. Marginal Revenue is always equal to per unit price, i.e. Average Revenue. It is explained with the help of following schedule and diagram: –

In the above table, industry determine the price of ₹6 where market demand is equal to market supply. Each firm accept the same price and can sell any quantity at a given price. Therefore, value of AR and MR curves are parallel to x-axis.

Imperfect Competition

Question. Define monopoly. Explain its features.
Ans. The word monopoly has two parts, i.e. ‘mono’ which means single and ‘poly’ which means seller. So, it refers to the form of market structure where only one seller supplies the product in the market with no difference between firm and industry.
Example, Delhi Jal Board, Indian Railways, etc.

Features-
1. Single seller: There is one seller for a particular product in monopoly market. So, it eliminates the difference between firm and industry.

2. No close substitute: There is no close substitute available in the market of the product produced by monopoly firm. Therefore, there is absence of competition for single seller and he can easily charge high prices for its product.

3. Restricted entry: There are restrictions for any firm to enter monopoly market. In other words, there are many barriers like license, patent rights which restrict the new firm to enter the market. Therefore, monopoly firm earns abnormal profits in the long run.

4. Firm is the price maker: In monopoly market, there is one seller having full control over the supply of product. So, price of the product is determined by the firm itself. Therefore, monopoly firm is called price maker.

5. Price discrimination: Another feature of monopoly firm is that single seller may discriminate the prices.
It is the process of charging different prices from different costumers for the same kind of product/service.
Example, Delhi Jal Board charge high prices from commercial uses of water and less prices from domestic uses of water.

6. Average Revenue and Marginal Revenue: Under monopoly, both AR and MR curves are downward sloping where value of Marginal Revenue is less than Average Revenue.

7. Nature of demand curve: Demand curve in monopoly firm is negatively sloped which indicates that firm can increase the demand of their product by reducing its price but it is relatively inelastic.

Question. Define monopolistic competition and its features.
Ans. It refers to that form of imperfect competition where large number of sellers produces differentiated products but close substitutes with free entry and exit.

Features-
1. Large number of sellers: There are large number of sellers in monopolistic competition but number of sellers are not so large as in perfect competition. Thus, each monopolistic firm has partial control over price.

2. Differentiated products: In this market, monopolistic firm produces differentiated products in a particular product group. It means products of heterogenous on the basis of quality, colour, design, etc. but they are close substitutes of each other.

3. Free entry and exit: There is freedom for any firm to either entry and exit monopolistic competition. Any other firm attracted by super profits can easily enter the market. Similarly, any existing firm can exit freely in case of losses. Therefore, each monopolistic firm in the long run, earns only normal profits.

4. Imperfect knowledge: In this market, buyers and sellers do not have complete knowledge of market conditions related to price and quality of product.

5. Selling cost: In monopolistic competition, each firm incurs the expenditure on sales promotion activities like advertisement with an objective to increase the demand of their product.

6. Average Revenue and Marginal Revenue: In monopolistic competition, both AR and MR curves are downward sloping where Marginal Revenue is always less than Average Revenue.

7. Nature of demand curve: Demand curve in monopolistic firm is negatively sloped which indicates that a firm can increase demand of their product by decrease in its price, but it is relatively inelastic.

Question. Define oligopoly competition and its features.
Ans. It refers to that firm of imperfect competition where few dominant firms competes with each other with strong barriers for entry.
Example, electronic appliances, automobile industry, etc.

Features-
1. Few sellers: In oligopoly market, there are only few sellers for a particular product where each firm produces substantial part of the industry.

2. Homogenous and differentiated products: In this market, few sellers compete with each other either by producing homogenous product like cement, steel, fertilizer industry (called perfect/pure oligopoly) by producing differentiated products (called imperfect/impure oligopoly) like electronic appliances, cold drinks, etc.

3. Barriers for entry: There are many barriers for a new firm to enter oligopoly market. Therefore, oligopoly firms earn abnormal profits.

4. Mutual Interdependence: There is very close interdependence among oligopoly firms. It means decision or strategy taken by one firm also affects decision/strategy of rival firm.

5. Selling cost: In this market, oligopoly firms incur huge expenditure on sales promotional activities like advertisement with the objective to increase their market share and to create barriers for the entry of new firm.

6. Price rigidity: In this market, oligopoly firms do not enter in price competition, rather they compete with each other on the basis of non-price strategy.

7. No demand curve: There is absence of demand curve of a firm in oligopoly market because there is very close interdependence and uncertainty in the market. Therefore, it is very difficult for a firm to determine shape and position of demand curve.

Duopoly is a special case of oligopoly, in which there are exactly two sellers. Under duopoly, it is assumed that the product sold by the two firms is homogenous and there is no substitute for it. Examples where two companies control a large proportion of a market are: (i) Pepsi and Coca-Cola in the soft drink market; (ii) Intel and AMD in the consumer desktop computer microprocessor market.

Question. Explain the nature of AR and MR curves of a firm under perfect competition, monopoly and monopolistic competition.
Ans. Under perfect competition, value of Average Revenue and Marginal Revenue are always equal and constant, and both AR and MR curves are parallel to x-axis. It is because price of the product remains constant for a firm as price is determined by industry and firm has zero control over the price. Rather a firm can sell any quantity at a given price. Therefore, addition in Total Revenue by selling one more unit, i.e. Marginal Revenue is always equal to per unit price, i.e. Average Revenue.

Under monopoly and monopolistic competitions, both AR and MR curves of a firm are downward sloping from left to right.
The negatively sloped AR curve indicates that a firm can sell more quantity by reducing the price of the product.
When Average Revenue falls, Marginal Revenue is always less than Average Revenue. It is because impact of decrease in price is divided by all the units in case of Average Revenue, but it falls on single unit in case of Marginal Revenue.

AR curve shows different quantity at different price. Therefore, it is the demand curve.

Question. Explain the nature of demand curve of a firm under perfect competition, monopoly and monopolistic competition.
Ans. Under perfect competition, demand curve of a firm is perfectly elastic, i.e. horizontal in shape. It is because price of the product remains constant for a firm as price is determined by the industry and a firm has zero control over the price due to very small market share. Therefore, a firm can sell any quantity at a given price so it makes demand curve parallel to x-axis.

Under monopoly and monopolistic competitions, demand curve of a firm is downward sloping from left to right. Negatively sloped demand curve indicates that a firm can increase the demand by reducing the price of the product.
But demand curve under is relatively inelastic(steeper) whereas demand curve under monopolistic competition is relatively elastic(flatter). It is because there is no close substitute available in the market of the product produced by the monopoly firm whereas many close substitutes are available of the product produced by monopolistic firm.

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