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CHAPTER

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6.1 Perfect Competition in the Long Run: Free Entry and Exit 6.2 Monopoly 6.3 Monopolistic Competition

The notion of market structure was introduced in Chapter 4. A per fectly competitive market structure is one that has the following features: (a) there are a large number of sellers and buyers in the market, (b) the product is homogeneous and (c) there is free entry and exit of firms in the long run. In Chapter 4 we saw how (a) and (b) lead to the supply curve, given that the objective of a firm is to maximise profits. In Chapter 5 we studied the interaction between supply and demand curves, and, learnt how the price/market mechanism works. In this chapter we study market structures as such. Having already analysed the implications of (a) and (b) under perfect competition, we begin by analysing the implications of feature (c), i.e., perfect competition in the long run. There are other market structures, which are not perfectly competitive. They go under the name of imperfect competition or imperfectly competitive market. There are three broad forms of imperfectly competitive markets: monopoly, monopolistic competition and oligopoly. In this chapter, we analyse the first two.

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6.1 PERFECT COMPETITION IN THE LONG RUN: FREE ENTRY AND EXIT Before analysing the implications of free entry and exit, we discuss a couple of things. 1. Recall from Chapter 3 that there are no fixed costs in the long run. Moreover, both the Long run Average Cost (LAC) and the Long run Marginal Cost (LMC) curve are U-shaped. The pattern of returns to scale that is, initially at low levels of output, a firm would experience increasing returns to scale, followed by constant returns to scale and diminishing returns to scale implies the U-shape of LAC curve, which, in turn, implies the U-shape of LMC curve. 2. How does producers equilibrium or profit-maximisation happen in the long run? The answer is that it happens the same way in principle as in the short run. Profit is maximised when P = LMC. The economic logic behind it is also parallel to that in the short run. We are now ready to examine the effects of free entry and exit. Suppose that the market price of the product is P1, and the firms are producing at the point where the price line intersects the LMC curve. Moreover, suppose that the price, P1, is high enough such that, at the profitmaximising level of output, firms are making positive profits. In economics, a positive profit is sometimes referred to as abnormal profit, in the sense that the total cost is assumed to

include not just the production costs but also the opportunity cost of the producer herself and hence profits are equal to the producers excess earning over her opportunity cost. (Likewise, negative profits, that is, losses are called abnormal losses.) In this situation, abnormal profits will attract many new firms to the industry. This will shift the market supply curve to the right, driving down the market price and profits. Another way to look at it is that there will be more competition, which will lower price and profits. How far will this continue? It will happen till there are no abnormal profits. Similarly, if, initially, the price is low enough such that firms are incurring losses, free exit means that some existing firms will start to quit the industry. This will tend to shift the market supply curve to the left. The price will rise. Losses will be less. The exit process will continue till there are no losses. It then follows that free entry and exit imply zero profit in equilibrium. Note that profit being zero is equivalent to P = LMC . This is the break-even price, the price at which the abnormal profit is zero. We can then say that free entry and exit imply that in the long run the market price will be equal to the break-even price. Together with the profit maximising condition P = LMC, the long-run competitive equilibrium is then defined by

P = LMC = LAC.

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That is, at the long run equilibrium, firms are in equilibrium (i.e. they are maximising profits) and there is no entry or exit. This is illustrated in fig. 6.1. Panel (a) shows that a firm produces the output qL. At this level of output, both the marginal cost and the average cost are equal to the price pL. Abnormal profits are zero, as price equals average cost. Implicit in this panel is that there is an equilibrium number of firms, not too many or too few, which is consistent with profits being zero. However, it is not possible to see what this number is in this diagram. See Exercise 6.47 for a numerical solution. Fig. 6.1(b) depicts the long-run market supply curve (with the number of firms being equal to its equilibrium value) and the demand curve. Market equilibrium occurs at price pL. The total equilibrium quantity produced and exchanged is QL . There is an important property associated with a perfectly competitive market in the long run equilibrium.

