✪✪✪ Principles Of Economics: Questions And Answers
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Chapter 23. Measuring a Nation’s income. Principles of Economics
Perfect competition is often distinguished from pure competition, but they differ only in degree. The first four conditions relate to pure competition while the remaining three conditions are also required for the existence of perfect competition. The practical importance of perfect competition is not much in the present times for few markets are perfectly competitive except those for staple food products and raw materials. Though the real world does not fulfill the condition of perfect competition, yet perfect competition is studied for the simple reason that it helps us in understanding the working of an economy, where competitive behaviour leads to the best allocation of resources and the most efficient organization of production.
A hypothetical model of a perfectly competitive industry provides the basis for appraising the actual working of economic institutions and organization in any economy. Monopoly is a market situation in which there is only one seller of a product. The product has no close substitutes. The cross elasticity of demand with every other product is very low. The monopolized product must be quite distinct from the other products so that neither price nor output of any other seller can perceptibly affect its price-output policy.
Thus he faces the industry demand curve, his firm being an industry itself. The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes and incomes of his customers. He is a price-maker who can set the price to his maximum advantage. However, it does not mean that he can set both price and output. He can do either of the two things. His price is determined by his demand curve, once he selects his output level. Or, once he sets the price for his product, his output is determined by what consumers will take at that price.
In any situation, the ultimate aim of the monopolist is to have maximum profits. The type of monopoly described above is simple or imperfect monopoly. There is also pure, perfect or absolute monopoly to which we refer now. But we shall be concerned mainly with detailed discussion of simple monopoly and discriminating monopoly. Pure Monopoly :. In pure monopoly one firm produces and sells a product which has no substitutes. The cross elasticity of demand with every other product is zero. His price-output policy does not influence firms in other industries. Nor is he affected by others. In Fig. The monopolist can fix either price or output. If he fixes OP price, then the level of output OA to be sold is determined by his customers.
If he fixes his output at OA, then price OP to be paid for that is also decided by the customers. Thus even a pure monopolist with no rivals at all cannot fix both price and output at the same time. Since a pure monopolist earns the whole income of the community all the time, he will maximize his profits when his total costs are the lowest. It implies that his profits are the maximum when he sells a very small output, only one unit at a very high price and in the process takes away the entire income of consumers. This is, however, not possible. So, pure monopoly is only a theoretical Possibility. It has never existed and will never exist. We, therefore, pass on to the study of price-output policies under simple or imperfect monopoly. Bilateral Monopoly :. Bilateral monopoly refers to a market situation in which a single producer faces a single buyer.
The seller considers himself a monopolist. So does the buyer. The problem of bilateral monopoly has two facts. The first refers to isolated exchange between two individuals completely cut off from other people. Cournot offered a determinate solution to this case. Suppose A is the single producer of bauxite, who sells it to B, who manufactures aluminium and sells it in a monopoly market. D and MR are, therefore, the demand and marginal revenue curves of A, the single seller.
The seller monopolist would like to sell OM 1 output at M 1 S price in order to maximize his profits. It is assumed that A regards B as one of the many buyers in a competitive market. Similarly B considers A as a competitive seller. It implies that each acts autonomously so that the MC A curve is both the marginal cost curve and the supply curve. He would thus be prepared to pay M 2 P price for OM 2 quantity.
Thus, price and quantity are indeterminate. Cournot, however, offered a determinate solution to this problem. According to him both the seller and the buyer monopolists would accept and pay M 1 S price for OM 1 output because it is at this level that they maximize their profits; the seller monopolist from the buyer monopolist and the buyer monopolist from the purchasers of the finished product aluminum. On the one hand, he has the monopoly of buying bauxite and on the other, of selling aluminium. He would, therefore, try to extract monopoly profit from two sides.
Naturally, his intention would be to pay a low price M 2 P and buy a larger quantity OM 2 of bauxite. The seller monopolist on his part would wish to sell a smaller quantity OM 1 at a higher price OM 2. Indeterminacy does not imply that there is no equilibrium position and no trade takes place. Rather it means that the determinate solution to the problem of bilateral monopoly is beyond the tools of economic analysis. Long-run monopoly adjustments are of two types:. If the monopolist operates on a single plant there may exist three possibilities — i If in the short-run the monopolist is incurring losses, he may make such adjustments in his plant as to stop losses in the long-run.
