Market Structure and Pricing: Perfect Competition, Monopoly and Price-Output Determination (Overview) Questions

Question 1

Write the profit maximisation condition.

Accepted Answer

A firm maximises profit where MR = MC (with MC rising).

Question 2

Define perfect competition.

Accepted Answer

Perfect competition is a market with many buyers and sellers, homogeneous product, and free entry/exit where firms are price takers.

Question 3

What is monopoly?

Accepted Answer

Monopoly is a market with a single seller and no close substitutes, protected by barriers to entry.

Question 4

What is marginal revenue (MR)?

Accepted Answer

Marginal revenue is the change in total revenue due to selling one more unit (MR = ΔTR/ΔQ).

Question 5

State one feature of perfect competition.

Accepted Answer

Homogeneous (identical) product is a key feature of perfect competition.

Question 6

What is price discrimination?

Accepted Answer

Price discrimination is charging different prices to different customers for the same product, not due to cost differences.

Question 7

Explain criteria used to classify market structures.

Accepted Answer

Market structures are classified based on: (1) number of firms (sellers) and buyers, (2) nature of product (homogeneous or differentiated), (3) conditions of entry and exit (barriers), and (4) degree of control over price and information.

These criteria determine how competitive the market is and how much pricing power firms have.

Question 8

Explain revenue concepts TR, AR and MR.

Accepted Answer

TR (Total Revenue) = P×Q. AR (Average Revenue) = TR/Q and generally equals price. MR (Marginal Revenue) = ΔTR/ΔQ, i.e., additional revenue from selling one extra unit.

These concepts are used to decide output and price under different market structures.

Question 9

Explain features of perfect competition (any five).

Accepted Answer

Features of perfect competition (any five):
1) Large number of buyers and sellers.
2) Homogeneous product.
3) Firms are price takers.
4) Free entry and exit.
5) Perfect information (ideal).
6) No selling cost (ideal).

Hence individual firms cannot influence market price.

Question 10

Explain short-run equilibrium of a firm under perfect competition.

Accepted Answer

In short run, market determines price and the firm takes it as given (MR=AR=P). The firm chooses output where MR (=P) equals MC. After choosing output, compare P with AC to know profit or loss.

If P>AC: supernormal profit; if P=AC: normal profit; if P<AC: loss.

Firm may continue in loss in short run if P ≥ AVC.

Question 11

Explain features of monopoly (any five).

Accepted Answer

Features of monopoly (any five):
1) Single seller controlling supply.
2) No close substitutes for the product.
3) Barriers to entry (legal, natural, technical).
4) Firm has price-making power (within demand limits).
5) Downward sloping demand curve.
6) Monopolist may earn supernormal profit in long run due to entry barriers.

Question 12

Differentiate between perfect competition and monopoly.

Accepted Answer

Perfect competition has many firms, homogeneous product, free entry/exit and firms are price takers with AR=MR=P; long-run profits are normal.

Monopoly has a single seller, no close substitutes and strong entry barriers; firm is a price maker with downward sloping AR and MR below AR; it can maintain supernormal profits in long run.

Thus pricing power and entry conditions differ sharply.

Question 13

Explain price-output determination under perfect competition in short run and long run.

Accepted Answer

Perfect competition: many firms sell a homogeneous product, so each firm is a price taker.

Short-run price-output determination:
1) Market determines price P; for the firm, AR=MR=P (horizontal).
2) The firm chooses output where MR (=P) = MC (and MC is rising).
3) Profit/loss depends on comparison of P with AC at that output: 
   - P > AC: supernormal profit
   - P = AC: normal profit
   - P < AC: loss
4) Shutdown condition (mention): if P < AVC, the firm shuts down in short run; if P ≥ AVC, it may operate even at loss because it covers variable cost.

Long-run equilibrium:
- Entry occurs if firms earn supernormal profits; supply increases and price falls.
- Exit occurs if firms incur losses; supply decreases and price rises.

Long-run equilibrium conditions:
- P = MR = MC and P = AC (only normal profit).
- Firms operate at minimum LAC (productive efficiency).

Thus, competitive forces ensure only normal profit in the long run.

Question 14

Explain price-output determination under monopoly. Include AR-MR relationship and steps of equilibrium.

Accepted Answer

Monopoly is a market with a single seller and no close substitutes, protected by barriers to entry. The monopolist faces the market demand curve.

Revenue relationship:
- AR (demand) curve is downward sloping.
- MR lies below AR because to sell additional units, the monopolist must reduce price on all units (for a single price market).

Equilibrium/price-output determination steps:
1) Find the output level where MR = MC (and MC is rising). This gives equilibrium output (Q*).
2) Determine price (P*) from the AR (demand) curve corresponding to Q*.
3) Profit depends on comparison of P* with AC at Q*. If P* > AC, the monopolist earns supernormal profit.

Important points:
- Unlike perfect competition, price is not equal to MR under monopoly.
- Monopoly can maintain profit in long run because entry is blocked.
- Monopoly has no supply curve because price-output pair depends on demand and MC conditions.

Thus, monopoly sets output first (MR=MC) and then charges the price from demand curve.

Question 15

Explain price discrimination. State conditions for price discrimination and types with examples.

Accepted Answer

Price discrimination means charging different prices to different buyers (or markets) for the same product, not due to differences in cost of supply. It is generally possible when a firm has some monopoly power.

Conditions for price discrimination:
1) Market segmentation: firm must be able to separate customers into distinct groups (students, adults; regions).
2) Different price elasticity in different segments: one segment less elastic can be charged higher price.
3) No resale/arbitrage: buyers in low-price market should not be able to resell to high-price market.
4) Some degree of market power/barriers to entry.

Types with examples:
1) First degree (perfect): each buyer charged maximum willingness to pay (ideal; rare).
2) Second degree: different prices for different quantities/versions (bulk discounts, different data plans).
3) Third degree: different groups charged different prices (student discount, senior citizen fare; different country pricing).

Managerial significance: helps increase total revenue and profit by capturing consumer surplus, but must be done ethically and within legal limits.

Market Structure and Pricing: Perfect Competition, Monopoly and Price-Output Determination (Overview)

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