That is, the firm produces at a level (qL),where the LAC is at the minimum, i.e., production occurs at the most efficient scale. The firms scale of operation is large enough such that the benefits of increasing returns to scale have been realised, but it is not that large so as to incur the problems associated with decreasing returns to scale. 6.2 MONOPOLY Some of you must have heard this term before. Mono means one, poly means seller and thus monopoly means one seller. This is defined in the context of a given geographical location or space. In India, before liberalisation in the power sector got underway in the 1990s, the generation, transmission and distribution of electricity were in the hands of State Electricity Boards (SEBs). The SEBs were monopolies in the respective states. To take another instance, you hear many people use the term xeroxing

(a)

(b)

Fig. 6.1 Firm and Market Equilibrium in the Long Run

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CLIP 6.1
Patent Laws
Most developed countries have comprehensive patent laws. During the patent life the patent holder can sell license to other firms for using its technology (legally). Typically, the license is sold to firms who operate in markets other than where the patent holder operates, e.g., in a different country. The enforcement of patent law is also strict in developed countries. A patent holder can take to court some other firm, who may be using its technology without a license, and get a fairly quick decision. In India, the patent law and its enforcement are rather passive. This is because research and development, discoveries and inventions have not been a focus of activities by firms. Barring a few exceptions, we generally import technology from abroad. The most important patent legislation in India is the Indian Patent Act of 1970. It provided that any invention of a new product or a process of production, which is useful and not obvious, is patentable. But it explicitly did not allow product patents in the drug and food sector. This allowed Indian drug companies to produce drugs invented in the developed countries and sell them in less developed countries. Cipla, an Indian drug company, is an example. For a long time, Cipla has supplied antiAIDS drugs, named Combivir, to a country like Ghana. Recently however, as an obligation of being a member of WTO (World Trade Organisation), India and other countries had to revamp their patent laws. In India, a major amendment to the Patent Act of 1970 was done in 1999, by which both product and process patents are allowable in the food and drugs sector. In general, patents are being protected more aggressively than before. To continue our account of Cipla selling Combivir in Ghana, a multinational company named Glaxo Smith Kline claimed that it had patents on the generic version of drug Combivir and it filed a patent violation complaint against Cipla in Ghana. After the hearing of arguments by both companies, the government of Ghana in 2000 rejected Ciplas application to market this drug in Ghana. There is a fear in India that, because of our being a member of WTO, we are forced to honour patent protection. As a result, particularly in the drug sector, Indian companies will no longer be able to sell many essential drugs at affordable prices. Once multinational companies start to sell them, the drug prices are going to skyrocket, and many poor people will be denied access to these drugs. Are patents a good thing for a developing country like India? Should India be a member of WTO? An immediate reaction may be a no to both. However, a careful and rational thinking might suggest just the opposite. We recommend you to visit WTOs website, http://www.wto.org and read many articles on these issues.

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to mean the use of a photocopying machine. Actually, Xerox is an American company, which discovered the plain-paper photocopying machine in 1959. It obtained patent on it. (The concept of patent will be explained shortly.) Throughout the 1960s it was the only company that manufactured and sold plain-paper photocopying machines.1 This is an example of a private monopoly. A monopoly is the opposite of the per fectly competitive market structure: there is just one firm/seller instead of many. There is little competition. It is implicit that there are no close substitutes to the monopolys product or service available in the market. It is also implicit that there is no free entry (otherwise, more than one firm can operate in the industry). A monopoly market structure emerges because of any of the following reasons. (a) The government gives license to only one company for producing a product or providing a service in a given locality or space. For instance, till 2002, VSNL (Videsh Sanchar Nigam Limited) had monopoly in India in providing international telephony service. (b) Big private companies typically in developed countries engage in research and come up with new
1

products or new technology in producing an existing product. As a reward for their risk and investment in research, they can apply to their government for a patent, which is an of ficial recognition that they are the originators of the new product or technology and no one else can use their technology without obtaining license from them. In other words, monopoly arises because of granting patent certificate or what is called patent rights. The case of Xerox is an example.2 However, patents are not granted for ever. They are valid only for a certain number of years (after which other firms can freely copy the technology). This period is called patent life. In most developed countries the patent life varies between 15 to 20 years. In Australia it is 20 years; in the U.S. it is currently 17 years. See Clip 6-1 on patent laws. (c) Sometimes, fir ms retain their individual identity but they coordinate their outputs and pricing policy so as to act as if it is a monopoly. This is called a cartel. The OPEC (Organisation of Petroleum Exporting Countries) in the 1970s is an example of a cartel that led to virtual monopoly in the

