Eco Notes PDF

Market  A Market is a place where the exchange of goods takes place. The market has a different and wider meaning in economics, as it does not refer to a specific place. In Economics, a Market is a region where the buyers and sellers don’t have to assemble at a specific place for the...

Market  A Market is a place where the exchange of goods takes place. The market has a different and wider meaning in economics, as it does not refer to a specific place. In Economics, a Market is a region where the buyers and sellers don’t have to assemble at a specific place for the sale and purchase of goods. Instead, they have to be in contact with each other through any communication means, such as the internet, letters, mail, telephone, etc.  Markets can exhibit different structures based on the number of buyers and sellers and the degree of competition. Common structures include perfect competition, monopolistic competition, oligopoly, and monopoly. Markets are driven by the forces of supply and demand. Sellers provide goods or services, while buyers demand them. In a competitive market, equilibrium occurs when the quantity supplied equals the quantity demanded at a specific price, known as the equilibrium price. Markets are considered efficient when they allocate resources to their most valued uses. Characteristics of a Market  Area: In economics, a market is not related to a specific place, instead, it spreads over an area that becomes the point of contact between the producers/sellers and consumers/buyers. With the advancement of technology and modern means of communication, the market area of a product has become wide.  Commodity: In economics, a market is not related to a specific place but to a specific product. It means that a market can exist if there is one commodity that will be purchased and sold among the buyers/consumers and sellers/producers.  Buyers and Sellers: Another characteristic of a market is the presence of buyers and sellers. The buyers and sellers must contact each other in the market. However, it does not mean that they should meet physically, the contact can be through modern means of communication, like the internet, mail, telephone, etc.  Competition: For a market to exist, it is necessary that there is free competition amongst the buyers and sellers. The absence of competition in the market results in the charging of different prices for the homogeneous commodity by the sellers.  Basis for Classification of the Market Structure  Number of Buyers and Sellers - If there are a large number of buyers and sellers in the market, then a single buyer or seller cannot influence the price of a commodity. However, if there is one seller of a commodity, such as Railways, then the seller has great control over its price.  Nature of the Commodity - If a commodity is homogeneous in nature (identical goods such as pen, paper, etc.), then it is sold at a uniform price in the market. If a commodity is heterogeneous in nature (non-identical, totally different goods, such as different toothpaste brands, etc.), then it may be sold at different prices. However, commodities with no close substitutes, such as Railways can charge a higher price from the buyers  Mobility of Goods and Factors of Production - Free movement of factors of production from one place to another results in a uniform price in the market. However, if the movement of factors of production is not free, then the prices may differ from each other.  Freedom of Movement of Firms - Freedom in entry and exit of firms results in price stability in the market. However, restrictions on the entry of new firms or exit of the existing ones can lead to the firms influencing the price of goods and services, as they have no fear of competition from other existing or new firms.  Knowledge of Market Conditions - If the buyers and sellers are aware of the market conditions and have full knowledge about them, then the uniform price of goods and services prevails in the market. Whereas, if the buyers and sellers are unaware of the market conditions, then sellers are in a position to charge their customers different prices. Perfect Competition  A market situation where a large number of buyers and sellers deal in a homogeneous product at a fixed price set by the market is known as Perfect Competition.  Homogeneous goods are goods of similar shape, size, quality, etc. In other words, in a perfectly competitive market, the sellers sell homogeneous products at a fixed price determined by the industry and not by a single firm.  In the real world, the situation of perfect competition does not exist; however, the closest example of a perfect competition market is agricultural goods sold by farmers. Goods like wheat, sugarcane, etc., are homogeneous and their price is influenced by the market.  