STUDY MATERIAL FOR CLASS XII

SUBJECT – ECONOMICS
TOPIC- FORMS OF MARKET

Meaning of Market
The term Market in Economics means a system where buyers and sellers
interact leading to the purchase and sale of goods and services at prices that
are determined by the Demand and Supply forces.
Meaning of Market structure
Market structure refers to certain market characteristics that influence
the firm’s pricing and output decisions. These are:
a) Number of buyers and sellers
b) Information and mobility
c) Nature of the product
d) Entry and exit

Classification of Markets on the basis of Degree of Competition

Perfect competition (Perfectly competitive market)
This is a market structure where there are numerous buyers and
sellers who sell the same(homogenous) products at a given price, and
individual seller has no control over the market price. Thus, the firm is
a Price taker in such a market where there are no barriers on entry and exit
of firms. Economic resources are perfectly mobile between places and jobs,
both buyers and sellers have perfect knowledge about the market
conditions. Also, no selling costs are involved in the market.
It should be noted that Perfect competition is an ideal form of market
and no such examples exists in the real world.
The characteristic features of such a market are as follows:

1. Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers must be so large
that none of them individually is in a position to influence the price and
output of the industry as a whole. In the market the position of a purchaser
or a seller is just like a drop of water in an ocean.

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Each seller supplies an insignificant portion of the total market supply, as
such any change in supply by the individual seller cannot exert any
influence on the price. Similarly, individual buyers too cannot exert any
influence on the price. The price is determined by the market demand and
market supply. Each seller is just a Price taker and have to sell all units of
the commodity at the market determined price. Uniform price prevails in the
market.

2. Homogenous Product:
This feature means that each firm should produce and sell
homogeneous(identical) product having same physical features like shape,
size, colour etc, same constituents, composition and quality. The commodity
sold should also have identical conditions of sale. If one seller sells the good
in an A.C market and another producer sells the same good in a non-A.C
market, there will be variation in prices which contradicts the feature of
homogeneity.

The goods sold by different firms are perfect substitutes of each other so
that no buyer has any preference for the product of any individual seller
over others. If goods will be homogeneous then price will also be
uniform everywhere. So, in this market the seller does not have to spend
on advertisement and product promotion as goods are identical. No selling
cost is incurred by the sellers under perfect competition.

3. Free Entry and Exit of Firms:

The firms are free to enter or leave the market. If the existing firms in the
market are earning profits new firms will enter in business and if there are
losses being earned by few firms, the firm will leave the business. Free entry
and exit are possible due to non-existence of any Government control
measures.

As the new firms enter the market attracted by super normal profits earned
by few firms in short run, market supply increases which leads to fall in the
prices and the excess profits earned are thus wiped out. Alternatively, when
some firms incurring losses in short run exit the industry, there is a fall in
market supply leading to rise in market prices and thus losses are wiped
out. Thus, in the long run firms make only normal profits.

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4. Perfect Mobility of the Factors of Production:
There should be perfect mobility of factors between industries. Factors of
production like labour should be free to move from low wage production
units to those places where they can fetch the highest price or wages. This
leads to fall in supply of labour in the previous units leading to rise in their
wages and rise in labour supply in the latter unit resulting in fall in wages.
Free mobility untimely ensures prevalence of one uniform wage rate in the
industry and therefore uniform prices of the commodity shall prevail in
the market.

5. Perfect Knowledge of the Market conditions:

Buyers and sellers must possess complete knowledge about the prices at
which goods are being bought and sold, of prices at which others are
prepared to buy and sell as well as the quality of the product sold. There is
absence of any uncertainty which comes from perfect knowledge This will
help in having uniformity in prices eliminating all price differences.

Each firm also has absolute knowledge about techniques of production and
makes use of the best technique. All of these leads to similarity in cost
structure too.

6. Absence of Transport Cost:

Negligible transport cost will help the complete market in maintaining
uniformity in price. If transport costs are different for different producers,
they will charge different prices. Thus, transport charges are considered
absent under Perfect competition.

Distinction between Pure and Perfect competition

Perfect competition is when there are numerous buyers and sellers, selling
homogenous product at the given price with perfect knowledge about the
market ,free entry and exit into the market, absence of transport cost and
perfect mobility of the factors of production such that no individual seller
has any control over the market price.

On the other hand, Pure competition is said to exist where there are
numerous buyers and sellers, selling homogenous product with free entry
and exit of firms in the market.

