(Me) Types of Competitions

 PERFECT COMPETION
Perfect competition means complete freedom in economic

life and absence of rivalry among firms. Perfect competition is
the market situation in which there are a large number of
buyers and sellers of a homogeneous product and the price of
the product is determined by the market forces.
 Characteristics
 Large number of buyers and sellers
 Homogeneous products
 A single price
 Free entry and exit
 perfect knowledge of market condition
• In the perfect competitive market , firms are not price makers
but they determine the output.
• The output which yields maximum profit to the firm is called
equilibrium output.
• The firm reaches equilibrium when the following 2 conditions
are satisfied :
• The firm reaches the equilibrium position when it produces
that level of output at which marginal cost is equal to marginal
revenue.
• MC curve must cut MR curve from below that is MC curve
should have positive slope.
 During the market period the supply of a commodity is fixed,
the supply is perfectly inelastic. Hence price depends on
changes in demand.
 The role of supply is depend on the nature of commodity. If a
commodity is perishable like vegetables, fruits, fish etc. In this
case the supply curve of a commodity is a vertical line.
 If the commodity is durable like wheat, car etc. it can be
stored. Then the supply curve will be curved in the beginning
and will take a straight line.
 In short run, the firm is able to change its supply, but does not
have time to change its scale of plant.
 The expenses incurred on variable factor and fixed factor are
called variable cost and fixed cost respectively.
 A firm gets maximum profit where MC=MR.
 During the long run there will be a sufficient time for the
existing firm to expand their production.
 If during short run the firms have been earning super normal
profit (AR>AC) then in the long run new firms are attracted
by the short run super normal profit to enter the industry. Due
to the entry of new firms , price of production factors and cost
increase. The supply also increases. Hence the price (AR)
comes down. Thus in long run super normal profit disappears.
 Under perfect competition, the firm is in equilibrium when
AR=MR=LAC=LMC. It is at the point that LMC=LAC.
M
S
 MONOPOLY
Monopoly is a market situation in which there is only one
seller or producer of a product for which there is no close substitute.
He has complete controls over the whole supply and price of a
particular product. Thus monopoly means the absence of
competition.
 Characteristics
 One seller and a large number of buyers
 No close substitute for the product
 Fuller control over the supply of the commodity
 The monopolist fixes the price of the commodity. He is the price
maker.
 Other seller or new firms cannot enter into the market easily
 The firm and industry are one and the same
 The demand curve of the monopolist would be the same as
the demand curve of the industry. This demand curve is
downward slopping. This is because the monopoly firm can
sell more at lower prices and less at higher prices. The demand
curve is also the average revenue curve for the monopolist.
 When AR curve slopes downward the MR curve also slopes
downward but it lies between the AR curve. This means the
MR curve declines at a higher rate than the AR or demand
curve.
 Short run equilibrium under monopoly
• During short run the monopolist can increase his output only
with the existing plant and machinery. The profit of the
monopolist will be maximum during short run when his MC is
equal to MR.
 Long run equilibrium under monopoly
• Under monopoly entry of new firms is not possible , therefore
the monopoly firm can easily protect its short period super
normal profit in the long run.
• In short run the monopolist maximizes the profit under long
run by producing and selling that output at which MR=LMC.
The long run equilibrium of the firm will be at the output
where the long run marginal cost curve (LMC) intersects MR.
 MONOPOLISTIC COMPETITION
Monopolistic competition refers to a market situation
in which competition is imperfect. It is a market structure in
which relatively many firms supply differentiated products,
with each firm having a limited degree of control over price.
 Characteristics
 Large number of producers
 Product differentiation
 Free entry and exit of firms
 Important role of selling cost
 Non price competition
 Lack of perfect knowledge of the market
• The demand curve under monopolistic competition is flatter
than that under monopoly. Reasons for this are, there are fewer
firms than in perfect competition, the products are
differentiated and firms enjoy some monopoly, there is some
degree of competition because the products are close
substitutes.
• Thus the demand or AR curve is downward sloping . Hence
MR curve also slopes downward but lies between AR curve.
 SHORT RUN
 Possibility of profit : The firm may get abnormal profit only
when the demand is very high and there is no close substitute
of its product. Under this the firm can fix high prices for the
product. This possible in short run because no new firm can
enter into the market . For maximizing profit the firm will
produce that level of output at which MC=MR.
 Possibility of loss : loss happens when the demand
becomes low. Due to low demand, the firm has to sell at a
price less than its cost. In this case AR is less than AC.
E
 LONG RUN
• Long run is the period in which a firm can adjust supply of its
product according to its demand.
• The long run equilibrium of the firm under monopolistic
competition will be at level were the MR=MC and AR=AC
 OLIGOPOLY
The Oligopoly Market characterized by few
sellers, selling the homogeneous or differentiated products. In
other words, the Oligopoly market structure lies between the
pure monopoly and monopolistic competition, where few
sellers dominate the market and have control over the price of
the product.
Characteristics
 Few sellers
 Interdependence
 Competition
 Entry and exit barriers
 Lack of uniformity
 In many oligopolistic industries prices remain sticky or
inflexible, that is, there is no tendency on the part of the
oligopolists to change the price even if the economic
conditions undergo a change.
 The kinked demand curve hypothesis was put forward
independently by Paul M. Sweezy, an American economist,
and by Hall and Hitch, Oxford economists.
 It is for explaining price and output under oligopoly with
product differentiation
 This is because when under oligopoly products are
differentiated, it is unlikely that when a firm raises its price, all
customers would leave it because some customers are
intimately attached to it due to product differentiation.
 There are only a few firms in an oligopolistic market.
 The firms are producing close-substitute products.
 The quality of the products remains constant and the firms do not
spend on advertising.
 A set of prices of the product has already been determined and these
prices prevail in the market at present.
 Each firm believes that if it reduces the price of its product,
the rival firms would follow suit, but if it increases the price,
then the rivals would not follow it, they would simply keep
their prices unchanged. We shall see presently that, because of
this asymmetric reaction pattern of the rivals, the demand
curve of each firm would have a kink at the prevailing price of
its product.
 DUOPOLY
A duopoly is a type of oligopoly, characterized by two
primary corporations operating in a market or industry,
producing the same or similar goods and services. The key
components of a duopoly are how the firms interact with one
another and how they affect one another.
In a duopoly, two companies control the entirety of the
market for the goods and services they produce and sell. While
other companies may operate in the same space, the defining
feature of a duopoly is the fact that only two companies are
considered major players. These two firms – and their
interactions with one another – shape the market they operate
in.

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 PERFECT COMPETION

Perfect competition means complete freedom in economic

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