Observations In a perfect competition market, there are numerous buyers and sellers, none of whom have the power to influence the market price. Products sold in a perfect competition market are identical or homogeneous. In the long run, firms in a perfectly competitive market earn zero economic profit. Perfect competition leads to an efficient allocation of resources, as firms produce at the minimum point on their average total cost curve, maximizing total surplus (consumer and producer surplus). Features of Perfect Competition  Homogeneous Product: It means that the goods are identical in every respect such as size, shape, colour, quality, etc. As the goods are identical, these can be easily substituted for each other, which results in zero specific preference of the buyer from any particular seller. As the products are homogeneous, the buyers are willing to pay the same price only for the products of every firm of the industry. It also means that an individual firm cannot charge a higher price for their product, ensuring uniformity in price in the market.  Very large number of Buyers and Sellers:. The number of buyers and sellers is so large that the share of each buyer in total demand and the share of each seller in total supply is so insignificant that neither a buyer nor a seller can influence the market price. Therefore, firms are deemed to be price-takers, not price makers.  Freedom of Entry and Exit: It means that there are no artificial restrictions or barriers to the entry of a new firm or exit of an existing firm. This feature of a perfect competition market ensures that abnormal profits and abnormal losses do not exist in the long run. i. Normal Profits: The minimum profit required by a firm to run the business is Normal Profit. ii. Abnormal Profits: The excess amount of earnings of a firm over its total production cost is known as Abnormal Profit. iii. Abnormal Losses: The shortage in the amount of earnings of a firm over its total production cost is known as Abnormal Losses. Perfect Mobility of Factors of Production: The factors of production such as land, labor, capital, and entrepreneurship under a perfect competition market are perfectly mobile. There is no occupational and geographical restriction on the movement of factors of production, i.e., they are free to move to the industry with the best price.  Perfect knowledge. There is perfect dissemination of the information about the market conditions. Both buyers and sellers are fully aware of the nature of the product, its availability or saleability and of the price prevailing in the market. In simple words, perfect knowledge means that each buyer knows what can be bought at what price and where. Similarly, each seller knows what can be sold at what price and where.  Absence of collusion or artificial restraint. There is no sellers’ union or other kinds of collusions between the sellers such as cartels or guilds, nor is there any kind of collusion between the buyers, e.g. , consumers’ associations or consumer forum. Each seller and buyer acts independently. The firms enjoy the freedom of independent decisions.  No government intervention. There is no licencing system regulating the entry of firms to the industry, no regulation of market prices, i.e., fixation of lower or upper limits of prices, no control over the supply of inputs, no fixation of quota on production, and no rationing of consumer demand, no subsidy to producers or to consumers, etc.  Absence of Selling Costs: Selling cost is the cost of the advertisement of a product. As the goods under perfect competition are homogeneous, they do not include selling costs. The perfect knowledge of the buyers and sellers regarding the product, makes it easy for the firms to sell the goods without selling cost.  Absence of Transportation Costs: To ensure uniformity in the price of goods, it is assumed that there is no transportation cost under perfect competition. In other words, it is assumed that a manufacturer can sell the product at any place, and the buyers can purchase the product from any place of their choice.  Example - agricultural markets (fruits, vegetables, and grains), fish markets, stock and foreign exchange markets and roadside flower stalls. Perfect Competition and Pure Competition  Pure competition does not have perfect factor mobility and perfect knowledge. In simple words, perfect competition less perfect mobility of factors and perfect knowledge is regarded as pure competition. Pure Competition is used in a narrower sense as compared to Perfect Competition Short Run Equilibrium of the firm under Perfect Competition  Super Normal Profits : A firm is in equilibrium when its marginal cost is equal to marginal revenue (MC = MR) and marginal cost curve cuts marginal revenue curve from below. A firm in equilibrium earns super normal profit when average revenue (price per unit) determined by the industry is more than its average cost.  In the above figure , output of the firm is shown on OX- axis and Cost/Revenue on OY-axis. MC is marginal cost and AC is average cost curve. Price line is both average revenue and marginal revenue curve, because under perfect competition AR=MR.  Suppose, OP is the price determined by the industry. At this price, firm's equilibrium will be at point E, where marginal cost is equal to marginal revenue and marginal cost curve cuts marginal revenue curve from below.  