Plain-paper photocopy machine has been regarded as the most successful commercial product in history. Now there are many well-known companies, besides Xerox, in the world market that produce photocopying machines, e.g., Canon, Mita, Panasonic, Ricoh, Royal, Sharp and Toshiba. Many fax machines also have copying capability. Another example is a drug company called Eli Lilly, which has a patent on a very widely used antidepressant called Prozac. This patent is supposed to expire in 2003.

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world market for oil. See Clip 6-2 for a brief history of the OPEC and the world oil market.3 6.2.1 Total, Average and Marginal Revenues The objective of a monopolist is to maximise its total profit, which, by definition, equals total revenue minus total cost. The cost structure facing a monopolist is similar to that of a competitive firm. We have the same concepts, total cost, average cost, marginal cost etc., and their general shapes are also the same as for a competitive firm. But the revenue structure facing the monopolist is quite different. Recall that a perfectly competitive firm is very small compared to the

market. It does not have any market power and thus it is a price-taker. None of this is true for a monopoly since it is the only producer by definition. It has market power and it is a price-maker so-to-speak. This is the most important difference of a monopoly firm from a perfectly competitive firm. It implies that the way total revenue changes as output changes is different from what happens to a perfectly competitive firm. In case of the latter, we already know that, as output increases, the price remains unchanged. But a monopoly firm faces the entire market, hence faces the market demand curve. Hence, as it increases or decreases its output it cannot expect that the market price remains unchanged: price will change according to what consumers are

Clip 6-2
OPEC and The World Oil Market
OPEC had five founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. It came into existence in 1960. Qatar joined it in 1961, followed by Indonesia and Libya in 1962, United Arab Emirates in 1967, Algeria in 1969 and Nigeria in 1971. In the 1970s when the first oil price shock overtook the world economy, OPEC consisted of the above-mentioned countries. (Currently there are two other countries in OPEC, namely, Ecuador and Gabon.) The aim of the OPEC countries is to set production quotas, so as to manipulate the price of petrol in the world market. Besides the OPEC, there are other countries which are major producers of oil. For example, America was and still is, a big producer of oil. But its consumption is even greater and thus it is an importer of oil. India also produces oil and is an importer. Hence, in the import-export market, OPEC in the 1970s can be interpreted as a monopoly. The oil shortage of 1970s motivated many other countries to explore oil. By mid 1980s there were other countries, who were major exporters of oil and who used to be importers of oil earlier, e.g., Mexico, The Netherlands and Russia.
3

There are other reasons for monopoly or near-monopoly also, e.g., merger and acquisition. In the early 1990s, in the tea industry, Brooke Bond and Lipton merged and subsequently they merged with Hindustan Lever. It left out Tata, another large tea firm.

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willing to pay along the demand curve. The monopolist has to take this into account. Put differently, the market demand curve is a constraint facing a monopoly firm. This point must be understood very clearly. Suppose, the market demand schedule is as given in Table 6.1. Since the monopolist faces this demand schedule it means that if she wants to sell 4 units for example, she (the monopolist) must charge price equal to Rs. 7. The reason is as follows. If she charges any price higher than Rs. 7, she will be able to sell only less than 4 units. Moreover, as long as she wants to sell 4 units, she can sell them all by charging Rs. 7 each because along the market demand curve 4 units are demanded at the price equal to Rs. 7. Therefore, there is no reason to sell at any price less than Rs. 7. Similarly, it can be argued that if the monopolist wants to produce and sell 5 units, the price charged will be Rs. 5, and so on.4 We can then write Output or Quantity in place of Quantity Demanded and present the same demand schedule with output listed in increasing order, starting with output equal to 0 (and corresponding price equal to Rs. 15). This is done along the first two columns in Table 6.2. These two columns represent the same

