Class 12 Economics Notes Chapter 6 (Non-competitive markets) – Introduction MicroEconomics Book

Detailed Notes with MCQs of Chapter 6: Non-Competitive Markets from your Microeconomics textbook. This is a crucial chapter, not just for your board exams but also for various government exams where basic economic concepts are tested. Unlike perfect competition where firms are price takers, non-competitive markets feature firms that have some degree of control over the price of their products.

Let's break down the key concepts:

Non-Competitive Markets: An Overview

• Definition: Market structures where the conditions required for perfect competition (large number of buyers and sellers, homogeneous product, free entry and exit, perfect information) are not met.
• Key Feature: Firms in these markets have market power, meaning they can influence the market price of their product. They face a downward-sloping demand curve.
• Types: The main types we study are Monopoly, Monopolistic Competition, and Oligopoly.

1. Monopoly

• Definition: A market structure characterized by a single seller selling a unique product with no close substitutes.
• Features:
  • Single Seller: One firm controls the entire supply of the product.
  • No Close Substitutes: The product offered by the monopolist has no readily available alternatives for consumers.
  • Barriers to Entry: Significant obstacles prevent new firms from entering the market. These can be natural (economies of scale), legal (patents, licenses), or strategic.
  • Price Maker: The monopolist has considerable control over the price. They can choose a price-output combination on the market demand curve.
• Demand Curve: The monopolist faces the market demand curve, which is downward sloping. To sell more, the monopolist must lower the price.
• Revenue Curves:
  • Average Revenue (AR): Since the monopolist faces the market demand curve, the AR curve is the same as the demand curve (AR = Price). It slopes downwards.
  • Marginal Revenue (MR): The MR curve also slopes downwards and lies below the AR curve. This is because to sell an additional unit, the monopolist must lower the price not just for that unit but for all preceding units as well. (MR < AR or Price).
• Profit Maximization: Like any firm, a monopolist maximizes profit where:
  • Marginal Revenue (MR) = Marginal Cost (MC)
  • MC curve cuts the MR curve from below.
  • The price is determined by extending a vertical line upwards from the profit-maximizing quantity (Q*) to the demand (AR) curve.
• Profit in the Short Run: A monopolist can earn supernormal profits, normal profits, or even incur losses in the short run.
• Profit in the Long Run: Due to strong barriers to entry, a monopolist can sustain supernormal profits in the long run.
• Price Discrimination: Sometimes, a monopolist may charge different prices to different consumers for the same product (e.g., electricity charges for domestic vs. commercial use). This is possible only if market segmentation is feasible and resale is not possible.
• Inefficiency: Compared to perfect competition, monopolies generally produce less output and charge higher prices, leading to a deadweight loss (loss of total surplus).

2. Monopolistic Competition

• Definition: A market structure characterized by a large number of firms selling differentiated products that are close substitutes for one another.
• Features:
  • Large Number of Sellers: Many firms compete, but each has a small market share. No single firm dominates.
  • Product Differentiation: This is the key feature. Products are similar but not identical. Differentiation can be based on branding, quality, design, location, or service. (e.g., toothpaste brands, restaurants).
  • Freedom of Entry and Exit: Firms can enter or leave the market relatively easily in the long run, although not as freely as in perfect competition (due to product differentiation costs).
  • Selling Costs: Firms incur significant expenditure on advertising and sales promotion to differentiate their products and attract customers.
  • Downward Sloping Demand Curve: Due to product differentiation, each firm has some control over its price and faces a downward-sloping, but relatively elastic, demand curve (more elastic than monopoly).
• Demand Curve: Downward sloping and relatively elastic because of the availability of close substitutes.
• Revenue Curves: Similar to monopoly, the AR curve (demand curve) slopes down, and the MR curve lies below it (MR < AR).
• Profit Maximization: Condition remains the same: MR = MC. Price is determined from the AR curve.
• Profit in the Short Run: Firms can earn supernormal profits, normal profits, or incur losses.
• Profit in the Long Run: Due to freedom of entry and exit, firms in monopolistic competition earn only normal profits in the long run. If firms earn supernormal profits, new firms enter, increasing competition and shifting each existing firm's demand curve leftward until only normal profits are made (Price = Average Cost).
• Excess Capacity: In the long run equilibrium, firms under monopolistic competition operate at a level of output less than the socially optimal level (i.e., they don't produce at the minimum point of their Long Run Average Cost curve). This is called excess capacity.