Equilibrium output is OQ1. At this output Average Revenue = EQ1 and Average Cost=BQ1. Since, AR > AC, firm is earning EB super normal profit per unit of output.  Total super normal profit of the firm is BC x EB = EBCP (the shaded area). Thus, firm will be in equilibrium at point E and produce OM output at OP price. At this output, it will be earning EBCP super normal profit. Normal Profits  Normal profits is the minimum profit which is required by the firm to sustain itself. Thus, a firm in equilibrium earns normal profits when its average cost (AC) is equal to the price (AR) determined by the industry, i.e. AC = AR.  At OP price, which is determined by the industry, firm's equilibrium is at point E2 and OQ2 is the equilibrium output.  At point E2, marginal cost and marginal revenue are equal and marginal cost curve cuts marginal revenue curve from below.  The firm earns normal profits at OQ2 output because at this output it’s MC = MR = AR = AC.  In other words, average cost and price per unit (average revenue) are equal. This point is also known as break-even point. Loss  When the price set by the industry just covers the average variable cost. As long as price (AR) is more than or equal to average variable cost (AVC), the firm will continue its production. Thus, the price covers only the operational cost of the firm while it bears losses in terms of covering its fixed cost. Any fall in price below this level will lead to shutting down of the firm.  In fig., at price OP, firm is equilibrium at point E with OQ1 as the equilibrium level of output. However, at point E, the firm is only able to cover its variable cost. Any fall in price beyond this level of output will lead to shut down of the firm. Thus, a firm in equilibrium in the short period will continue its production as long as its losses are minimum and are confined to its fixed costs only, i.e. the price covers at least the average variable cost. Thus, shutdown price is the price below which the firm chooses not to produce. Long Run Equilibrium of the firm under Perfect Competition  In the long-run firm faces decisions like— whether to enter, stay or leave the industry; and whether to increase or decrease the plant size.  If price (AR) is greater than AC then firms would be making super-normal profit, this would attract new firms to enter the industry and push the price down because of increased supply in the industry.  On the other hand, if price (AR) is lower than AC, then some firms would leave industry because they are unable to recover their cost, in such case there will be a decline in supply which will push the price up.  Hence in either situation, whether P (AR) is greater or lower than AC, firms would keep entering or leaving respectively till P or AR is equal to AC.  So in long-run, we have the following two conditions giving the equilibrium level of output:  i) P (or AR or MR) = MC and  ii) AR = AC From these two equations we get, P = MC = AC. And since, MC and AC are equal only at the minimum of AC, so price line (or AR curve) should be tangent to AC curve at the long-run equilibrium level of output. MONOPOLY  Monopoly is derived from two Greek words, Monos (meaning single) and Polus (Meaning seller).  It is a market situation where there is only one seller in the market selling a product with no close substitutes.  For example, Indian Railways. In a monopoly market, there are various restrictions on the entry of new firms and exit of existing firms. Also, there are chances of Price Discrimination in a Monopoly market.  In a monopoly market, there is only one seller or producer of a particular product or service. Monopolies often arise due to significant barriers to entry, such as exclusive access to resources, patents, or high start-up costs. Monopolies may engage in price discrimination, charging different prices to different consumers based on their willingness to pay. Monopoly Markets are often associated with allocative inefficiency, as prices are typically higher and output lower compared to perfectly competitive markets. Causes of Monopolies : The barriers to entry are, therefore, the major sources of monopoly power. The main barriers to entry are:  Legal Restrictions : Some monopolies are created by law in the public interest. Most of the erstwhile monopolies in the public utility sector in India, e.g., postal, telegraph and telephone services, telecommunication services, generation and distribution of electricity, Indian Railways, Indian Airlines and State Roadways, etc., were public monopolies.  Also, the state may create monopolies in the private sector also, through licence or patent, provided they show the potential of and opportunity for reducing cost of production to the minimum by enlarging scale of production and investing in technological innovations. Such monopolies are known as franchise monopolies.  Control over Key Raw Materials : Some firms acquire monopoly power because they have traditional control over certain scarce and key raw materials which are essential for the production of certain goods, e.g., bauxite, graphite, diamond, etc.  