Non Competitive Markets Class 12 NCERT: Chapter 6 Guide

Key Terms You Must Know

Non-competitive market

A market structure where individual firms have some power to influence price, usually because there are few sellers, differentiated products, or entry barriers.

Monopoly

A market with a single seller of a product that has no close substitute. The monopolist faces the market demand curve and is a price maker.

Monopolistic competition

A market with many firms selling differentiated products, such as different brands of similar goods. Firms have limited price power, but entry and exit are relatively free.

Oligopoly

A market with a few large firms where each firm considers the possible reactions of rivals before changing price or output.

Marginal revenue

The addition to total revenue when one more unit of output is sold. In monopoly, MR is less than price because the firm must lower price to sell more units.

Why Non-Competitive Markets Behave Differently

In perfect competition, each firm is very small compared to the market, so it accepts the market price. In non-competitive markets, the firm faces a downward-sloping demand curve: to sell more, it generally has to reduce price. This creates an important gap between average revenue or price and marginal revenue. For example, if a monopolist cuts price to sell one extra unit, the lower price applies not only to the extra unit but often to earlier units too, so MR falls faster than AR. Therefore, output is chosen where MR = MC, but price is read from the demand curve. This is why a monopolist can charge P greater than MC, while a perfectly competitive firm has P = MC in equilibrium.

How to Find Equilibrium in Monopoly Problems

1. Step 1: Write the demand or AR function — A question may give price as a function of output, such as P = 100 - 2Q. Since AR equals price, this is also the AR curve faced by the monopolist.
2. Step 2: Derive total revenue and marginal revenue — Calculate TR = P × Q. If P = 100 - 2Q, then TR = 100Q - 2Q². Differentiate or use the linear demand rule to get MR = 100 - 4Q.
3. Step 3: Equate MR and MC — The profit-maximising output is found where MR = MC, provided MC is rising or cuts MR from below. This gives the output level, not the price directly.
4. Step 4: Find price from the demand curve — Substitute the equilibrium Q into the demand equation. A common exam mistake is to treat MR as price; never do this in monopoly.
5. Step 5: Check profit or loss if cost data is given — Profit = TR - TC, or Profit per unit = Price - AC. A monopoly can earn supernormal profit, normal profit, or even loss in the short run depending on costs.

Worked Examples: Monopoly and Monopolistic Competition

• Example 1: A monopolist faces P = 100 - 2Q and TC = 20Q + 100. Find equilibrium price, output and profit. Step 1: TR = P × Q = (100 - 2Q)Q = 100Q - 2Q². Step 2: MR = 100 - 4Q. Step 3: MC = 20, so set MR = MC: 100 - 4Q = 20. Step 4: 4Q = 80, so Q = 20. Step 5: Price from demand: P = 100 - 2(20) = 60. Step 6: TR = 60 × 20 = 1200 and TC = 20(20) + 100 = 500. Final answer: Output = 20 units, Price = ₹60, Profit = ₹700.
• Example 2: Why is MR less than price under monopoly? Suppose a monopolist sells 4 units at ₹10 each, so TR = ₹40. To sell 5 units, price must fall to ₹9 each, so TR = ₹45. Step 1: Extra revenue from the 5th unit is ₹9. Step 2: But the first 4 units now earn ₹1 less each, causing a loss of ₹4 on earlier units. Step 3: Net MR = ₹9 - ₹4 = ₹5. Final answer: MR is ₹5, while price is ₹9, so MR < Price.
• Example 3: A monopolistically competitive firm sells 100 units at price ₹50 and its AC is ₹44. Explain the short-run and long-run result. Step 1: Profit per unit = P - AC = 50 - 44 = ₹6. Step 2: Total profit = 6 × 100 = ₹600, so the firm earns abnormal profit in the short run. Step 3: Because entry is relatively free, new firms enter with close substitutes. Step 4: Demand for the existing firm shifts left until only normal profit remains. Final answer: Short run profit is ₹600; in long run, entry tends to reduce abnormal profit to zero.

Board Exam Tips and Common Traps

Do not write that a monopolist can charge any price. It can choose price only with reference to demand; a very high price may reduce quantity demanded sharply. Also remember: equilibrium output is found from MR = MC, while equilibrium price is found from AR or demand. In diagrams, label AR and MR separately, with MR below AR for monopoly. For monopolistic competition, mention both product differentiation and free entry; for oligopoly, mention interdependence among firms.

High-Scoring Points to Remember

• In monopoly, the firm and the industry are the same because there is only one seller.
• A monopolist faces a downward-sloping demand curve, so it can sell more only by reducing price.
• MR lies below AR in monopoly because lowering price affects revenue from all units sold.
• The profit-maximising condition is MR = MC, but this condition alone does not guarantee profit; cost and demand determine profit or loss.
• In monopolistic competition, products are differentiated, so firms use branding, packaging, location, and service to create limited market power.
• In oligopoly, decisions are strategic: one firm’s price cut or advertisement campaign may trigger reactions from rivals.

Practice Questions with Solutions

• Q: Define monopoly and state two features of a monopoly market.
  A: Step 1: Monopoly means a market structure with a single seller of a product having no close substitute.
  Step 2: Feature 1: The monopolist is a price maker because it faces the market demand curve.
  Step 3: Feature 2: There are strong barriers to entry, such as patents, legal restrictions, control over resources, or high setup cost.
  Final answer: Monopoly is a single-seller market with no close substitute, price-making power, and barriers to entry.

• Q: A monopolist faces the demand function P = 120 - Q and has constant MC = 20. Find profit-maximising output and price.
  A: Step 1: Write TR = P × Q = (120 - Q)Q = 120Q - Q².
  Step 2: Derive MR = 120 - 2Q.
  Step 3: Set MR = MC: 120 - 2Q = 20.
  Step 4: Solve: 2Q = 100, so Q = 50.
  Step 5: Substitute Q = 50 in demand: P = 120 - 50 = 70.
  Final answer: Profit-maximising output is 50 units and price is ₹70.

• Q: Why is the marginal revenue curve below the average revenue curve in monopoly?
  A: Step 1: In monopoly, AR is the price charged at each output level and the AR curve is downward sloping.
  Step 2: To sell an additional unit, the monopolist must reduce price.
  Step 3: This lower price reduces revenue on previous units as well as adding revenue from the extra unit.
  Step 4: Therefore the addition to total revenue is less than the price of the additional unit.
  Final answer: MR lies below AR because selling more requires a price cut that lowers revenue on earlier units too.

• Q: Distinguish between monopolistic competition and oligopoly using any two points.
  A: Step 1: Under monopolistic competition, there are many firms selling differentiated products; under oligopoly, there are only a few large firms.
  Step 2: In monopolistic competition, a single firm’s decision has a small effect on others; in oligopoly, firms are highly interdependent.
  Step 3: Example for monopolistic competition can be restaurants or clothing brands; example for oligopoly can be airlines or telecom services.
  Final answer: Monopolistic competition has many differentiated sellers with limited interdependence, while oligopoly has few firms with strong strategic interdependence.

Frequently Asked Questions