NCERT Questions for Class 12 Economics Chapter 6 – Non competitive Markets

Important Questions with Solutions of Class 12 Economics Chapter 6 – Non competitive Markets

1) What can be done to bring down the equilibrium price of mandatory medicine via market forces? Describe the changes that occurred in the market.

Ans – Since medicine is a necessary good, its demand is relatively inelastic. When the equilibrium price determined by market forces of demand and supply is too high, several market interventions can be placed to bring it down.

One effective method is increasing the supply of the medicine. This can be attained by the state decreasing the taxes imposed on its producers or giving subsidies to its producers. The producers would receive an incentive to increase the quantity they supply.

As supply increases, the supply curve shifts to the right. The new equilibrium is established at a lower price from the original price to a new, lower price of OP1. Since demand for the medicine is inelastic, the quantity at which it is traded remains almost the same price. This will ensure that the medicine becomes affordable without affecting the quantity available in the market.

2) Explain how the government policy of liberalization makes the market for any necessary goods more competitive in the interest of consumers.

Ans – The policy of liberalization encourages the entry of new firms into the industry, thereby increasing the total output. As the total demand is constant, supply increases, lowering the price to benefit consumers through a lower cost.

Liberalization removes the barriers to entering the market these include licensing quotas liberalizing the entrance for more firms. The entry of more firms raises supply and increases competition in the market, shifting the supply curve to the right, lowering the equilibrium price, and raising the equilibrium quantity, other things being equal. This will finally eliminate supernormal profits to the benefit of consumers through the quantity of goods available at lower prices.

3) What are the effects of a price ceiling?

Ans – A price ceiling refers to the maximum price of any commodity, as fixed by the government. These are the possible impacts of imposing a price ceiling below the equilibrium price:

• Shortages: The reduced price will increase demand while reducing supply leading to a commodity shortage.
• Black Markets: Black markets may spring up to avoid the ceiling and the goods sold at higher prices than the ceiling price. This often happens as some consumers will be willing to pay more for the good than without it.
• Lower Quality: Suppliers may lower the quality of the product/service to recapture the revenue lost from a lower price.

Lowered Incentives of Producers: Producers are less motivated to produce more due to reduced profits due to the shortage.

In general, even though the price ceiling guarantees products are affordable to consumers, it comes with other negative implications like black markets and lower-quality goods.

4) What are the effects of a price floor?

Ans – A price floor can be referred to as a government-set minimum allowable price, usually above the equilibrium price. The impact of a price floor includes:

• Surplus: If a price floor is fixed higher than the equilibrium price in an excess commodity supply. Though the producers are willing to supply more at a higher price, the consumers won’t buy at that price.
• Buffer Stock: To absorb this excess supply, the government employs a buffer stock system. It buys up the excess supply from producers to sustain the price floor and thus stabilize the market. These stocks are then stored by the government for future use to meet any shortage if needed.
• Lower Consumer Welfare: As this price floor has inculcated higher prices for consumers, they will decrease consumption and overall welfare may lower.
• Disincentives for Producers: Although a price floor does guarantee higher income for producers, it reduces their incentive to innovate or develop efficiency since a minimum guaranteed price will reduce competitive pressures.

A price floor is supposed to guarantee a minimum price to producers for their goods, and all that comes with this are surpluses, high prices to consumers, and potential inefficiency in the market.

5) What are the chain effects of a rise in demand for a commodity if the market was initially in equilibrium?

Answer: When the market of a good is in equilibrium and there is a rise in demand, the following chain effects take place:

• Excess Demand: With the rise in demand, the original equilibrium price won’t suffice to meet the new level of demand resulting in a situation where demand is more than the supply at the prevailing price.
• Price Rise: The surplus demand is extinguished through price rise due to the fierce competition from the buying side. Its consumers are willing to pay more to secure the limited supply.
• Adjustment in Supply & Demand: With the rise in prices, the quantity demanded starts decreasing, that is, there is a contraction of demand, and producers get an incentive to expand the supplied quantity.
• New Equilibrium: Price may rise until the higher price level brings a new equilibrium. It’s where the increased supply level is matched by the elevated demand level.

6) What are the flaws of the functions of the oligopoly market?

