Match List—I with List—II and select the correct answer using the code given below the Lists: List—I (Market structure) A. Perfect competition B. Monopoly C. Monopolistic competition D. Oligopoly List—II (Characteristic) 1. Only one producer selling one commodity 2. Few producers selling similar or almost similar products 3. Many producers selling differentiated products 4. Many producers selling similar products Code:
- (a)A B C D : 4 3 1 2
- (b)A B C D : 4 1 3 2
- (c)A B C D : 2 1 3 4
- (d)A B C D : 2 3 1 4
Correct — B, A B C D : 4 1 3 2. Two variables define these four market structures — how many sellers there are, and whether their product is identical or differentiated. Perfect competition has many producers selling an identical product, which is entry 4, many producers selling similar products. Monopoly is the single seller, entry 1, only one producer selling one commodity. Monopolistic competition keeps the large number of sellers but gives each a product of its own through branding, packaging or quality, which is entry 3, many producers selling differentiated products. Oligopoly is the small-numbers case, entry 2, few producers selling similar or almost similar products. So A is 4, B is 1, C is 3 and D is 2.
- (a)A B C D : 4 3 1 2 — Gets perfect competition and oligopoly right but swaps monopoly with monopolistic competition — it makes the single-seller market the one with many differentiated products and the differentiated market the single seller.
- (c)A B C D : 2 1 3 4 — Puts perfect competition and oligopoly the wrong way round. It makes perfect competition a market of few producers and oligopoly a market of many, which reverses the one feature that defines an oligopoly.
- (d)A B C D : 2 3 1 4 — Wrong on three of the four pairings, keeping only the number of oligopolists in the wrong place and misassigning monopoly and monopolistic competition as well.
Perfect competition assumes many buyers and sellers, a homogeneous product, free entry and exit and perfect information; no single firm can influence price, so each faces a horizontal demand curve and is a price taker. Monopoly is one seller with no close substitute and blocked entry, so the firm faces the whole market demand curve. Monopolistic competition has many sellers with differentiated products and free entry, giving each firm a little pricing power. Oligopoly has few sellers, interdependent decisions and significant barriers to entry.
The two-question drill answers every item of this kind. First, how many sellers — one, few or many? Second, is the product identical or differentiated? One seller gives monopoly; few gives oligopoly; many with an identical product gives perfect competition; many with differentiated products gives monopolistic competition. In a match-the-lists item, start with the entry you are surest of and use it to eliminate options: here, monopoly must go with the single-producer entry, which alone rules out two of the four codes. Barriers to entry are the feature candidates most often misplace — they are high in monopoly and oligopoly and low in the two competitive structures.
- Perfect competition has many sellers, a homogeneous product, free entry and exit, and price-taking firms.
- Monopoly has a single seller of a product with no close substitute and blocked entry.
- Monopolistic competition has many sellers of differentiated products with free entry — the market for soaps or toothpaste is the standard example.
- Oligopoly has few sellers, interdependent pricing decisions and substantial barriers to entry.
- Barriers to entry are high in monopoly and oligopoly and low in perfect and monopolistic competition.
Two questions — how many sellers, and is the product identical — place all four structures without any further theory.
- Reading 'monopolistic competition' as a synonym for monopoly; the two differ on the number of sellers.
- Assuming an oligopoly always sells differentiated products; the defining feature is the small number of sellers, and the product may be similar.
- Forgetting that free entry is what keeps long-run profits down under monopolistic competition despite each firm's pricing power.
As a match of market structures to characteristics, or as a real-world example asked to be classified.
A market, in which there are a large number of firms, homogeneous product, infinite elasticity of demand for an individual firm and no control over price by firms, is termed as
- (a) oligopoly
- (b) imperfect competition
- (c) monopolistic competition
- (d) perfect competition
Answer(d) perfect competition
The same classification asked from characteristics to name, in the very next CDS paper. Its wording spells out what 'many producers selling similar products' means in this item — homogeneous product, infinitely elastic firm demand and no control over price.
Which of the following factors signify monopolistic competition ? 1. Differentiated products 2. Large number of buyers and sellers 3. Barriers to entry 4. Homogeneous products Select the correct answer using the code given below :
- (a) 1 and 2 only
- (b) 1, 2 and 3 only
- (c) 3 and 4 only
- (d) 2 and 4 only
Answer(a) 1 and 2 only
The one structure candidates most often mishandle, tested on its features. Differentiated products and a large number of sellers are in; barriers to entry and homogeneous products are not.
- practice — not a real PYQ
A market with a large number of firms selling closely substitutable but differentiated products, with free entry and exit, is best described as
- (a)perfect competition
- (b)monopoly
- (c)monopolistic competition
- (d)duopoly
Answer(c) monopolistic competition — the market for soaps, toothpastes or detergents is the standard textbook illustration.
- practice — not a real PYQ
Under perfect competition, an individual firm is described as a price taker because
- (a)it produces a differentiated product
- (b)it faces a perfectly elastic demand curve at the market price
- (c)entry into the industry is blocked
- (d)it can restrict output to raise price
Answer(b) it faces a perfectly elastic demand curve at the market price — its own output is too small a share of the market to move the price.