demand schedule as in Table 6.1. Now, by multiplying output by price, we get the Total Revenue (TR), which are given in column (3). Dividing TR by output gives average revenue, AR, since, by definition, AR = TR/output. This is Table 6.1 A Demand Schedule Price (in Rs.) 1 3 5 7 9 11 13 15 Quantity Demanded (units) 7 6 5 4 3 2 1 0

shown in column (4). TR being equal to price output, AR = price output/ output = price, that is, AR is equal to price.5 Thus the entries in column (4) are same as those in column (2). Also recall from Chapter 4 the concept of Marginal Revenue (MR), defined as the addition to the total revenue from one extra unit sold. The last column gives the MR schedule.

Hence, unlike what many, especially non-economists, believe, a monopolist despite having market power, cannot not just charge any price at its sweet will. It could have, only if the demand curve were totally vertical, i.e., there were absolutely no substitutes available. But for most products substitutes are available. This is true except when output is zero. At zero output, TR/output = 0/0, which is not defined.

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We note the following properties of the three revenue concepts. 1. MR decreases with the output. Initially it is positive and after a Table 6.2 TR, AR and MR under Monopoly Output Price (Rs.) TR (Rs.) AR (Rs.) MR (Rs.)

0 1 2 3 4 5 6 7

15 13 11 9 7 5 3 1

0 13 22 27 28 25 18 7

13 11 9 7 5 3 1

13 9 5 1 -3 -7 -11

4. Since AR = price, if we wish to graph the AR curve, it is always same as the demand curve facing the firm. 5. Except for the first unit, at all other levels of output, MR < AR. This follows from the relationship between average and marginal discussed in Chapter 3, that is, if average is falling (rising), marginal is less (greater) than the average. Panels (a) and (b) of fig. 6.2 respectively graph the TR curve, and the AR and MR curves corresponding to Table 6.2. The TR curve is inverse U-shaped as TR initially increases and then decreases with output.

certain level of output it becomes negative. 2. TR increases or decreases as MR is positive or negative. 3. TR first increases with output and then it decreases. Therefore, if we graph TR against output (i.e. the TR curve), it rises initially and then falls. This is because MR is initially positive and then negative. Moreover, it means that, if output is measured on a continuous scale, TR reaches maximum when MR = 0. Thus the shape of the TR curve facing a monopoly firm is quite different from that facing a competitive firm.

(a)

(b)
Fig. 6.2 The TR, AR and MR Curves corresponding to Table 6.2

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Fig. 6.3 depicts a smooth hypothetical TR curve and the associated AR and MR curves. As you can notice, TR reaches its maximum when MR = 0.

(a)

The condition (A) is quite intuitive. At very low level output, MR will exceed MC. Since, by definition, these are respectively equal to additional revenue and additional cost, as long as MR > MC, a marginal increase in output will fetch additional revenues, which will be more than the additional cost involved in increasing the output. Thus the firm will obtain more profits if it increases its output. On the other hand, at a very large level of output, MC will be very high and MR very low (possibly negative). This means that, if the firm reduces output, the savings in cost will be greater than the revenues lost and hence profits will be higher. Therefore, profit is maximum at the level of output, where MR = MC. 6.2.3 Monopoly Versus Perfect Competition These are the following general and important features of monopoly in comparison to perfect competition. 1. In perfect competition profit maximisation leads to a supply curve which tells how much a firm produces at different market prices that are given to the firm. In monopoly, however, the fir m decides output and price. There is no question of the optimal level of monopoly output at different prices. Hence there is no supply curve as such under monopoly. This does not mean however that demand and supply forces do not interact. They do. Shifts in the Demand Curve (AR) or in the MC curve do affect a monopolists output and price.

(b) Fig. 6.3 Smooth TR, AR and MR Curves

6.2.2Profit-Maximising Rule A full analysis of a monopolys profit maximisation or producers equilibrium is beyond our scope here. But we can state its condition:

MR = MC. That is, a monopolist maximises profit by selecting the level of output at which MR = MC. This is indeed a very general condition of profit maximisation by a firm. (It was noted in Chapter 4 also.) Recall that for a competitive firm MR = P and thus the condition P = MC is a special case of the general condition MR = MC.