Ex - Aluminium Company of America had monopolized the aluminium industry before World War II , From its inception in 1888 until the start of the 21st century, De Beers controlled 80% to 85% of rough diamond distribution.  Such monopolies are often called ‘raw material monopolies’. The monopolies of this kind emerge also because of monopoly over certain specific knowledge of technique of production.  Efficiency in Production. In an open economy, some firms attain monopoly status because of their superior efficiency in production.  Efficiency in production, especially under imperfect market conditions, may be the result of long experience, innovative ability, financial strength, availability of finance at lower cost, low marketing cost, managerial efficiency, etc.  Efficiency in production reduces cost of production below the cost level of competing firms. As a result, a firm gains higher competitive strength and can eliminate rival firms and gain the status of a monopoly. Such firms are able to gain governments’ favour and protection.  The economies of scale are a primary and technical reason for the emergence and existence of monopolies in an unregulated market.  If a firm’s long-run minimum cost of production or its most efficient scale of production coincides almost with the size of the market, then the large-size firm finds it profitable in the long-run to eliminate competition through price cutting in the short-run.  Once its monopoly is established, it becomes almost impossible for the new firms to enter the industry and survive. Monopolies created on account of this factor are known as natural monopolies.  Ex – Railways , Telecommunications , Nestle India , Marico  Government Licensing: Before entering into an industry, a firm has to take permission from the government and obtain a license for the same. Licensing helps a firm in ensuring minimum standards of competency. Therefore, sometimes government does not grant the license to the new firms so they can make sure that only one firm runs in the market.  Patents or Copyright – First important source of monopoly is that a firm may possess a patent or copyright which prevent others to produce the same product or use a particular production process. Generally, when the firms introduce new products, they get patent rights from the Government so that other cannot produce them. Features of Monopoly Market  Single Seller: Under Monopoly, there is only one seller selling the product in the market. It means that the monopoly firm and the industry are the same in this form of market. As there is one seller, the monopolist has full control over the price and supply of the product. Whereas, the number of buyers in a Monopoly market is large, which means that no single buyer can influence the price of a product in the market.  No Close Substitutes: As there is a single seller selling the product under a monopoly market, there are no close substitutes for the same. Therefore, a monopoly firm has no fear of competition from other firms, either new or existing ones. For example, Indian Railways has no close substitute for transportation services. However, there are other distant services like metro, etc.  Price Discrimination: As a monopolist is a single seller in the market, he/she can charge different prices at the same time from a different set of consumers, which is also known as Price Discrimination. A. Personal Price Discrimination: When the seller charges different prices for the same product from different kinds of buyers, it is known as Personal Price Discrimination. For example, a doctor charges less from poor people and more from rich, railways charges less from senior citizens and more from young citizens. B. Place Price Discrimination: When the seller charges a different price for the same product at different places, it is known as Place Price Discrimination. For example, the money charged for electricity in rural areas is less than the money charged per unit in urban areas. C. Use Price Discrimination: When the seller charges a different price for the same product based on its uses, it is known as Use Price Discriminations. For example, electricity charges per unit for a commercial purpose is different from the charges per unit for residential purpose.  Restrictions on Entry and Exit: Under a Monopoly market, there are strong restrictions/barriers on the entry of new firms and exit of the existing firms. It means that a monopoly firm can earn abnormal losses and profits in the long run. One of the reasons behind the barriers may be legal restrictions, like licensing, patent rights, etc., or it might be due to the restrictions in the form of cartels created by the firms.  Price Maker: As there is only one seller under the monopoly market, and the firm and the industry are the same things, the seller has a complete control over the price of the product. Being a sole seller, the monopolist can influence the supply of goods in the market and can fix the price on their own.  