MCQ

What is a Market?

A market is a place (physical or virtual) where buyers and sellers interact to exchange goods and services at a mutually agreed price.

Forms of Market

Markets can be classified into the following types based on the nature of competition:

▪ Perfect Competition

▪ Monopoly

▪ Monopolistic Competition

▪ Oligopoly

▪ Duopoly (a special type of oligopoly)

Perfect Competition

Definition: A market where there are many buyers and sellers dealing in homogeneous (identical) products.

Key Features:

• Large number of buyers and sellers

• Homogeneous products

• Firms are price takers

• Perfect mobility of factors of production

• Perfect knowledge

• Free entry and exit of firms

• Demand curve is perfectly elastic

Demand Curve Diagram (Perfectly Elastic):

markdown

Price
  |
  |——————— D = AR = MR (horizontal line)
  |
  |
  |__________________________ Quantity

Profit Condition:

Firms earn normal profit in the long run due to free entry and exit.

Monopoly

Definition: A market with only one seller and no close substitutes for the product.

Key Features:

• Single seller

• Price maker

• High entry barriers

• Downward-sloping demand curve

• Firm must reduce price to sell more

Demand Curve Diagram (Monopoly):

markdown

Price
  |
  |
  | 
  |    AR (Demand Curve)
  |   
  |    __ MR (Lies below AR)
  |
  |__________________________ Quantity

Why Monopoly Arises:

• Patents, licenses, exclusive control

• High setup cost

• Legal barriers

Price Discrimination under Monopoly

Definition: Charging different prices to different consumers for the same product, not based on cost differences.

Conditions:

• Monopoly power

• Market segmentation

• No resale possible

Example: Railway tickets, movie tickets, airline fares

Monopolistic Competition

Definition: A market with many sellers offering similar but not identical products.

Key Features:

• Product differentiation (branding, packaging)

• Partial control over price

• Freedom of entry and exit

• Downward-sloping demand curve

• Imperfect mobility of resources

Demand Curve Diagram (Monopolistic Competition):

markdown

Price
  |
  |
  | 
  |    AR
  |   
  |    __ MR (More steeply downward)
  |
  |__________________________ Quantity

Why it’s called Monopolistic + Competition:

• Monopoly: Some control due to brand loyalty

• Competition: Large number of firms, free entry/exit

Oligopoly

Definition: A market dominated by a few large firms where decisions are interdependent.

Key Features:

• Few dominant firms

• Strategic decision-making

• High entry barriers

• Advertising and brand wars

• Demand curve is kinked (price rigidity)

Kinked Demand Curve Diagram (Oligopoly):

markdown

Price
  |
  |       
  |        
  |        AR (kink at prevailing price)
  |   ___
  |          
  |           
  |__________________________ Quantity

Cut-Throat Competition:

Firms may aggressively lower prices to beat competitors, hurting profits.

Duopoly

Definition: A form of oligopoly with only two firms controlling the market.

Features:

• High interdependence

• Possibility of cooperation (collusion) or fierce competition

Cartel Formation

Definition: Firms collude to act as a monopoly by fixing prices or output.

Examples:

OPEC (oil), cement or steel cartels