Economics (NCERT) Notes

6.1 Non-competitive Markets

Conditions for Perfect competition market structure
(i) there exist a very large number of firms and consumers of the commodity,   
(ii) firms are free to start producing the commodity or to stop production; i.e., entry and exit is free
(iii) the output produced by each firm in the industry is indistinguishable from the others  
(iv) consumers and firms have perfect knowledge of the output, inputs and their prices.
 
Non-competitive Markets
•Non-competitive Markets arises in a ssituation where one or more of these conditions are not satisfied.
•It means
     (i) number of firms and consumers are limited
     (ii) entry and exit is not free
     (iii) the output is not indistinguishable from the others 
     (iv) consumers and firms do not have perfect knowledge of the output, inputs and their prices.
 
Monopoly and Oligopoly
•If entry and exit of firms is not free and it becomes difficult for firms to enter a market, then a market may not have many firms.
•In the extreme case a market may have only one firm.
•Such a market, where there is one firm and many buyers is called a monopoly.
•A market that has a small number of large firms is called an oligopoly.
•The assumption that goods produced by a firm are indistinguishable from those of other firms implies that goods produced by firms are close substitutes, but not perfect substitutes for each other.
•Such markets, where this assumption does not hold are called markets with monopolistic competition.
 
Conditions for Monopoly
•A market structure in which there is a single seller is called monopoly.
•A monopoly market structure requires that
     •there is a single producer of a particular commodity;
     •no other commodity works as a substitute for this commodity; and
     •for this situation to persist over time, sufficient restrictions are required to be in place to prevent any other firm from entering the market and to start selling the commodity.
     •all other markets remain perfectly competitive.
•Other assumption for monopoly
     •All the consumers are price takers; and
     •The markets of the inputs used in the production of this commodity are perfectly competitive both from the supply and demand side.
 
Competitive Behaviour versus Competitive Structure
•A perfectly competitive market has been defined as one where an individual firm is unable to influence the price at which the product is sold in the market.
•Since price remains the same for any level of output of the individual firm, such a firm is able to sell any quantity that it wishes to sell at the given market price.
•It, therefore, does not need to compete with other firms to obtain a market for its produce.
•This is clearly the opposite of the meaning of what is commonly understood by competition or competitive behaviour.
 
Examples of competition
•Coke and Pepsi compete with each other in a variety of ways to achieve a higher level of sales or a greater share of the market.
•Individual farmers does not complete among themselves to sell a larger amount of crop.
•This is because both Coke and Pepsi possess the power to influence the market price of soft drinks, while the individual farmer does not.
 
Difference between competitive behaviour and competitive market structure
•Competitive behaviour and competitive market structure are, in general, inversely related;
•The more competitive the market structure, less competitive is the behaviour of the firms.
•On the other hand, the less competitive the market structure, the more competitive is the behaviour of firms towards each other.
•In a monopoly there is no other firm to compete with.



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