He may have a less than the optimum size plant in order to earn profits. If he cannot, he will have to stop production altogether ii He may have a plant larger than the optimum size. This plant is, however, of less than the optimum size, for the monopoly firm is not producing at the lowest point of the LAC curve L. It has some excess capacity. It is not in a position to take full advantage of the economies of scale due to the small size of the market for his product. In the second case the monopolist is in short-run equilibrium where he is maximizing his profits.
In the long run, he changes the scale of his plant in order to earn larger profits. Accordingly, he builds the plant by adjusting its scale of plant in the long run, the monopoly firm has been able to sell more at a lower price and earn larger profits than in the short-run. In the third case, if the monopolist tries to install a plant larger than this optimum scale plant, he will lose instead of gaining more by producing a larger output. The expansion of output beyond the optimum level would lead to diseconomies of production. It implies that producing beyond the optimum output will lead to higher per unit cost.
A monopolist may operate more than one plant. In the short-run, he can operate any number of plants of the same size or of different sizes. But in the long-run, he operates only those plants which together bring in larger profits. Given each plant of the same size and of identical cost conditions, he will have each plant of that size where the long-run average cost curve LAC and the SAC curve touch each other at their minimum points. If in the short-run, the monopolist operates four plants, he may reduce them to two in the long-run by employing more efficient plants so that the long-run average and marginal costs are lowered and he earns larger profits.
Like the single plant monopoly, the multi-plant monopoly adjustment in the long-run may be followed by quantity and price changes. But in the case of multi-plant monopoly the firm will operate at the minimum long-run average costs to gain maximum profits. In India a large number of business are carried on in the shape of Joint Hindu Family JHF which are in essence individual entrepreneurs possessing almost all the advantages and limitations of sole proprietorship.
A JHF comes into existence by the operation of law. If the business commenced by a person is carried on by male members of his family after his death, it is a case of JHF. Except in West Bengal where Dayabhaga system of Hindu Law is prevailing, in the rest of India Mitakshara system of inheritance is in operation according to which three successive generations in the male line simultaneously inherit the ancestral property from the moment of their birth. Thus son, grandson, and great grandson become joint owners of ancestral property by reason of their birth in the family. They are called co-partners in interest. The Hindu Succession Act, , has extended the line of co-partners interest to female relatives of the deceased partner or male relative claiming through such female relatives.
The family business is included in heritable property and is thus the subject of co-partenary interest. Under the Dayabhaga Law, the male heirs become members only on the death of the father. Father or the other senior family member manages the business and is called Karta or Manager; other members have no right of participation in the management. The Karta has control over the income and expenditure of the family and is the custodian of the surplus, if any. The other members of the family cannot question the authority of the Karta and their only remedy is to get the JHF dissolved by mutual agreement. If the Karta has misappropriated the funds of the business, he has to compensate the other co-partners to the extent of their share in the joint property. The Karta can borrow funds for conducting the business but the other co-partners are liable only to extent of their share in the business.
In other words, the liability of the Karta is unlimited. A Joint Hindu Family can enter into partnership with others. But outsiders cannot become members of the JHF. The death of a member does not dissolve the business or the family. No matter how much people earn, they tend to spend more than they earn. Which of the following is not among the reasons why we need the government? The government provides social welfare services for the poor and the needy. The government imposes laws and controls to protect competitiveness of the industry. Suppose a gardener produces both green beans and corn in her garden.
If she must give up 14 bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is. Related Topics. More Economics Quizzes. Different factors affect the economic status of a country or individual, and one of the most common is the political environment and inflation as a whole. Over the past few weeks, we have covered much about economic and social Questions: 10 Attempts: Last updated: Jun 15, Sample Question. Only 1. Ten Principles of Economics. Thinking Like an Economist. Interdependence and the Gains from Trade. The Market Forces of Supply and Demand. Elasticity and Its Application. Supply, Demand, and Government Policies. Consumers, Producers, and the Efficiency of Markets.
Application: The Costs of Taxation. Application: International Trade. Public Goods and Common Resources. The Design of the Tax System. The Costs of Production. Firms in Competitive Markets. Monopolistic Competition.
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