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Demand curve faced by a firm under Perfect Competition

Each firm sells homogenous products at the given price (determined by

market forces of Demand and Supply) in the industry. Thus, each firm can
sell any amount of output at that given price. So, the Demand curve Dx
faced by each firm is perfectly elastic, horizontal line/ parallel to X
axis. The Demand curve Dx is identical to the Average revenue AR curve of a
perfectly competitive firm as AR=P. The Average Revenue and Marginal
Revenue curves also coincide as Price remains same for each additional unit
of output sold.

Monopoly
The word monopoly has been derived from the combination of two words
i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly refers to seller/selling.

In this way, monopoly refers to a market situation in which there is

only one seller of a commodity. There are no close substitutes for the
commodity it produces and there are barriers to entry. The single
producer may be in the form of individual owner or a single partnership or a
joint stock company. In other words, under monopoly there is no difference
between firm and industry.

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(Government monopoly) in the country, in West Bengal the WBSEB has a
monopoly in the distribution of power outside Kolkata. Similarly, other state
electricity boards too have a monopoly in power distribution in their
respective state, there is a Government monopoly in the Nuclear power
industry in the country.

However Pure Monopoly rarely exists in the real world.

Characteristic Features of a Monopoly:

1. One Seller and Large Number of Buyers:

The monopolist’s firm is the only firm in the market; it is an industry. But
the number of buyers is large. The single seller may be an individual owner,
partnership or a Joint stock company. The single seller has absolute control
over market supply and price whereas the individual buyer has no influence
on market price. Thus, the monopolist is the Price Maker who sets his
own price for the goods sold.

2. No Close Substitutes:
There shall not be any close substitutes for the product sold by the
monopolist and no competition in the market. This is an essential condition
of a monopoly. Existence of close substitutes will introduce competition that
no longer makes it possible for the monopoly to exist. The cross elasticity of
demand between the product of the monopolist must be negligible or zero.
The individual buyer of the good is left with no alternative but to buy from
the monopolist who is the Price maker. The demand curve faced by a
monopoly firm is therefore inelastic in nature.

3. Closed Entry of New Firms:

There are either natural, institutional, legal and artificial barriers on the
entry of firms into the industry, even when the firm is making abnormal
profits. Natural monopoly arises due to the physical feature or
characteristics of a region to produce the given commodity as it may be the
sole producer of the particular raw material. Legal and institutional barriers
may be in the form of patent rights, copy rights, intellectual property
rights, Government laws etc. Thus, no new firms can enter the industry
and there is total absence of any competition.

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4. Price Maker:
Under monopoly, monopolist has full control over the supply of the
commodity. But due to large number of buyers, demand of any one buyer
constitutes an infinitely small part of the total demand. Therefore, buyers
have to pay the price fixed by the monopolist. Thus, lack of competition
and strong market barriers enables the monopolist to have full decision-
making power regarding Prices and so he is the Price maker.

5. Price discrimination:
This is a unique feature in a monopoly market. The monopolist sometimes
charges different prices from different consumers for reasons other than
difference in cost of supplying the product to different consumers. This is
known as Price discrimination. Different buyers pay different prices in
different markets with different price elasticities of Demand for the same
product. E.g. A company producing electricity charges separate rates for
domestic and industrial consumers.

Nature of Demand curve under Monopoly:

Under monopoly, it becomes essential to understand the nature of demand

curve facing a monopolist. In a monopoly situation, there is no difference
between firm and industry. Therefore, under monopoly, firm’s demand curve
constitutes the industry’s demand curve. Since the demand curve of the
consumer slopes downward from left to right, the monopolist faces
downward sloping demand curve.

The Demand curve is downward sloping and also relatively inelastic

in nature. The monopolist needs to reduce his price to sell more units of
the commodity in the market. If the monopolist (Price maker) increases the
price of the commodity, consumers have no other alternative available, so
they have to buy the given commodity. Thus, demand for the commodity is
very less impacted by the change in price. The Demand curve is steeper in
this case as can be seen in the figure given below fig(ii).

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Demand curve faced by a monopolist

Fig(ii)

Comparison between perfect competition and Monopoly

Perfect competition Monopoly

Numerous buyers and sellers Single seller and many buyers

Seller is the Price taker and has no Seller is the Price maker and has
influence over the product prices. complete control over thr product
pricing.

Maximum competition in the Absence of any competition as there

market and individual supply by a is a singl seller in the market who
firm forms an insignificant part of copntrols the total market supply.
the total market supply.

