Economic Questions Answers 2022

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

ECONOMICS1
Table of Contents
Question a...................................................................................................................................2
Perfectly Competitive Market................................................................................................2
Monopoly Market...................................................................................................................5
Monopolistic competition......................................................................................................6
Oligopoly Market...................................................................................................................8
Question b................................................................................................................................10
Case Study of a Monopoly Firm in India: Indian Railways.................................................10
Price and output determination under monopoly.................................................................11
Question c.................................................................................................................................13
Inefficiency market structure of Indian Railways................................................................13
Question d................................................................................................................................15
Switch over of Railway sector from Monopoly to Oligopoly..............................................15
References................................................................................................................................18

ECONOMICS2
Question a
Depending on some basic characteristics markets are divided into four categories. The
four main types of market structures are perfectly competitive market, monopoly market,
monopolistic competition and oligopoly.
Perfectly Competitive Market
Perfect competition happens when the market satisfies certain characteristics.
Sellers and Buyers- The market deals with infinite sellers and buyers. Hence, not a single
seller or buyer influences the output or the price. Both have detailed knowledge about the
product, price and technology involved to manufacture the product. Government cannot
interfere and control over demand-supply mechanism under this market structure. Thus, seller
does not affect market price. Hence, they are price taker (Hansen, 2013).
Product Type and Advertisement- The goods produced in this market are homogenous.
Hence, there are no requirement of advertising the product. The existing firms here does not
include cost of transportation as it sells homogenous product.
Condition for entry and exit- Under this market, there are no restriction to the entry and exit
of the firms (Dunne et al., 2013). Suppose, a firm incurs loss, then they can leave the market
without any barriers faced.
Profit and loss faced in short run and long run- The firms present in perfect competition
incurs loss and profits in short run and makes normal profit in long run. The price equals to
average revenue in perfect competition.

ECONOMICS3
Figure 1: Firm experiencing super normal
Short run profit maximization of the competitive firm is shown in figure 1. The price
set at P1 helps in determining the supply and demand of the market. The MC curve cuts the
AC, making MC=AC. Accordingly, the producer is producing the output level at A where
MR=MC. AR is greater than AC at Q1. AB is the distance measured between AR and AC.
The market experiences super normal profit at P1ABC.
Figure 2: Firm experiencing loss

ECONOMICS4
In figure 2, the price is set at P2, for which market incurs loss. Price is below the
average cost of the firm. Competitive firm therefore is unable to cover total cost resulting in
economic loss for the firm.
Figure 3: Firm experiencing normal profit
In figure 3, the new price is set at P3. The firm starts producing at point G where
MR=MC. At this point price equals average cost of firm. Total revenue just equals total cost
of firm and the firm attains only normal profit.
Figure 4: Long run equilibrium under perfect competition

ECONOMICS5
Figure 4 portrays the situation in long run. Suppose price in the competitive market
equals P*. At this price, firms in the industry earn a supernormal profit. As, there are no
restriction on entry or exit of the firms therefore new industries join the market to earn profit.
When new firms enter the market, there is an increase in supply within the industry. This
shifts the supply curve to right. The excess supply in the industry reduces market price and
lowers profit. The process continues unless all firm in the industry achieves only normal
profit (Long, 2018).
An example of perfect competitive market is agricultural market.
Monopoly Market
Main characteristics of monopoly market are given as follows
Sellers and Buyers- Unlike perfect competition, the market deals with one seller. However,
the market have large number of buyers.
Product Type and Advertisement- Monopoly does not have any alternatives to their
products. The product demand elasticity is therefore zero. The firms present in monopoly
entirely controls its supply and affects the product price. Therefore, they are price maker
unlike perfect competition. The firms usually have good public relations to attract the buyers
to buy their products (Chen & Schwartz, 2013).
Condition for entry and exit- This market differs from perfect competition in respect to this
features. There are restrictions on the entry of new firms because of license set by
Government, large amount of capital requirements and economies of scale.
Profit and loss faced in short run and long run- The demand curve in the monopoly
market slope downwards, which means that the firms earns profit by rising their sales and
reducing the price of the product. As monopoly firm is the price maker in the industry and