Economics: Market Definition and Functions

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Questions and Answers

What is price discrimination?

Price discrimination refers to the charging of different prices by the monopolist for the same product.

How is the market price or equilibrium price determined in perfect competition?

In perfect competition, price is determined through the intersection of market demand and market supply curve. When market supply equals market demand, equilibrium is achieved.

Explain the equilibrium conditions or profit maximizing condition of the perfect competitive firm.

A perfect competitive firm is in equilibrium when MR (Marginal Revenue) equals MC (Marginal Cost) and MC cuts MR from below. This occurs when the total profit is maximum at a specific level of output.

How does a competitive firm attain equilibrium in the short run?

A competitive firm in the short run achieves equilibrium at a production level where both necessary (MR=MC) and sufficient (MC cuts MR from below) conditions are met. Signup and view all the answers

What is the relation between AR, MR, and price elasticity of demand (ep)?

The relation is given by MR = P(1 - 1/ep). When ep > 1, MR > 0, and when ep < 1, MR < 0. If ep = 1, MR = 0. Monopoly power index is represented by 1/ep. Signup and view all the answers

How does a monopolist attain equilibrium in the short run?

A monopolist in the short run achieves equilibrium by producing at a level where MR = MC and where MC curve cuts the MR curve from below. The monopolist can earn super normal profit, normal profit, or incur losses. Signup and view all the answers

Compare between Perfect Competition & Monopoly with respect to their characteristics.

Perfect Competition has infinite number of sellers, free entry/exit, price takers, earn normal profit, price discrimination not possible, and elastic demand curve. Monopoly has one seller, barriers to entry, price maker, earn super normal profit, price discrimination possible, and downward sloping demand curve. Signup and view all the answers

How, according to the Cournot model, does a firm attain equilibrium?

In the Cournot model, two firms in a duopoly market compete by selecting production levels based on assumptions about each other's output. They continue adjusting output until reaching a point where neither can increase profit by changing output. Signup and view all the answers

How does a monopolistically competitive firm attain equilibrium in the short run?

In the short run, a monopolistically competitive firm attains equilibrium where marginal cost equals marginal revenue, resulting in a level of production where profit is maximized. Signup and view all the answers

Define market and explain its functions and characteristics.

In economics, a market refers to a social relation or social institution between buyers and sellers. The main functions of a market are to act as a bridge between buyers and sellers, narrowing the gap between production and consumption, and to determine the price based on the interaction of demand and supply. Some characteristics of markets include having a market for each product and each factor of production, the presence of buyers and sellers, commodities having a price, and the existence of a social or economic relation between buyers and sellers. Signup and view all the answers

What are the different types of markets and describe them?

Markets can be classified into local markets (commodities sold near their place of production), national markets (commodities sold throughout the country at a similar price), and international markets (commodities sold domestically and exported to other countries). Markets can also be classified based on time period, type of commodity being sold, and competition level. Signup and view all the answers

What is meant by market price?

Price determined through market demand and supply curve Signup and view all the answers

Market price is constant and influenced by demand. (True/False)

False Signup and view all the answers

What is meant by shutdown point? Minimum price of the AVC is called the _______ Point.

Shutdown Signup and view all the answers

Explain the conditions for profit maximization of a firm.

A firm maximizes profits when the marginal revenue equals the marginal cost (necessary condition) and the marginal cost cuts the marginal revenue from below (sufficient condition). Signup and view all the answers

Match the following: Market types with their descriptions:

Perfect Competition = Characterized by a large number of buyers and sellers, homogeneous products, and perfect knowledge Monopoly = Single seller with high market share and unique product Oligopoly = Market dominated by a small number of firms Monopolistic Competition = Many firms selling differentiated products Signup and view all the answers

Study Notes

Market and its Characteristics

A market is a social institution where buyers and sellers interact to exchange goods and services.
The two main functions of a market are:
- Bridging the gap between production and consumption
- Determining the price of a commodity through the interaction of demand and supply