Perfect competition Monopoly

Demand curve faced by a firm Demand curve faced by a

under Perfect competition is Monopolist is inelastic in nature.
perfectly elastic

No scope of price discrimination is Price discrimibnation may exist in a

there in the market monopoly market

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 Free entrey and exit of firms is Restriction on the entry of firms in
alloiwed. the market is an absolutely
essential condition of Monopoly.

Normal profits earned by the firms A monopolist may earn Super

in the long run. normal profits in the long run.

Monopolistic Competition

This is a market structure in which there are many firms selling

closely related(similar) but differentiated commodities. Examples are
detergents, textile, footwear. Cosmetics, food products etc.

Characteristic features of Monopolistic Competition

1. Large Number of Buyers and Sellers:

There are large number of firms but not as large as under perfect
competition. Thus, there exits competition among various firms selling
similar products. Each seller supplies a small part of the total market. This
feature of Monopolistic competition is similar to Perfect competition.

That means each firm can control its price-output policy to some extent. It is
assumed that any price-output policy of a firm will not get reaction from
other firms that means each firm follows the independent price policy.

If a firm reduces its price, the gains in sales will be slightly spread over
many of its rivals so that the extent to which each of the rival firms suffers
will be very small. Thus, these rival firms will have no reason to react.

2. Free Entry and Exit of Firms:

Like perfect competition, under monopolistic competition also, the firms can
enter or exit freely. The firms will enter when the existing firms are making
super-normal profits. With the entry of new firms, the supply would increase
which would reduce the price and hence the existing firms will be left only
with normal profits. Similarly, if the existing firms are sustaining losses,

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some of the marginal firms will exit. It will reduce the supply due to which
price would rise and the existing firms will be left only with normal profit.

3. Product Differentiation:
Another feature of the monopolistic competition is the product
differentiation. Product differentiation refers to a situation when the
sellers of the product differentiate the product with others. Basically,
the products of different firms are not altogether different; they are
slightly different from others and said to be close substitute of one
another. Although each firm producing differentiated product has the
monopoly of its own product, yet he has to face the competition. This
product differentiation may be real or imaginary.

Real differences are like design, material used, colour, skill, after
sale services, difference in location of firms etc.

Whereas imaginary differences are through advertising, packaging,

branding, trade mark and so on.

Product differentiation lends a monopoly element to the product of each

seller competing with other sellers selling similar product. It is Product
differentiation that makes each seller the unique producer of its own
product and a monopoly of its own brand., along with competition with rival
firms of similar product.

4. Selling Cost:
Another feature of the monopolistic competition is that every firm
tries to promote its product by different types of expenditures. The
amount of money spent on product promotion and marketing is called
Selling cost. Advertisement is the most important constituent of the
selling cost which affects demand as well as cost of the product. It
may be in form of ad campaigns, door to door sales, free gifts, coupons etc.

The main purpose of the firm is to earn maximum profits by firms by

attracting customers towards its own product from its rivals selling similar
goods.

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5. Non price competition:

Non-price competition refers to the efforts on the part of a monopolistic

competitive firm to increase its sales and profits through product variation
and selling expenses instead of a cut in the price of its product. The
monopolistic competitor can always change his product either by varying its
physical attributes or by changing the promotional programmes. It may be
in the form of warrantee period, quality improvement, gifts, coupons to win
prizes, etc
6. Independent price policy

Under this every firm has got its own price policy. Firms are price
makers and are faced with a downward sloping demand curve. Because
each firm makes a unique product, it can charge a higher or lower price
than its rivals. If a firm changes the price of his product, it has not much
effect over the price of the commodity because other firms do not change the
price accordingly. Further, the numbers of firms are more, so the change
has got negligible effect.
7. More Elastic Demand:
Under monopolistic competition, demand curve is more elastic. In order to
sell more, the firms must reduce its price, downward sloping Demand curve.
As there are many firms in the market selling similar products,
change in price by one firm impacts the demand in more than
proportionate manner. E.g. if one company selling lipsticks raise their
prices, many consumers will shift to other such companies that are
producing similar commodity but at a reduced price. Thus, the Demand
curve faced by a firm under Monopolistic competition DD is more elastic in
nature.

