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
Correct — D, perfect competition. Read the four conditions in the stem and they are the textbook definition, one by one. A large number of firms and a homogeneous product mean no buyer has any reason to prefer one seller, so no seller can charge above the going price. Infinite elasticity of demand for the individual firm is the same point drawn as a graph: each firm faces a horizontal demand curve at the market price, so average revenue equals marginal revenue equals price. And no control over price by firms is the conclusion — the firm is a price taker, and the price is set by market demand and supply. Free entry and exit and perfect information usually complete the list; the stem simply gives four of the standard conditions.
- (a)oligopoly — Fails on the very first condition. Oligopoly means a few firms, each large enough that its pricing affects the others, so firms are interdependent and certainly not price takers.
- (b)imperfect competition — An umbrella term for every market that is not perfectly competitive — monopoly, monopolistic competition and oligopoly all sit under it. A market meeting all four conditions in the stem is the one thing it cannot be.
- (c)monopolistic competition — Has many firms, so the first condition looks satisfied, but its products are differentiated by brand, quality or location. That differentiation gives each firm a downward-sloping demand curve and some power over its own price.
Market structures are classified by the number of sellers, the nature of the product and the freedom of entry. Perfect competition has many firms selling an identical product with free entry, so each is a price taker. Monopoly has a single seller of a product with no close substitute. Monopolistic competition has many firms selling differentiated products. Oligopoly has a few firms selling similar or nearly similar products, each watching the others.
The phrase that decides this question is 'infinite elasticity of demand for an individual firm'. Perfectly elastic firm demand is unique to perfect competition, and it follows from homogeneity — if every unit is identical, a firm that raises its price by a rupee loses every customer. Under monopolistic competition the product is not identical, so a small price rise loses some customers but not all. Option (b) is the tempting near-miss for candidates who read 'perfect' and 'imperfect' as a pair without noticing that imperfect competition is a category, not a market type.
- Under perfect competition the firm faces a perfectly elastic, horizontal demand curve at the ruling market price.
- For that firm, price equals average revenue equals marginal revenue.
- Free entry and exit drives economic profit to zero in the long run.
- Monopolistic competition combines many sellers with product differentiation and therefore some price-setting power.
- Oligopoly is defined by a small number of interdependent firms, not by the nature of the product.
Ask how many sellers, then ask whether the product is identical. Those two answers place any of the four.
- Treating 'imperfect competition' as a fourth market type rather than the category the other three belong to.
- Confusing perfectly elastic firm demand with perfectly elastic market demand — the market curve still slopes down.
- Assuming many firms alone proves perfect competition; the product must also be homogeneous.
As a definition-to-name item like this one, or as a List-I to List-II match pairing each structure with one distinguishing characteristic.
CDS_GK_2020_I_Q1172020Match 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
Answer(b) A B C D : 4 1 3 2
The same four structures set as a match six months earlier in the same exam. It pins perfect competition to many producers selling similar products, which is precisely the pair of conditions this question opens with.
- practice — not a real PYQ
Under perfect competition, the demand curve facing an individual firm is
- (a)downward sloping
- (b)perfectly elastic
- (c)perfectly inelastic
- (d)upward sloping
Answer(b) perfectly elastic — a horizontal line at the ruling market price, which is why the firm cannot raise its price at all.
- practice — not a real PYQ
Product differentiation is the defining feature of which one of the following market structures?
- (a)Perfect competition
- (b)Monopoly
- (c)Monopolistic competition
- (d)Duopoly
Answer(c) Monopolistic competition — many sellers, but each sells a product distinguished by brand, quality or location.