Basis Perfect Competition Monopoly It is a market situation where a large number of It is a market situation where there is only one Meaning buyers and sellers deal in a homogeneous product at seller in the market selling a product with no close a fixed price set by the market. substitutes. Number of This market has a very large number of sellers. This market has a single seller. Sellers Number of This market has homogeneous products. There are no close substitutes in this market. Product Entry and There is a restriction on the entry of new firms and There is freedom of entry and exit in this market. Exit of Firms exit of old firms. Demand This market is less elastic and has a downward- This market has a perfectly elastic demand curve. Curve sloping demand curve. As each of the firms in this market is a price-taker, As the firms in this market are price-maker, there is Price the price is uniform. a possibility of price discrimination. In this market, only informative selling costs are Selling Costs In this market, no selling costs are incurred. incurred. Level of There is perfect knowledge of the market. There is imperfect knowledge of the market. Knowledge PRICE DISCRIMINATION UNDER MONOPOLY  Monopoly firms have been found to charge different prices from different class of consumers. This is called price discrimination.  Price discrimination means selling the same or slightly differentiated product to different sections of consumers at different prices.  Consumers are discriminated on the basis of their income or purchasing power, geographical location, age, sex, colour, marital status, quantity purchased, time of purchase, etc.  Some common examples of price discrimination, not necessarily by a monopolist, are given below: I. physicians and hospitals, lawyers, consultants, etc., charge their customers at different rates mostly on the basis of the customer’s ability to pay II. merchandise sellers sell goods to relatives, friends, old customers, etc., at lower prices than to others and offer off-season discounts to the same set of customers III. railways and airlines charge lower fares from the children and students, and for different class of travelers IV. cinema houses and auditoria charge differential rates from different class of audience. V. some multinationals charge higher prices in domestic market and lower prices in foreign markets, called ‘dumping’, VI. lower rates for the first few telephone calls, lower rates for the evening and night trunk-calls; higher electricity rates for commercial use and lower for domestic consumption, etc. Necessary Conditions for Price Discrimination  Different markets must be separable for a seller to be able to practice discriminatory pricing. The markets of different classes of consumers must be so separated that buyers of one market are not in a position to resell the commodity in the other.  Markets are separated by i) geographical distance involving high cost of transportation, e.g., domestic versus foreign markets; ii) exclusive use of the commodity, e.g., doctor’s services; iii) lack of distribution channels, e.g., transfer of electricity from domestic use (lower rate) to industrial use (higher rate).  The elasticity of demand for the product must be different in different markets. The purpose of price discrimination is to maximize the profit by exploiting the markets with different price elasticities.  There should be imperfect competition in the market. The firm must have monopoly over the supply of its product to be able to discriminate between different classes of consumers, and charge different prices. Degrees of Price Discrimination  First degree: First degree or perfect price discrimination is feasible when the market size of the product is very small and the monopolist is in a position to know the price each consumer or each group of consumers is willing to pay.  Under this condition, the monopolist sets the price accordingly and tries to extract the entire consumer surplus.  Example, the case of medical services of exclusive use. A doctor who the paying capacity of his patients can charge the highest possible fee from presumably the richest patient and the lowest fee from the poorest patient.  Consumer Surplus : Consumer surplus is the difference between the price a consumer is willing to pay and the price he actually pays.  Second degree : Where market size is fairly large, perfect discrimination is neither feasible nor desirable. In that case, a monopolist uses second degree discrimination or the ‘block pricing method’.  The monopolist divides the potential buyers into blocks, e.g., rich, middle class and poor, and sells the commodity in blocks.  The monopolist sells its product first to the rich customers at the highest possible price. Once this part of the market is supplied, the firm lowers down the price for middle class buyer. Finally, bottom price is used for the poor class of buyers  The second-degree price discrimination is feasible where I. the number of consumers is large and price rationing can be done, in case of utility services like telephones, supply of water, II. demand curve for all the consumers is identical III. a single rate is applicable for a large number of buyers  Third Degree - Under third degree price discrimination, the monopolist divides the market for his product into two or more sub-markets with different price elasticities of demand and charges different prices from each one of them.  