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Comparison between Perfect competition and Monopolistic competition
Perfect competition
It refers to a market situation where
there are a very large number of
buyers and sellers dealing in
homogenous goods at a price
determined by demand and supply
in the market.
Homogenous goods sold in market
at uniform prices.
Firm is the Price taker as price is
determined by the industry.
Buyers and sellers have perfect
knowledge about market conditions.
Selling costs not incurred by firms
as there does not exist product
differentiation.
The demand curve facing a firm is
perfectly elastic, any amount of a
good can be sold at the given price
Comparison between Monopoly and Monopolistic Competition
Monopoly
There is a single seller in the market There are many sellers in the
The monopoly firm may sell
homogenous or non-homogenous
products
No selling cost is incurred by the
monopolist as there are no close
substitutes for the product
Entry of new firms into the market
is restricted by natural, institutional and exit of new firms into the
and legal barriers.
The firm generally earns super
normal profits in the long run
Monopolistic competition
It refers to a market situation in
which there are a large number of
firms selling closely related but
differentiated goods.
Products are differentiated on the
basis of brand, size, shape, colour
etc.
So a firm is in a position to
influence the Price.
Firm is Price maker and has some
control over its own prices due to
product differentiation.
Buyers and sellers do not have
perfect knowledge about market
conditions.
Selling cost incurred by firms as
there exists product differentiation.
The Demand curve facing a firm is
elastic , more output can be sold at
reduced price and firms are selling
similar products.
Monopolistic competition
market
Each firm in such a market sell
similar but differentiated products
Selling cost on marketing,
advertising is incurred by the firms
There is no restriction on the entry
market
Each firm earns normal profits in
the long run
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 Oligopoly

The term ‘Oligopoly’ is coined from two Greek words ‘Oligoi meaning ‘a few’
and ‘pollein means ‘to sell’.

It occurs when an industry is made up of a few firms producing either

an identical product or differentiated product that is being sold to
many consumers leading to an intense competition among firms.

In simple words, “Oligopoly is a situation in which there are so few sellers

that each of them is conscious of the results upon the price of the supply
which he individually places upon the market”-The number of sellers is
greater than one, yet not big enough to render negligible the influence of any
one upon the market price.

Characteristic features of Oligopoly

1) Intense Competition:
This leads to a very important feature of the oligopolistic market, the
presence of competition. Since under oligopoly, there are a few sellers, each
firm has a large share in the total market with few rivals also having similar
market power to influence market prices.

Therefore, a move by one seller immediately affects the rivals. So, each seller
is always on the alert and keeps a close watch over the moves of its rivals in
order to have a counter-move. Firms keep on evolving aggressive and
defensive strategies to deal with rivals. There is intense rivalry among the
firms and sometimes these few firms might enter into collusive agreement
(i.e. form cartels to maximize their joint profits) for fixation of collusive price
and output.

2). Interdependence among the rival firms

The foremost characteristic of oligopoly is interdependence of the various
firms in the decision making. Each firm closely watches the moves of its
rivals regarding product or price decision.

This fact is recognized by all the firms in an oligopolistic industry. If a small

number of sizeable firms constitute an industry and one of these firms
starts advertising campaign on a big scale or designs a new model or offers
discounts on the product which immediately captures the market, it will

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surely provoke countermoves on the part of rival firms in the industry. This
can be seen in the automobile industry, soft drinks industry in India

Thus, different firms are closely interdependent on each other.

3) Nature of the product:

This is a form of market where there are few firms (usually more than two to
ten) dominating the industry and many buyers existing in the market. These
few firms sell either Homogenous (Pure oligopoly) or Differentiated goods
(Differentiated Oligopoly). E.g. of oligopoly market selling homogenous goods
are market for L.P.G, Petrol, diesel etc. In case of differentiated oligopoly,
differentiation might be real or fancied. Examples of differentiated oligopoly
are aviation industry, automobile industry etc.

4) Selling cost
Under oligopoly a major policy change on the part of a firm is likely to have
immediate effects on other firms in the industry. Therefore, the rival firms
remain all the time vigilant about the moves of the firm which takes
initiative and makes policy changes regarding price and output. Thus, sales
promotion tools like price cutting, door to door campaigns, discounts, offers
are all powerful instrument in the hands of an oligopolist. A firm under
oligopoly can start an aggressive advertising campaign with the intention of
capturing a large part of the market. Other firms in the industry will
obviously resist its defensive advertising.

5) Barriers to Entry of Firms:

As there is keen competition in an oligopolistic industry, there are no
barriers to entry into or exit from it. However, in the long-run, there are
some types of barriers to entry which tend to restrain new firms from
entering the industry.
These may be:
(a) Economics of scale enjoyed by a few large firms;
(b) Control over essential and specialized inputs;
(c) High capital requirements due to plant costs, advertising costs, etc.
(d) Exclusive patents; and licenses.