(A)

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2. In perfect competition there is a major difference between short run and long run. Not only are cost curves different (because there are no fixed costs in the long run), there is free entry and exit, which drives profits to zero in the long run. In contrast, in monopoly, by definition, there is no entry and exit. Hence, essentially, there is not much analytical difference between short run and long run.6 3. Now we come to the most important behavioural difference between monopoly and perfect competition. We already know that, for a monopoly, P > MR and it selects an output level where MR = MC. These two relations imply that P > MC, that is, while price is equal to marginal cost in perfect competition, the price exceeds marginal cost under monopoly. It means that a monopoly, in a sense, charges too high a price for its product. Moreover, the monopoly price being higher than the competitive price, it follows that, along a given demand curve, less is sold and therefore less is produced under monopoly than under perfect competition. In summary, we can then say that the monopolist produces less and charges a higher price, compared to perfect competition.
6

The last point summarises what is wrong with a monopoly market structure. It is the basis of negative sentiments against a monopolist, which arises from time to time and which flares up to a slogan that a monopolist exploits the public and hence should be regulated and discouraged. 6.2.4 MERITS OF MONOPOLY But before we rush to this conclusion we should note some good things about the monopoly too. 1. Suppose that initially there are two firms in an industry and both are somewhat inefficient. Their MC curves are at a high level and consequently they charge a higher price and produce less than what they would if the MC curves were at a lower level. They realise, however, that if they merge with each other and thereby become a monopoly they can reduce their costs. For instance, one firm may have excellent technical manpower but may not have good marketing skills, whereas the other may not have good technical manpower but possesses superior marketing knowledge. By merging, the resulting monopoly firms MC curve will be at a lower level and thus it will be a more efficient firm. This, by itself, will induce the monopoly

However, it is quite possible and likely that over a long period the monopolist loses its monopoly power. For example, if the monopoly is present, in the first place, by virtue of a patent, the patent eventually expires and other firms use the same technology and there is competition. But the point is that as long as there is monopoly, there is little analytical difference between short run and long run in terms of output and price determination.

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to charge a price, which is less, and produce a quantity, which is greater than when both firms were competing with each other. This is a good thing about monopoly. On the other hand, the resulting monopoly will be in a position to exercise greater market power and charge the monopoly price. We already know that this is a bad thing. Hence, there is a trade-off between efficiency and market power. If ef ficiency gains are suf ficiently strong, then a monopoly serves the society better and hence is preferable. Many countries including India have the so-called anti-trust legislations to deal with this issue. The objective of this legislation is to permit mergers, acquisitions and business practices that have strong ef ficiency ef fects and prevent those, which are meant to create or enhance market power accompanied by little efficiency gains.7 2. Another major benefit from granting monopoly is that monopoly power and profits provide incentives for inventions and innovations. In reality, these activities are very risky propositions. Often times they materialise from individual efforts and persistence. Why would
7 8

someone invent a product if he/she is not allowed to enjoy monopoly profits for a few years? As mentioned earlier in the chapter, this is indeed the essence behind granting patents. These two points together with the inherent property of the monopoly market structure that price exceeds marginal cost imply that economic policy toward monopolies is a subtle practical issue that should be handled with care rather than be governed by simplistic and often populist view that all private monopolies are bad. 6.3 MONOPOLISTIC COMPETITION This is an interesting market structure, in which both competitive and monopoly elements are present. Its features are the following. (a) There are a large number of sellers and buyers. (b) There is free entry and exit in the long run. Moreover, (c) there is product differentiation. That is, each firm produces a brand or variety (of the same product) that is unique, i.e., different from what any other firm produces. The varieties produced are very close substitutes of one another. Products like toothpaste, soap and lipstick are prominent examples.8 Features (a) and (b) are competitive features. (a) states that each firm is small relative to the market. (b) implies that firms earn zero abnormal profits in the

In India, the MRTP Act of 1969 is the land-mark anti-trust legislation. For example, at the point of writing this book, there are 7 brands of lipstick available in the Indian market: Avon, Elle, Lakme, Loreal, Maybelline, Revlon and Tips & Toes. There are many more brands of toothpaste, e.g., Acquafresh, Anchor, Amar, Babool, Cibaca, Close-Up, Colgate, Forhans, Meswak, Neem, Pepsodent, Promise and Vicco Bajradanti.

