NCERT Solutions For Class 11 Economics Chapter 12 Non-competitive Markets

The following are the reasons for downward sloping demand curve under monopolist competition:

• A monopolistic firm sells differentiated products, thus to sell more it has to lower the price.
• The products of the monopolistic firms have close substitutes. Thus, to sell more quantities of its produce monopolistic firms has to reduce its price.

The monopolist firm continues to produce in the short run if a loss is incurred at the best short run level of output conditioned upon:

1. If the price is less than minimum AVC: If the monopolist firm is incurring loss in the short run and the price is less than minimum AVC, the monopolist stop production.
2. If the price is greater than minimum AVC: If the monopolist firm is incurring loss in the short run and the price lies between minimum of AC and minimum AVC, the monopolist continues the production.

Price rigidity implies that the market price does not move freely in response to changes in demand. This is due to the way in which oligopoly firms react to a change in price initiated by any firm. If any firm tries to increase the price with the expectation of earning high profit, it will lose its customers because other firms will not do the same. Therefore, the firm will lose its revenue and profit.

On the other hand if firm tries to reduce its price in order to earn higher profits by maximising sales, in response the other firms will reduce the price. The increase in the total quantity sold due to the lowering of price is therefore shared by all the firms and the firm that had initially lowered the price is able to achieve only a small increase in the quantity it sells. A relatively large lowering of price by the first firm leads to a relatively small increase in the quantity sold. Thus the firm that initiated selling at lower price may get a lower share of the increase in the quantity sold than expected.

Therefore, firm finds it irrational to change the prevailing market price due to the fear of rival’s action, leading to prices that are more rigid compared to perfect competition.

The oligopoly firms may behave in the following three different ways:

1. Firms may collude together and decide not to compete with each other and maximise total profits of the firms together. In this case firms would behave like a single monopoly firm that has different factories producing the commodity.
2. Each of the firms decides how much quantity to produce by maximising its own profit assuming that the other firm would not change the quantity that it is supplying.
3. Economists propound that oligopoly market structure makes the market price of the commodity rigid i.e. the market price does not move freely in response to changes in demand. Firm finds it irrigational to change the prevailing market price due to fear of rival’s action, leading to prices that are more rigid compared to perfect competition.

There is free entry and exist of the firms in the monopolistic market structure. In the monopolistic competition, if the firms are earning abnormal or super normal profits, then new firms will enter the industry and start producing the commodity.As the total production of the commodity start increasing and the prices in the market will start falling and therefore the profits. When the profit becomes zero, there is no attraction to new firms to enter.

If the firms in the industry facing losses in short run, some of the firms would stop producing and exist from the market. This will lead to fall in quantity supplied and increase in the price. The process of increasing price will remain continue and become equal to the minimum of AC. Price = AC in the long run implies that in the long run all the firms will earn zero economic profit. At this price there is no incentive for new firms to enter and existing firms to leave.

1. The quantity for which the MR and MC are equal is 6 units.
2. The equilibrium quantity of output and the equilibrium price of the commodity 6 units and ₹19 respectively(corresponding to quantity at which MR is equal to MC).
3. Total revenue = ₹ 114

Total cost = ₹119

Total profit in equilibrium = TR – TC = ₹5

If the government sets rule for the public sector unit to accept the fixed price as given, the firm will be price taker and therefore behave as a firm in a perfectly competitive market. The government has set the price at the point where market demand is equal to the market supply as shown in the following diagram:

Equilibrium price = OP

Quantity = OQ

Profit = normal profit

If the firm behaves like a monopolist firm, it would be earning super normal profit but if the firm is forced to behave like a perfectly competitive firm by the government, it would have normal profit only.

When demand curve is elastic i.e. ed > 1, then MR will be positive.

We know,

MR= p(1 – 1/ed)

Since, ed > 1 so 1/ed < 1

It implies, (1 – 1/ed) is positive.

We know the price is always positive and any positive number multiplied with any positive number, gives positive result. Thus, MR will be positive.

P = 10 P’ = 8

Q= 1 Q’ = 2

∆Q = Q’ – Q = 2 – 1 = 1

∆P = P’ - P = 8 – 10 = –2

Price elasticity demand = – ∆Q/∆P × P /Q

     =  – 1/ –2 × 10/1 = 5

Similarly, we can find the price elasticity of demand for the remaining quantities.

1. The shape of the demand curve would be horizontal straight line or parallel to X-axis so that the total revenue curve is a positively sloped straight line passing through the origin.

This is the case of perfect competition market structure. It indicates that price will remain constant at all levels of output.

2. The shape of the demand curve is downward slopping for total revenue curve to be a horizontal straight line.

This is the case of monopoly and monopolistic competition market structure. It indicates that the price will fall as the output level increases.

The equation for market demand is

q = 200 – 4p

When the market demand curve is straight line and the total cost is zero, the duopolist finds it profitable to produce half of the maximum quantity demanded of the good.

Maximum quantity is attained when the price is zero i.e.

By putting P = 0 in the market demand equation we get q = 200 – 4p

q = 200 – 4(0)

q = 200

Maximum quantity is 200 units.

Assuming the firm B supplies zero units of the good then firm A supply 100 units. Given that firm A is supplying 100 units, now, firm B would realise maximum demand of 100 units and would supply 50 units.In the same fashion, the two firms would keep making moves which are shown in following tables:

And so on.

Therefore both the firms would finally supply an output equal to

200/2 - 200/4 + 200/8 - 200/16+ 200/32 …=200/3

We can solve by applying geometric progression (in two separate series) as:

S = a/1-r

Series 1: 200/2 + 200/8 + 200/32…= 400/3

Series 2: - 200/4 - 200/16 - 200/64 … = - 200/3

The sum of these two separate series will give us the sum of given series as

Sum of Series 1 and Series 2 = 400/3 - 200/3 = 200/3

The total quantity supplied in the market equals the sum of the quantity supplied by the two firms is

200/3 +200/3 = 400/3 units =133.33 units

The equilibrium market price is 400/3 = 200 – 4p

4p = 200 - 400/3

P = 200/12

P = ₹50/3 = ₹16.666

(i)     When TR curve is positively slopped straight line, MR curve is will be horizontal straight line and parallel to X-axis.

This is the case of perfect competition market structure. It indicates that price will remain constant at all levels of output.

(ii)     When total revenue curve is a horizontally sloped then marginal revenue curve is also a horizontally sloped and coincides with X-axis.

Note: We have taken TVC equal to zero. It is because in some cases monopolist faces 0 variable cost.

For maximisation of profit, there are two conditions:

• TR –TC is maximum
• MR =MC, where MC is increasing

The first condition is satisfied at two levels: TR –TC is maximum (profit = 200) at two levels i.e. at 5^th and 6^th unit of production.

The second condition is satisfied at 6^th unitonly.

Thus, the monopolist will maximise its profit at 6^th unit and the short run equilibrium price and profit will be ₹ 50 and ₹200.

Since in monopoly market structure other firms are prevented from entering the market, the profits earned by monopoly firms do not go away in the long run.

When the total cost is ₹ 1000,

Since, total revenue is negative for all the units, the firm will produce where the loss is minimum i.e. at 6^th unit in the short run.

In the long run, the given monopoly firm stop production because for every unit profit is negative. Also, the firm is incurring loss in the short run.