*According to the CBSE Syllabus 2023-24, this chapter has been removed.
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NCERT Solutions for Class 12 Economics Chapter 6 – Non-competitive Markets furnishes a clear picture of what non-competitive Markets are.
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1. What would be the shape of the demand curve so that the total revenue curve is
(a) a positively sloped straight line passing through the origin?
(b) a horizontal line?
(a) The slope of the demand curve will be a horizontal line parallel to the x-axis when the revenue curve is a positively sloped straight line.
(b) Demand curve will be downward sloping when the revenue curve is a horizontal line.
2. From the schedule provided below, calculate the total revenue, demand curve and the price elasticity of demand:
The solution to this question is as follows:
3. What is the value of the MR when the demand curve is elastic?
MR and elasticity of demand are bound by this relationship, where
MR = P (1 – 1/ed)
Therefore, when the demand curve is elastic, i.e. (ed > 1), the value of 1/ed will always be less than 1, and hence the MR will always be positive. It can be represented in a graph as follows:
4. A monopoly firm has a total fixed cost of Rs. 100 and has the following demand schedule:
Find the short-run equilibrium quantity, price and total profit. What would be the equilibrium in the long run? In case the total cost is Rs. 1000, describe the equilibrium in the short run and in the long run.
The solution to this question is as follows:
We know that the total Cost (TC) = TFC + TVC
Let the total variable cost of the firm be 0
Profit will be maximum where TR (Total Revenue) is maximum, and as per the table, it is the 6th unit of output that is providing a maximum profit.
Therefore, the short-run equilibrium price is 50.
Now let’s calculate the profit
Profit = TR-TC
In the short run, the level at which total revenue is maximum is used to determine the equilibrium quantity; therefore, 300 will be the equilibrium quantity.
Now, calculating profit in the long run,
Profit= Total Revenue – Total Cost or TR – TC
As per the numbers, the firm is suffering losses in the long run.
5. If the monopolist firm of Exercise 3 was a public sector firm. The government sets a rule for its manager to accept the government fixed price as given (i.e. to be a price taker, and therefore behave as a firm in a perfectly competitive market), and the government decide to set the price so that demand and supply in the market are equal. What would be the equilibrium price, quantity and profit in this case?
A monopolist firm, when asked to accept fixed prices by the government, will behave like a perfectly competitive firm. The price set by the government will make demand and supply equal, and the firm will earn normal profit or zero economic profit.
Therefore, equilibrium price = P
Equilibrium quantity = Q
Profit = Normal Profit
6. Comment on the shape of the MR curve in case the TR curve is a
i. positively sloped straight line
ii. horizontal straight line
i. The MR curve will be a horizontal line when the TR curve is a positively sloped straight line. At the condition of perfect competition, the MR and demand curve will be the same, with the AR constant for different output levels.
ii. The MR will be zero when the TR curve is a horizontal straight line. The horizontal slope of the TR curve represents the fact that MR (marginal revenue) is zero. It can be represented graphically as follows:
7. The market demand curve for a commodity and the total cost for a monopoly firm producing the commodity is given by the schedules below.
Use the information given to calculate the following:
(a) The MR and MC schedules
(b) The quantities for which MR and MC are equal
(c) The equilibrium quantity of output and the equilibrium price of the commodity
(d) The total revenue, total cost and total profit in the equilibrium
(a) The solution to this is as follows:
(b) MR and MC become equal at the 6th unit of output.
(c) MR = MC in the state of equilibrium, according to the table, it is the 6th unit of output where MR = MC. Therefore, the equilibrium price is 19.
(d) As the 6th unit of output is where equilibrium is attained,
TR = 114, TC = 109 and profit = 114-109 = 5.
8. Will the monopolist firm continue to produce in the short run if a loss is incurred at the best short-run level of output?
i) If the price of a product is less than the minimum average cost, the firm will incur losses in the short run.
ii) If the price falls below the average variable cost, the monopolist firm will stop all production.
iii) If the price is between the average variable cost and the average cost, the firm will continue production.
9. Explain why the demand curve facing a firm under monopolistic competition is negatively sloped.
A firm in monopolistic competition sells products that are differentiated from its competitor’s product. Therefore, the monopolistic firm will lower the cost to increase the demand. Because differentiated products can be substituted for each other, the demand for commodities produced under monopolistic competition tends to be elastic. This elastic demand is the reason why the demand curve is negatively sloped for a firm under monopolistic competition.
10. What is the reason for the long-run equilibrium of a firm in monopolistic competition to be associated with zero profit?
A firm in monopolistic competition sells products that are differentiated from its competitor’s product. In other words, the products sold by a firm in monopolistic competition are unique and only have partial competition. Because of the free entry and exit of firms, the long-run equilibrium price will be the same, and the firm will earn zero profit.
11. List the three different ways in which oligopoly firms may behave.
Oligopoly firms may behave in the following ways:
1. Firms realise that raging a price war will not sustain in the long run, and therefore the main focus is on advertising the products and trying to differentiate their product from competitors so that it strikes a chord with the audiences.
2. Some firms may join hands to form cartels to maximise profit among themselves and capture a large part of the market due to the combined effort.
3. Firms may decide on the quantity of output to be produced so that they can earn the maximum benefits, with a mutual agreement with other firms in limiting production as per agreement.
12. If duopoly behaviour is one that is described by Cournot, the market demand curve is given by the equation q = 200 − 4p and both the firms have zero costs, find the quantity supplied by each firm in equilibrium and the equilibrium market price.
As per the question,
q = 200 − 4p
The demand curve, being a straight line and firms having zero costs, a duopolistic firm finds it best to supply goods amounting to half of the maximum demand in order to gain the most profit.
Therefore, at P= 0
Market demand is q = 200 − 4p
= 200- 4(0)
If firm B is not involved in any production, the market demand for A will be 200 units. Accordingly, the supply will be 200/2 = 100 units (half of the maximum market demand).
Firm B will face a market demand of 200-100 = 100 units
Supply will be 100/2 = 50 units
As firm B produced 50 units, A needs to have a demand of 200-50 = 150 units
A will produce 150/2= 75 units in order to earn profits.
At equilibrium, both the firms, A and B, will have an output of 200/3 units.
Market supply will be =
Now, the equilibrium output is 400/3
Calculating equilibrium price,
q = 200 − 4p
4p = 200- q
p = 50- q/4
p = 50- 100/3
Therefore, the equilibrium price is 50/3.
13. What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?
Price rigidity refers to the situation in which price does not change with respect to demand. It may happen that a firm changes its price by more units to earn high profits, similar firms in the same industry will not do the same due to the fear of losing out the profit. If a firm reduces the price to increase sales and profits, the other firm will soon follow the steps to share total market sales. Therefore, an oligopoly will lead to price rigidity in the market.
- Market – A market refers to a procedure or a technique that enables correspondence between the buyers and sellers for the sale and purchase of goods and services.
- Monopoly – It is a type of market where there exists a single seller of a product with no close competitors.
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