3. Oligopoly

• Definition: A market structure characterized by a few large firms dominating the market. Products can be homogeneous (e.g., steel, cement) or differentiated (e.g., cars, soft drinks).
• Features:
  • Few Firms: A small number of firms control a large majority of the market share.
  • Interdependence: This is the defining characteristic. Each firm's actions (regarding price, output, advertising) significantly impact its rivals, and firms must consider the potential reactions of competitors when making decisions.
  • Barriers to Entry: Significant barriers exist, making it difficult for new firms to enter (similar to monopoly, e.g., economies of scale, patents, control over raw materials, high capital requirements).
  • Nature of Product: Can be homogeneous (Pure Oligopoly) or differentiated (Differentiated Oligopoly).
  • Selling Costs: Heavy expenditure on advertising and sales promotion is common, especially in differentiated oligopoly.
  • Indeterminate Demand Curve: Due to interdependence, it's difficult for a firm to predict how rivals will react to a price change. This makes the firm's demand curve uncertain or indeterminate. The 'Kinked Demand Curve' model is one attempt to explain price rigidity in oligopoly, suggesting rivals will match price cuts but not price increases.
• Firm Behaviour:
  • Collusion: Firms might secretly cooperate (collude) to fix prices or output levels, acting like a monopoly to maximize joint profits. This is often illegal (e.g., forming a cartel like OPEC).
  • Non-Collusive Competition: Firms compete independently, often leading to price wars or intense non-price competition (advertising, product differentiation).
• Price Rigidity: Prices in oligopolistic markets tend to be sticky or rigid. Firms hesitate to change prices for fear of triggering a price war or losing market share.

Comparison Summary Table (Key Differences)

Remember these structures are models. Real-world markets often exhibit characteristics of more than one type. Understanding these models helps analyze firm behaviour and market outcomes.

Multiple Choice Questions (MCQs)

Here are 10 MCQs to test your understanding of Non-Competitive Markets:

1. Which of the following is NOT a characteristic of a monopoly market?
   a) Single seller
   b) Free entry and exit
   c) No close substitutes
   d) Price maker

2. In monopolistic competition, product differentiation leads to:
   a) A horizontal demand curve for the firm
   b) A downward-sloping demand curve for the firm
   c) Firms earning supernormal profits in the long run
   d) Homogeneous products

3. The defining characteristic of an oligopoly market is:
   a) A single seller
   b) Product differentiation
   c) Interdependence among firms
   d) Free entry and exit

4. For a monopolist, the relationship between Average Revenue (AR) and Marginal Revenue (MR) is:
   a) AR > MR
   b) AR < MR
   c) AR = MR
   d) AR curve is U-shaped, MR curve is downward sloping

5. In the long run, a firm under monopolistic competition earns:
   a) Supernormal profits
   b) Losses
   c) Normal profits
   d) Economic profits equivalent to a monopoly

6. 'Price rigidity' is a common feature observed in which market structure?
   a) Perfect Competition
   b) Monopoly
   c) Monopolistic Competition
   d) Oligopoly

7. Selling costs (like advertising expenditure) are most significant in:
   a) Perfect Competition and Monopoly
   b) Monopoly and Oligopoly
   c) Monopolistic Competition and Oligopoly
   d) Perfect Competition only

8. A cartel is an example of:
   a) Non-collusive oligopoly
   b) Collusive oligopoly
   c) Monopolistic competition
   d) Perfect competition

9. The profit maximization condition (MR=MC) applies to:
   a) Only Monopoly
   b) Only Oligopoly
   c) Only Monopolistic Competition
   d) All market structures (including Perfect Competition, though MR=Price there)

10. Compared to perfect competition, a monopoly typically results in:
    a) Higher output and lower price
    b) Lower output and higher price
    c) Same output and same price
    d) Higher output and higher price

Answer Key for MCQs:

1. b) Free entry and exit
2. b) A downward-sloping demand curve for the firm
3. c) Interdependence among firms
4. a) AR > MR
5. c) Normal profits
6. d) Oligopoly
7. c) Monopolistic Competition and Oligopoly
8. b) Collusive oligopoly
9. d) All market structures (including Perfect Competition, though MR=Price there)
10. b) Lower output and higher price

Study these notes thoroughly. Focus on the defining features and the differences between these market structures, especially concerning the demand curve, long-run profitability, and firm behaviour. Good luck with your preparation!