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6) Indeterminateness of Demand Curve:
In market structures other than oligopolistic, demand curve faced by a firm
is determinate. The interdependence of the oligopolists, however, makes it
impossible to draw a demand curve for such sellers except for the situations
where the form of interdependence is well defined. In real business
operations, the demand curve remains indeterminate. Each firm has to
guess the action and reaction of its rivals in the market in making its own
decisions. However, each firm cannot perceive the possible amount of sale at
different possible prices as they do not have exact idea about the strategies
of their of their rivals. This explains the indeterminateness of AR and MR
curves of the firms that keep on shifting.

Differences between Product differentiation and Price discrimination

Product differentiation Price discrimination

This occurs when different It occurs when a producer charges

producers differentiate their different prices for same product
products in the basis of external from different consumers in the
features shape, size, packaging, market.
brand name etc,

It is an important feature of It exists in Monopoly market

Monopolistic competition and
Oligopoly market

Elasticity of demand does not play Elasticity of demand plays an

an important role here important role in price
discrimination.

It is an example of Non price It is not an example of non-price

competition competition

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Comparison between Monopolistic Competition and Oligopoly

Monopolistic competition Oligopoly

Existence of many buyers and
sellers, each seller forming a very
small part of the market.
There exist few sellers with intense
rivalry between them, each having a
considerable share in the market
along with many buyers in the
market.

Differentiated products are a Both homogenous and differentiated

speciality of this market form products exist in the market.

There is freedom of entry and exit of Entry and exit of firms in the
firms in the market, all firms earn market is restricted.
normal profits in the long run.

Elastic demand curve facing a Indeterminateness of the demand

monopolistically competitive firm curve exists in an Oligopoly market.

Monopsony market: Imperfect competition on the buyers’ side

Monopsony means a ‘single buyer’. If there exists only one buyer and
many sellers of a specialised product in any market, it is called a
monopsony market. Generally, it indicates a Monopoly of the buyer. In the
factor market, there may remain a single buyer of a particular factor of
production.

In a monopsony, a large buyer controls the market. Because of their unique

position, monopsonies have a wealth of power. For example, being the
primary or only supplier of jobs in an area, the monopsony has the power to
set wages. In addition, they have bargaining power as they are able to
negotiate prices and terms with their suppliers. In a monopsony, the
controlling body is a buyer. This buyer may use its size advantage to obtain
low prices because many sellers vie for its business.

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Examples are:

a) The Government of India is the single purchaser of fighter aircrafts in

India.

b) The Indian Airforce (G.O.I) is the single buyer of services of the pilots
capable of operating fighter jets,

c) The Indian Railways are the single buyer of railway coaches.

Differences between Monopoly and Monopsony market

Monopoly Monopsony

There is a single seller of any There are many sellers of the

product or a factor service. product or factor service

There are many buyers of the There remains a single buyer of a

product or factor service product (or of factor services)

The monopolist faces the market The monopsonist faces the market
demand curve for a product or a supply curve of a product or factor
factor service. service.

It shows a specific form of sellers’ It shows a specific form of buyers’

market(imperfect competition on market(imperfect competition on
sellers side) buyers side)

Revision Questions
1) Define the term market and state the classification on the basis of
competition.
2) What is meant by Pure competition?
3) Explain the statement “In a perfectly competitive market producers are
price-makers”.
4) What is meant by ‘Product differentiation’? To which market is it
relevant? Explain three features of this market.
5) Define a Monopolistically competitive market. State two examples of this
market structure.
6) State one similarity and one difference between monopolistic competition
and perfect competition

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7) There are no substitute goods in a monopoly market. Give reasons to
support your answer.
8) Why do producers need to incur selling costs in a monopolistically
competitive market?
9) Explain with reasons whether the statement “A monopolist can sell the
same product at different prices to different consumers” is true or false.
10) Name a market where Selling cost is not required. Explain with reasons.
11) Explain any four distinctive features of
a) Monopoly
b) Monopolistic Competition
c) Perfect competition
d) Oligopoly
12) Explain the indeterminate demand curve under Oligopoly market.
13) State few similarities between Monopolistic competition and Perfect
Competition.
14) Distinguish between Oligopoly and Monopoly markets.
15) Monopolistic competition is said to be a combination of both Perfect
competition and Monopoly. Justify the statement.
16) What do you understand by a Monopsony market form? Explain with
proper example.
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