In this manner, he treats each sub-market as a separate market.  Monopolist has to sell its goods in two or more markets, completely separated from one another, each having a demand curve with different elasticity.  A uniform price cannot be set for all the markets without losing profits.  The monopolist is, therefore, required to find different price-quantity combinations that can maximize profit in each market.  Different prices may be charged from private companies, Government and educational institutions. Concessions to students in publications, circus, cinemas and transportation are other examples.  Itis practiced markets separated from each other by geographical distance, transport barriers, cost of transportation and legal restrictions on the inter-regional transportation of commodities. Firm’s Short-Run Equilibrium in Monopoly  Normal Profits - MC curve cuts the MR curve at the equilibrium point E. Also, the AC curve touches the AR curve at a point corresponding to the same point. Therefore, the firm earns normal profits. Super-normal Profits In the figure above, you can see that the price per unit = OP = QA. Also, the cost per unit = OP’. Therefore, the firm is earning more and incurring a lesser cost. In this case, the per unit profit is OP – OP’ = PP’ , Also, the total profit earned by the monopolist is PP’BA. Losses ❑ In the figure above, you can see that the average cost curve lies above the average revenue curve for the same quantity. ❑ The average revenue = OP and the average cost = OP’. ❑ Therefore, the firm is incurring an average loss of PP’ and the total loss is PP’BA. ❑ In the short-run, a monopolist sometimes sets a lower price and incurs losses to keep new firms away Long-run Equilibrium under Monopoly  Due to restrictions on the entry and exit into the monopoly market, the firms earn abnormal profits in the long run. Also, as the firms can sell more outputs by reducing the price of the product, the demand curve or AR curve of the firm slopes downwards, and because of this the MR curve also slopes negatively.  In the above graph, LMC and LAC are the Long-run Marginal Cost Curve and Long-run Average Cost Curve, respectively.  To attain equilibrium, the conditions i) MR = LMC ii) LMC curve cuts the MR curve from below are fulfilled at the OQ output level. If the output of the firm is priced at OP1 and LAC at OP, then it will earn abnormal profits of PBAP1 Monopolistic Competition  It consists of the features of both Perfect Competition and a Monopoly Market.  A market situation in which there is a large number of firms selling closely related products that can be differentiated is known as Monopolistic Competition.  The products of monopolistic competition include toothpaste, shampoo, soap, etc. Key Takeaways: Monopolistic Competition is a market structure characterized by many firms competing with differentiated products. Firms in this market strive to make their products appear unique or distinct through branding, quality, design, or other factors to attract consumers. Unlike in monopoly or oligopoly markets, there are relatively low barriers to entry and exit in monopolistic competition. Firms in monopolistic competition often engage in non-price competition, such as advertising, marketing, and product development, to differentiate their products and attract customers. Demand for products in monopolistic competition tends to be elastic, meaning consumers are sensitive to changes in price. Characteristics of Monopolistic Competition  Product Differentiation. Under monopolistic competition, the firms differentiate their products from one another. Product are differentiated with respect to their shape, size, color, design, minor qualitative differences, efficiency in use, some extra facility, packaging, after-sale-service, guarantee and warrantee and so on. The basic purpose of product differentiation is to make the consumers believe that a product is different from others and, thereby, to create BRAND LOYALTY of the consumers. Product differentiation affects firm’s demand curve in a significant way.  It means that the product of a firm is close to the product of another firm, but it is not a perfect substitute. The buyers of a monopolistic market structure differentiate the products manufactured by different firms and are also willing to pay different prices for the same differentiated product produced by different firms. The major benefit of product differentiation is that it gives monopoly power to a firm through which it can easily influence the market price of its product.  Product Differentiation means differentiating the products of the market based on their brand, colour, shape, size, etc. Differentiation among the products can be based on either real or imaginary differences.  