Question

Give reasons or explain:

1. Single price prevails in perfect competition.

2. Price discrimination is possible under monopoly.

3. Selling cost is incurred by a firm in Monopolistic competition.

4. A monopolist can control the supply of goods.

5. Sellers and the buyers are price takers in perfect competition.

Answer 1

1. Under perfect competition, each firm is a price taker and the industry is a price maker. This is because there are a large number of firms selling homogeneous goods, i.e., similar goods. If any firm increases its price, the buyer will shift to another producer. If the firm reduces the price, it will not be able to cater to the demand that will be shifted to it on reducing the price. The market price in the industry is determined by the intersection of the market supply and market demand curves. Therefore, individual firms take the market price, so determined, as fixed and adjust their supply accordingly.

2. Price discrimination implies charging different prices for the same product from different buyers at the same time. Since a monopoly firm is the single seller in the market it enjoys complete control over the price. In this regard he can follow price discrimination in order to gain maximum profits.

3. The products sold under monopolistic competition are differentiated from each other. The products of the monopolistic firm is differentiated on the basis of certain characteristics as colour, shape size, etc. Such product differentiation further leads to selling costs by the firms. Through such expenses as advertisement, a particular monopolistic firm tries to convince the consumers by distinguishing its product on qualitative basis from its substitutes and thereby, attract greater number of customers to it.

4. Being a single seller, a monopolist has sole control over the production. The supply of output rests on the monopolist’s decision. Therefore, we can say that a monopolist has complete control over the market supply.

5. There exist a large number of buyers and sellers in a perfect competitive market. The number of sellers is so large that no individual firm owns control over the market price of the commodity. Due to the existence of a large number of sellers in the market, there exists perfect and free competition in the market. The firm acts as a price taker and the price is determined by the ‘invisible hands of the market’, i.e., by the demand and supply of commodities.
Similarly, the number of buyers is so large that no single buyer can influence the price in the market. He accepts the price at which the firms sell the commodity.