Types of Markets

Classified according to geographical extent:
- Local market: commodities are sold near their place of production
- National market: commodities are sold throughout the country
- International market: commodities are sold in other countries
Classified according to the type of commodity:
- Different markets for different commodities
Classified according to time period:
- Very short period market: supply is assumed to be constant
- Short period market: firms can change their variable factors of production
- Long period market: firms can change their fixed factors of production and technology
- Very long period market: technology changes and new firms enter the market
Classified according to competition:
- Perfect competition: many buyers and sellers, homogeneous product, free entry and exit
- Monopoly: one seller, many buyers
- Monopolistic competition: many sellers, differentiated products
- Oligopoly: few sellers, interdependent decision-making

Market Price and Normal Price

Market price: the short-term price determined by the interaction of demand and supply
Normal price: the long-term price determined by the average cost of production

Shutdown Point and Break-Even Point

Shutdown point: the minimum price at which a firm is willing to operate in the short run
Break-even point: the point at which a firm's total revenue equals its total cost, and it earns normal profit

Demand Curve and AR Curve

In perfect competition, the demand curve is horizontal and the AR curve is parallel to the horizontal axis
AR = TR/Q = P

Profit Maximization

A firm maximizes its profit when:
- MR = MC
- MC cuts the MR curve from below

Perfect Competition

Characteristics:
- Many buyers and sellers
- Homogeneous product
- Free entry and exit
- Perfect knowledge
- Perfect mobility of factors
- No transport cost
Condition of profit maximization:
- MR = MC
- MC cuts the MR curve from below
Short run and long run:
- In the short run, a firm can earn super normal profit or loss
- In the long run, a firm earns normal profit

Other Concepts

Natural monopoly: a single firm can supply the entire market at a lower cost than multiple firms
Price discrimination: charging different prices for the same product to different buyers
Equilibrium price: the price at which the market demand equals the market supply### Monopoly and Monopolistic Competition
A monopolist faces a downward sloping demand curve or AR curve.
The corresponding MR curve is also downward sloping and lies below the AR curve.
A monopolist can earn super normal profit or normal profit in the short run.
The equilibrium of a monopolist is determined at the level of production where MR = MC.
The sufficient condition for equilibrium is that the MC curve must cut the MR curve from below.

Determination of Equilibrium Price and Output under Monopoly

The equilibrium price and output are determined where MR = MC.
The monopolist earns super normal profit or normal profit in the short run.
Super normal profit is earned when P > AC, and normal profit is earned when P = AC.

Comparison between Perfect Competition and Monopoly

Number of Sellers: Perfect competition has an infinite number of sellers, while monopoly has a single seller.
Nature of Product: Perfect competition has homogeneous products, while monopoly has a unique product with no close substitutes.
Nature of Firms: Perfect competition has firms that are price takers, while monopoly has a single firm that is a price maker.
Determination of Price and Output: Perfect competition has firms that determine only the level of output, while monopoly determines both price and output.

Cournot Model

The Cournot model is based on the following assumptions:
- There are only two firms in the market.
- The two firms sell homogeneous products.
- When a firm chooses its profit-maximizing output, it assumes that the output of its rival remains constant.
- The marginal cost of production is zero.
According to the Cournot model, each firm supplies 1/3rd of the market at a common price.

Criticism of Cournot Model

The assumption of costless production is unrealistic.
The model does not differentiate between the quality of goods produced by the two firms.
The assumption that a firm chooses its profit-maximizing output while assuming that the output of its rival remains constant is unrealistic.

Monopolistic Competition

A monopolistically competitive firm attains equilibrium in the short run in the same way as a monopoly.
The equilibrium of a monopolistically competitive firm is determined at the level of production where MR = MC.
The sufficient condition for equilibrium is that the MC curve must cut the MR curve from below.

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Description

This quiz covers the definition, functions, and characteristics of a market in economics. It explores the role of buyers and sellers in a market.