Differentiation may be based on product itself , such as patented features , trade mark , trade name , peculiarities of the package or container , design , style. In retail trade it also include factors as convenience of sellers location , tone and character of his establishment , his way of doing business , reputation of fair dealing ,personal link.  Real differences include difference in colour, shape, flavour, warranty period, after sales service, etc.  Imaginary differences include differences that are not really obvious to everyone, but the buyers are made to believe by the firms that those differences exist, such as selling costs through advertisement, etc. For example, in cars, product differentiated firms are Ford, Hyundai, TATA Motors, etc.  Product differentiation gives a monopoly to a firm by making the demand for the product less elastic. Because of the less elasticity of demand for the product, the firm can easily charge a higher price than the price charged by its competitors. For example, Red Label Tea is costlier than Brooke Bond Taaza Tea.  Large Number of Sellers. Under monopolistic competition, a large number of firms sell closely related but heterogeneous products. Every firm under this market structure acts independently and has limited share of the market, which means that an individual firm has a limited control over the market price of the product. However, as there are a large number of firms in the market, it leads to stiff competition.  Pricing Decision: The firms under monopolistic competition are neither price-maker nor price-taker. However, as the firms produce unique and differentiated products from each other, each firm has partial control over the price of the product. The extent of a firm’s power to control the price of the product depends upon the strength of the buyers’ attachment to the brand  Freedom of Entry and Exit: It means that there are no artificial restrictions or barriers to the entry of a new firm or exit of an existing firm. This feature of a monopolistic competition market ensures that abnormal profits and abnormal losses do not exist in the long run. Even though monopolistic competitive firms and perfectly competitive firms enjoy freedom of entry and exit, the former is not as easy and free as the latter. Entry of new firms reduces the market share of the existing ones and exit of firms does the opposite.  Selling Costs: The products under monopolistic competition market are differentiated. The information about these differences in the products is given to the buyers through its selling costs. The firms add selling costs to the product so they can persuade the buyers in buying a specific brand of the product and keep that brand as their preference over the competitor’s brand. Therefore, under monopolistic competition, the total cost of a product includes its selling costs. Selling cost is the cost incurred on the advertisement, marketing, and sales promotion of the product., salaries of sales personnel, cost of after sale service , allowance to retailers for display  The selling cost , also performs following functions : i. Informing potential buyers about the availability of product. ii. Increasing demand for the product by attracting customers of rival products. iii. To make demand curve shift upward.  Following factors determine the effect of selling cost : i. A high price of product makes selling cost less effective ii. A lower price of substitute makes selling cost less productive iii. Advertising a costly product in low – income society makes no pay off iv. The stronger the customer loyalty , the lower the cross elasticity and less effective selling cost.  Lack of Perfect Knowledge: The selling costs added in the total cost of a product manufactured by a monopolistic firm create an artificial superiority in the consumers’ minds, which makes it difficult for them to evaluate different products available in the market. Because of a lack of perfect knowledge and the creation of artificial superiority, a high priced product is preferred by the consumers even though other products provide the consumers with the same quality at a low price.  Non-Price Competition: In monopolistic competition, there exists not only price competition, but also non-price competition. Non-Price Competition means competing with other firms by offering them gifts, better credit terms, etc. It is done by the firms without changing the price of the product.  Monopolistic Competition is the combination of a Monopoly and a Perfect Competition market (Monopolistic Competition = Monopoly + Competition)  The firm under Monopolistic Competition is the sole producer of a specific product or brand. In other words, as far as a specific brand is concerned, the firms under Monopolistic Competition enjoy a Monopoly position. However, the availability of close substitutes in the market influences the monopoly position of the firm as they face stiff competition from other firms in the industry.  Hence, it can be said that Monopolistic Competition is a form of market in which there is competition among various monopolists.