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long run. However, (c) is a monopoly feature in the following way. Even though a firm is small and produces a brand that has many close substitutes, yet it is a unique brand. No one else produces exactly the same brand. In other words, there is only one firm producing a given brand. In this sense, each firm has some monopoly power. The last point means that a monopolistically competitive firm also faces AR and MR curves for its brand and it maximises profits at the level of output, where MR = MC. Moreover, it charges a price, which exceeds marginal cost. Analytically, all these are analogous to the case of monopoly, except for one qualitative difference. That is, since there are close substitutes available for any particular brand, the demand curve facing a monopolistically competitive firm (unlike that facing a monopoly firm) is very elastic, implying that the AR curve must be quite flat. There is, however, a major difference between monopolistic competition and monopoly in the long run. Unlike in monopoly, there is free entry and exit, which implies that abnormal profit is driven to zero. As we have already seen, this is equivalent to P = LAC, where the letter L refers to the long run. Together with the profit maximising condition MR = LMC we can then compactly write the long-run equilibrium conditions in monopolistic competition as MR = LMC; P = LAC.
9

Although the features of monopolistic competition are a combination of perfect competition and monopoly, in terms of decision-making, there is one aspect of it, which is different from both perfect competition and monopoly. That is, monopolistically competitive firms typically engage in advertising, i.e., they incur advertising costs or what is also called selling costs. It is because of the need to maintain a perception in the mind of the potential consumers that their respective brands are different (and more tasteful or classy), compared to other brands. This is persuasive advertisement and its purpose is to lure away consumers from other brands. In perfect competition, the product is perfectly homogeneous and hence there is no scope to engage in persuasive advertisement. In monopoly, since there is no competition, there is no need to engage in persuasive advertisement. Realise that such selling costs do not benefit the consumers as a group: they only serve to move consumers one brand to another. But they involve resources, which can be potentially used for production. Therefore, such costs are wasteful from the viewpoint of the society.9 This closes our analytical discussion on market structure. As said in the beginning of this chapter, we leave out one important form of an imperfectly competitive market, namely, oligopoly. See Clip 6-3 for a brief description of oligopoly.

Not all advertising costs are wasteful. There can be informative advertising (e.g. information about health), which is useful for the consumers.

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CLIP 6-3
Oligopoly
A market in which there are a few (two or more) number of large firms is called oligopoly. (The firms in it may be producing a homogeneous product or a differentiated product.) As a special case, if there are only two firms, then it is called a duopoly market. From an analytical perspective, what distinguishes oligopoly from other market structures is strategic interaction among firms. Since there are only a few number of firms, a particular firm, in choosing its output or price, has to take into account what the other firms are choosing and how they may react to its choices. This is a subject matter of a higher course in microeconomics.

SUMMARY
l l

l l l l l l l l l l l l l l

Imperfectly competitive markets are of three types: monopoly, monopolistic competition and oligopoly. The long run profit-maximising condition is essentially same as the short run profit-maximising condition. For a perfectly competitive firm, it is price being equal to the long run marginal cost. Free entry and exit imply zero profit, i.e., price is equal to the long run average cost. Firms break-even. The long run competitive equilibrium is characterised by the conditions: P = LMC = LAC. In the long run with free entry and exit, a perfectly competitive firm operates at the level where the long run average cost is at its minimum. A monopoly market structure emerges from licensing, granting of a patent or forming a cartel. A monopoly is a price maker. The market demand curve is a constraint facing a monopoly firm. For a monopoly firm, TR first increases and then decreases with output. For a monopoly firm, TR reaches its maximum when MR = 0. For a monopoly firm, MR typically decreases with an increase in output. MR = MC is indeed a very general condition for profit maximisation by any firm. Unlike in perfect competition, price exceeds marginal cost in monopoly. In comparison to a perfectly competitive industry, in monopoly a higher price is charged and less is sold. Formation of monopoly may lead to more efficiency (in the form of lower costs). Patents encourage discovery and invention.