(i) Few Firms

(ii) Barriers to Entry

Ans – (i) Few Firms:

A market of only a few large firms would mean that each firm commands significant market power – What one firm does in terms of pricing or output variation immediately affects the reaction of rivals. The presence of such interdependence of firms by predicting the demand curve of any individual firm is completely accurate and its behavior in the market difficult. The firms under oligopoly must indulge in strategic behavior, like trusts or cartels, to avoid the pressure of competitive pricing and to gain monopoly profits. Consequently, firms face reduced competition and command prices higher than they would if the market were more competitive, and their outputs are lower compared to a competitive market.

ii. Barriers to Entry:

A characteristic of an oligopolistic market is the presence of barriers to entry by new firms into that particular market. These could be natural monopolies due to huge startup costs the requirement for economies of scale, or even artificial barriers such as patent rights or brand loyalty. These barriers allow the incumbent firms to maintain their hold in the market and their profitability by preventing/discouraging the entry of new competitors. Hence, market concentration persists with restricted competition, further consolidating the oligopolistic tendencies of the industry.

7) What is the difference between collusive & non-collusive oligopoly? Describe how companies in an oligopoly are interdependent concerning their decisions about price & output.

Ans – Collusive Oligopoly – In a collusive oligopoly, rather than competing against each other, firms coordinate activities by entering into some type of agreement or cartel establishing either the level of prices or the level of output.

Behavior: Firms act precisely as if a single-unit monopolist were to exist. The firms coordinate their strategies to maximize their gains instead of competing against each other as individual companies.

Aim: This usually aims at an overall increase in profitability caused by the absence of any competition through price stabilization and collective control over market output.

Non-Collusive Oligopoly – A non-collusive oligopoly is one in which firms act independently and do not coordinate their actions in any manner with other firms.

Behavior: Each firm on its own competes by seeking to maximize its profits by changing prices and output levels based on its independencies.

Aim: The focus is on individual gains; firms act to serve their interest rather than based on collaborative goals set forth by them.

Interdependence of Price and Output Decisions:

Under an oligopoly, the few large players give rise to highly interdependent firms. This phenomenon materializes in the following ways:

Impact of Decisions: Any pricing or output decisions of one firm would significantly impact the moves of other firms within that category. For example, if one firm lowers the price, the others try to maintain their market share. On the other hand, if one firm increases the price, the rival firms may modify their strategy to capture any gain in demand without losing market share.

Strategic Reactions: Firms in an oligopoly anticipate and then act on the likely responses of their rivals. Any change in price or output by a single firm will have some readjustment to competitor reaction, creating, in effect, strategic interaction whereby firms keep modifying their respective strategies in the light of anticipated actions by others.Market Dynamics: Given that there are only some major firms, any serious move by one firm will result in perceptible changes in the market that may alter the price and output decisions made by all players. This interdependence begets an environment of complexity in which a firm has to be careful about the possible reactions of its rivals to its strategic moves.

8) What are the implications of the following features of perfect competition?

(i) Homogeneous Products

Implications:

Uniform pricing: Due to the nature, quality, size, shape, and color of products being homogeneous, no single producer can charge a different price for their product; hence, there is a uniformity of price in the market.

No Buyer Preference: Since the products are identical, there isn’t a buyer preference over any seller on account of the product. All that matters is the price.

Price Taker Behaviour: The producers accept the market price as given and do not influence the price. Since all products are homogeneous, the competition is based purely on price, and any deviation from the market price will result in the producer losing his customers to other producers.

(ii) Freedom of Entry and Exit

Implications:

Long-Run Equilibrium: Firms can enter and leave the industry due to its profitability. At this stage, a firm can only earn average profit where TC equals TR, AR is equal to MR, and the price is at MC.

Market Adjustments: Excess profits by firms in the market will attract new firms, thus increasing supply. Increased supply eventually brings the market price down and lowers the profit to a normal level. If firms sustain losses some firms would leave the market, reducing supply & raising the market price to eliminate losses.

Dynamic Market Conditions: The freedom to enter & exit ensures competitiveness in the market and adjustment according to changes in supply and demand, hence providing a stable market environment within which no firm can hold extraordinary profits or losses in the long run.