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A monopolistically competitive firm typically faces a very elastic demand curve for the brand it produces. The long run equilibrium in monopolistic competition is characterised by the conditions, MR = LMC and P = LAC. Monopolistically competitive firms engage in advertising costs to lure away customers from other brands to their own brands. EXERCISES

Section I
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 6.15 6.16 6.17 6.18 6.19 Name the three forms of imperfectly competitive markets. What is the profit-maximising condition of a competitive firm in the long run? What is meant by abnormal profit? What is meant by abnormal loss? If the firms are earning abnormal profits, how will the number of firms in the industry change? If the firms are making abnormal losses, how will the number of firms in the industry change? What is the relationship between marginal cost and average cost at the long run competitive equilibrium? State the conditions of long run equilibrium in a perfectly competitive industry. What is break-even price? What is the relationship between break-even price and marginal cost at the long run competitive equilibrium? Which point on the long run average cost curve does a competitive firm produce in the long run equilibrium? How many firms are there in a monopoly market? What are patent rights? What is patent life? What is a cartel? How does the total revenue change with output when the marginal revenue is positive? How does the total revenue change with output when the marginal revenue is negative? What is the relationship between the average revenue curve and the demand curve in a monopoly market? What is the profit-maximising condition for a monopoly firm?

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6.20 6.21 6.22 6.23 6.24 6.25 6.26 6.27 6.28 6.29 6.30 6.31 6.32 6.33 6.34

What is the shape of the total revenue curve in monopoly? What is the shape of the average revenue curve in monopoly? What is the shape of the marginal revenue curve in monopoly? What is the profit-maximising rule for a monopolist? What is the relationship between price and marginal cost at the monopoly equilibrium? How do the equilibrium monopoly output and price compare with the equilibrium price and output in perfect competition? What are anti-trust legislations? Which feature/features of monopolistic competition is/are monopolistic in nature? Which feature/features of monopolistic competition is/are competitive in nature? Give two examples of a monopolistically competitive market? State the conditions of long run equilibrium in a monopolistically competitive industry. What is the relationship between price and marginal cost in a monopolistically competitive market? What are selling costs? What are advertising costs? What is persuasive advertising?

Section II
6.35 Explain how in the long run equilibrium with free entry and exit, firms, under perfect competition, earn zero abnormal profits. Explain why the marginal revenue is less than average revenue for a monopoly firm. Explain how the market demand curve is a constraint facing a monopoly firm. Discuss various ways in which a monopoly market structure may arise. Explain how the efficiency may increase if two firms merge. Explain the motivation behind granting patent rights. Briefly discuss the features of monopolistic competition. Why is the demand curve facing a monopolistically competitive firm likely to be very elastic? Explain how price exceeds marginal cost in monopoly or in monopolistic competition.

6.36 6.37 6.38 6.39 6.40 6.41 6.42 6.43

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6.44

Explain how in the long run equilibrium with free entry and exit, firms, under monopolistic competition, earn zero abnormal profits.

Section III
6.45 The demand schedule facing a monopoly is given below. Derive its TR, AR and MR schedules. Price (Rs.) 0 10 20 30 40 50 60 70 6.46 Quantity Demanded (units) 8 7 6 5 4 3 2 0

The MR schedule of a monopoly firm is given below. Derive the TR and AR schedules. Output (units) 0 1 2 3 4 5 6 7 MR (Rs.) 14 10 7 5 0 3 5

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6.47

The technology is such that the long-run average cost is minimised at the firm output equal to 10 and the minimum longrun average cost is Rs. 15. Suppose that the demand schedule for the product is given as follows.

Price (Rs.) 10 12 15 18 20 (a)

Aggregate Quantity Demanded 1800 1440 1200 1000 760

6.48

What will be total quantity sold in the market and how many firms will operate in the long run competitive equilibrium? (b) Suppose that, because of technological progress, the average cost curve shifts down such that the minimum average cost is equal to Rs. 12 and it occurs at output level 8. How many firms will now operate in the market in the long run? Explain why MR = MC is the profit-maximisation principle of a firm in general.